Demand and Supply Factors
The production of food depends on environment, the amount of the arable land available, productivity and weather. From the previous global food crisis, such as the one experienced between 1973 and 1974, the supply side shocks are blamed for the soaring of food prices, which tend to transfer food volatility to prices in the world market. Considering that, the demand side for the food market tends to move at a slower pace compared to the supply side, and then the supply side progression is likely to have fueled the food crisis in 2008, as argued by Mitchell (2008). There are several reasons that are attributed to the decline in productivity, hence an increase in the supply variability (Benson 2008).
Between the Asian financial crisis that took place in 2007 and the food crisis that happened in 2008, the global demand and supply of food changed dramatically. In general, markets became tighter investments were nosediving, consumption grew faster than utilization, and productivity growth was leveling out. The global per capita production of food decreased by approximately 6% between the 1980s and 2000s, during this period the oil-seed and grain production annual growth rate was at 2.2% between 70s and 90s, the sane decreased to 1.3% between 1990 and 2007. The production of grains and oil-seed was expected to continue dropping by a significant margin over to 2012. In the period between 2005 and 2006, the Australian wheat production was below the expected amount by 50-60 percent, which was attributed to the drought that was being experienced at that period. A lengthy period of drought was a reason as to why Australia was wiped out of the list of global rice exporters by 2007. During the period between 2005 and 2006, the harvests from both Ukraine and Russia dropped below their initial projections due to poor weather conditions. Though production shortfalls of this nature can be attributed to the weather variability and events such as El Nino, it is more attributed to the climatic changes (Chiarolla 2011).
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Since 1990s, the food stocks have been reduced through an amalgamation of production declines and intentional policies. When the US, EU and Chinese reduced their national grain stocks between 1990 and early 2000, they relied more on the global market for supply of grains, where they had adapted a policy of just-in-time thinking. The food national food stocks have been used to dampen the price volatility as well as to supply the market whenever there is an under-supply. Both the stock-to-use and food stocks ratios recorded 25 years lows between 2007 and 2008, where for some commodities, they reached all-time lows (Chiarolla 2011).
From 1990s through 2003/2004, there is a steady decrease in the stock-to-use ratio for the major grains; this is accompanied by a steady rise in grain utilization. It is worth noting that, during the period 1980s and early 1990s, the investment in agriculture decreased significantly leading to leveling out of the production increase. The last two decades prior to the 2008 food crisis, were characterized by a decrease in prices and overproduction, which put off the investors. The supply-side dramatic changes caused the higher prices leading to more inelastic food markets in which a slight shock would result to a significant price outcome (Kjolberg 2010).
The export limitation and export are some of the short-terms trade shocks that are used by states that are experiencing a crisis of supply shortages. In October 2007, Indian rice export was banned due to the soaring rice prices that were as a result of under supply. Such policies have been given insignificant attention in the study of food crisis. The rate of the price increased from late 2007, denying the market a chance to readjust, this resulted into trade bans, panic buying, speculation and hoarding. In Asia rice export restriction, triggered a chain reaction, which was followed by barley and wheat export restriction in Vietnam, Egypt, Russia, Pakistan and Cambodia. Applying the monthly export-volume data from rice in Thailand and wheat, corn and soybeans from America, Headey (2010) concluded that a vast change in export capacities preceded the same large price volatility for corn, rice and wheat. Under the same argument, in 2008, Japanese sold 300000 tones of their surplus rice t the Philippines. This triggered a reversed chain reaction where the supply side was strong, leading t the lifting of export bans, which caused a drop in prices (Nation 2008).
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Industrial agriculture in the developed as well as in developing economies is second from the transport sector in dependence on fossil fuel, resulting to high marginal cost sensitivity for the food production sector. The crude oil prices started to increase back in 2003, which triggered price increase for the food commodities (Kjolberg 2010).
The price of oil impacts on food production directly, through costs of inputs such fertilizers and other artificial chemicals. The costs of fertilizers are 90 percent determined by the oil prices, these prices recorded an increase above agricultural products during the period between 2007 and 2008. The extra cost caused a decline in the output-to-input ratio and lowering marginal profits from food production. The mean production cost of soybeans, corn and wheat rose with 12 percent between 2003 and 2007 owing to increase in the fossils oil dependent factor (Tandon 2009).