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Relevance for the Policy Debate

Responses given so far in the public policy debate to address the causes of agricultural price movements and their relevance for the debate on food security differ widely. These differences centre around three fundamental policy problems that have emerged from the food security/price volatility debate, attempting to merge often conflicting demands on issues related to (a) environmental/climate-related challenges and the private versus public good debate (initially mainly an EU issue, which is becoming more prevalent in other parts of the developed world), (b) the price interests of the rural versus urban poor (a developing world issue with conflicting policy implications), and (c) the gap between existing research, innovation and productivity priorities and future market and trade challenges (an issue for all, including the BRICs). In all three above areas, both macroeconomic and sector-specific causality has major policy implications.

On the macroeconomic front, growth in income is obviously associated with growth in demand for food, and during the commodity price boom years the high rates of income growth that emerging economies experienced were associated more with growth in manufacturing and services than with growth in demand for food. And during these years, demand for most food items stagnated in high-income countries. Exchange rates are also clearly associated with commodity prices, through the inverse relationship of the latter with the US dollar. Yet it might be the current low interest rate environment that might affect developments in yet little understood ways.

It is clear that low interest rates increase consumption and induce larger stock-holding, thus raising pressure on demand. Less clear is the impact of the lower cost of capital on supplies. What if the low cost of capital during most of the past decade may have induced parallel rightward shifts in both demand and supply schedules? Although this hypothesis needs further testing, if confirmed it would add another dimension to the debate on commodity-related stress on resources and the environment.

That is, while a lower cost of capital due to low interest rates and quantitative-easing policies may not necessarily change commodity prices (due to its mutually offsetting effects on commodity demand and supply), it may magnify the pressures on natural resources by expanding the commodity production and consumption base.

Several analyses, even when disagreeing on methodology, confirm the importance of both stocks and energy prices in explaining agricultural price movements. Elasticity values are more than twice as high for stock-to-use ratios as for crude oil prices, thus implying twice as great an influence on agricultural prices from a given percentage change in stock- to-use ratios as the same percentage change in crude oil price. But actual percentage changes in oil prices are significantly larger than actual percentage change in stock-to-use ratios, thus having a much larger impact on agricultural prices than stocks.

This energy/agriculture link is crucial for several reasons. First, it applies as much to the pre-2014 high energy prices as it does to the post-2014 low energy price environment. Second, it is not limited to the direct energy costs to agricultural producers, as it also affects the relative energy costs between various players in global commodity markets (e.g., through the impact of natural gas supplies and prices on fertilisers). Third, there are indirect costs linked to the upstream and downstream industries (transport, storage, etc.). Fourth, energy security concerns, a key justification behind biofuel mandates (which were intended to produce more feedstocks for biofuels, and thus raised concerns about taking land away from food crops), are less relevant in a low energy price environment.

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