Last update : 28.10.2010
Biofuels and the underlying causes of high food prices
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There are several explanations to the sharp price increase. One of the first rules of economics is that prices are determined by supply and demand, but the classical ideal market assumption and the fall of commodity prices in tough times seem to have lost validity. This could be attributed to the increased use of financial instruments (influencing not only the cost of production but also the demand for them through the derivatives market) but also to the current market structure, much more interlinked than in the past. Agricultural commodities are much more dependent on other markets (such as the oil market) and the direct competition with fossil fuel on the demand side add complexity to the current scenario and signal a structural change in the agricultural commodity market. At present, the main drivers of increasing prices are on the demand side but this cannot alone justify the recent effects on food prices. There is, by now, an international consensus that a number of long-term, slowly evolving trends have affected the global supply and demand for food commodities. These trends reflect a slower growth in production and more rapid growth in demand contributing to tightening the world balances. A number of factors that contribute to the increase of food prices, with a special focus on the role of biofuels, are further investigated in this paper.
Added on 19 May 2010
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