Booming grain production in poor countries ends fears of high and extremely volatile prices

Grain prices are likely to settle down for the first time since the 2008 price shock, largely thanks to boosting production in developing countries, reveals a new report by the Overseas Development Institute (ODI) – the UK’s leading think tank on development issues.

Poorer countries have added 240 million tones of cereals since the 2008 crisis, representing 74% of the global increase, saving the world from feared prolonged periods of instability and huge price rises of the three main grains – maize, wheat and rice.

The 2008 shock saw a doubling of wheat and maize prices, and a tripling of rice prices, mainly caused by lower cereal stocks and wheat harvests, rising oil prices and the US switching maize to produce ethanol. Two lesser spikes followed in 2010 and 2012, but since then grain prices have fallen back.

ODI Research Fellow Steve Wiggins said: “Farmers especially in developing countries have finally adjusted to the roller-coaster ride of instability in cereal prices. This will create a new norm: higher prices than before 2008, but lower than levels seen recently. Higher oil prices, rising rural wages in Asia and biofuel demand mean that prices will not fall back to the very low levels seen in the early 2000s.”

Mr. Wiggins added that the adjustment seen calls into question some radical proposals put forward after the 2008 price spike, “including creating global public cereal stocks and curbing the futures market in maize and wheat. This will also bring relief to some developing countries like Egypt and Mexico which are net grain importers and have large urban poor populations.”

World grain production increased more than twice as much since 2008 than in the seven years previously. But contrary to expectations, this has mostly not come from traditional grain exporters in North America, Europe, Australasia, and the former Soviet Union, but from developing countries:

Accordingly ODI’s new report says East Asia, for example, boosted its cereal production by 100 million tons since 2008, representing 42% of the total increase in production from poorer countries; Sub-Saharan Africa, long thought to be the least likely region to respond to higher prices, has increased its grain production by over 24 million tons since 2008, three times more than it achieved in the seven years before the spike; Latin America also increased its production by 38 million tons since 2008, up from 23 million in the seven years prior to the crisis.

Increased production comes partly from farmers reacting to higher prices, but also from successful international and national efforts to boost supply. Notably among them, the G8 pledge in 2009 to provide US$22 billion to promote agriculture, rural development and food security in developing countries.

The report adds that increasing political uncertainty in the Ukraine probably does not pose a major threat. Although ranked third for maize exports and seventh for wheat, its exports account for no more than 10% of global stocks of both cereals. Hence even were all grain exports from Ukraine be lost, this should not affect prices unduly.