Inventories and the global food-commodity prices

Prices of major food commodities, such as corn, soybeans, rice, and wheat, increased by two to four fold between 2001 and 2007. A number of existing studies have identified several influences on these price increases, including increased food demand with economic growth, expansion of biofuels, food price increases due to exchange rate fluctuations, increases in energy prices, as well as speculation, trade policy and weather shocks. The study shows that commodity inventory demands also are an important influence, and that not accounting for this factor leads to misleading conclusions about other price influences. A simulation model shows that when the effects of inventory expansion are taken into account, the estimated overall impact on prices of economic growth, increased energy prices, biofuel expansion, and exchange rate fluctuations is roughly 12 percent smaller. This is a significant finding in light of the controversies surrounding various influences on food prices, and indicates that inventory management is an important policy measure to dampen food price increases.