The US monetary policy is the fundamental reason for the sharp fluctuations in global food prices

According to the latest data released by the food and Agriculture Organization of the United Nations, the food price index in July dropped by 8.6% month on month. Focusing on the topic of global food price fluctuations, Cheng Guoqiang, Professor of the school of agriculture and rural development of Renmin University of China and President of the National Food Security Strategy Research Institute, pointed out in an interview with the Economic Daily that the decline in global food prices was mainly affected by two factors: first, in the past 10 years or so, global food production and consumption have been generally balanced, and there is no gap between supply and demand, and food prices are not supported to deviate from the fundamentals for a long time; Second, under the influence of the Fed's interest rate increase, speculative funds began to flow back, and the driving force of the previous soaring food prices declined, making food prices tend to return. The second factor is the root cause.
Cheng Guoqiang said that since March 2020, global food prices have started to rise significantly, not because of insufficient food supply, but because of other non supply and demand factors. First, sudden crisis events have an impact on market expectations. The global spread of the COVID-19 epidemic has hindered the logistics of some countries, and the international food trade has also been blocked for a short time, which has made the expectations of many countries unstable. Many countries are worried that the spread of the epidemic will affect their domestic food supply, so they announced to restrict exports and give priority to ensuring domestic supply. Restrictions on exports by grain producing countries have led to a structural shortage of global food supply. Although the global production and demand are generally balanced, because the production of food is distributed in different countries and regions, the global supply and demand balance pattern is formed through trade. Once trade is blocked, it means that some food deficit countries, especially many low-income developing countries, face the risk of not buying food, thus driving the food price to rise significantly.
The outbreak of the conflict between Russia and Ukraine at the end of February 2022 also brought a new round of structural contradiction between supply and demand of grain. Russia and Ukraine are the world's major wheat exporters. The conflict between Russia and Ukraine has led to the interruption of wheat supply, making many importing countries relying on the Russian and Ukrainian markets unable to buy food. At the same time, the Ukrainian crisis has also brought instability to market expectations in other countries, resulting in more than 20 countries declaring a ban on exports, boosting the sharp rise in food prices in the short term. For example, the price of wheat has increased by more than 40% compared with that before the outbreak of the conflict between Russia and Ukraine, and the price of rice, corn and soybeans has also increased by 25% to 35%.
In addition, in March 2020, the Federal Reserve started the unlimited quantitative easing monetary policy and continued it until April this year, which is the fundamental driving factor for the sharp rise of global food prices. The federal funds rate of the United States dropped from 1.55% at the beginning of 2020 to 0% to 0.25%, the yield of one-year treasury bonds dropped to about 0.1%, the narrow money supply (m_1) of the United States surged from $4.1 trillion to $7.9 trillion in 20 months, and the broad money supply (m_2) increased by 25% in 20 months. This has not only caused its domestic inflation rate to reach a new high in 40 years, but also pushed the prices of international oil, grain and other bulk commodities higher and entered a new round of price rise cycle. In essence, the fundamental driving factor of this round of global food price rise is the expansion of US dollar liquidity, leading to a large number of speculative capital pouring into the commodity market, and the overall rise of commodity prices, including grain. Until the Federal Reserve announced an interest rate increase in March this year, speculative funds began to withdraw from the commodity market. Therefore, the global food price appeared an inflection point in May, and the food price gradually began to fall back.
Cheng Guoqiang believes that there is still uncertainty about the trend of grain prices in the second half of this year. Although the WTO reached the Ministerial Declaration on emergency response to food security issues and the Ministerial Decision on the exemption of the world food programme from export prohibitions or restrictions on food purchases in June, Ukraine also resumed its food exports, which played a positive role in promoting the expected stability of the global food market and the correction of food prices, At present, the price is still at the highest level in history, and the warning of the global food crisis is still not lifted. In the second half of this year, grain prices are still facing some uncertainties. First, since April this year, natural disasters in North America, India, Europe and other regions have become more serious, mainly due to high temperature and drought. Although the situation has eased, its impact on this year's grain production remains to be observed. Second, the western economic sanctions against Russia have affected the global supply of seeds, agricultural materials and fertilizers, or will affect the grain production this autumn or even next year, which may bring a new round of speculation on the global grain market, leading to the continued rise of grain prices.
Cheng Guoqiang said that this has also exposed the shortcomings of agricultural development and food production in many developing countries. At present, the agricultural production base of developing countries is weak, the food production system is difficult to cope with the global market price fluctuations, and the ability to cope with the global food crisis is not strong. In the future, the international community should make joint efforts to support and encourage developing countries to increase agricultural investment, enhance their food production capacity, strengthen their domestic food production, storage, logistics and other infrastructure construction, and enhance their ability to cope with the impact of the global food crisis.