potential explanation for rise in grain prices..

Have grain prices risen purely due to speculation?
Fact 1: Inventory levels have been consistently reducing, i.e. decline in hoarding
Fact 2: Expanding class of population that is inelastic to rise in grain prices

• Global hoarding of grains – lower buffer stock leads to lower chances of curbing price volatility in grains. it’s been down in 2000-05 and hence there was a dearth of buffer stock to stabilize rise in prices. Why was there a reduction hoarding grains? Speculators didn’t forecast the crop failures in Australia, the spurt in demand in grains and the search for bio-fuels. Secondly, the period between 2000-05 was a high growth period with interest rates in the US consistently appreciating and stock market performing well. Under such a circumstance, it was seen as less rewarding to invest capital to stock up on food grains vis-à-vis other asset classes. Due to this, there seems a real lack of supply from bumper stocks maintained in past. for a graph on opposite trend in inventory level and price of grains in current period, view http://www.imf.org/external/pubs/ft/weo/2008/01/c1/FIG1_20.pdf

• Reduction in the size of the ‘buffer/ shock absorbing class’ - comprising of poor people in India and China for example. In the past, when the price of grains had risen the well off people in the society were inelastic to the change in grain prices as it did not constitute a significant part of their expenditure. The poor however suffered because food expenses constitute more than half of their spending. Hence a huge layer of population in developing nations had to curtail food consumption, and made up for the increase in prices. The average American did not suffer because the price increase was rebalanced by reduction in demand from poor section of world population (which make a big proportion of demographics in underdeveloped and developing nations). Today the tables are turning, with people in India and China being raised to higher income levels, are able to consume more, and grain price rise doesn’t seem to affect them as adversely as it would have had in the past. The small portion of those who are still acutely poor still suffer, but their lowering of consumption is not enough of a ‘buffer’ to alleviate the current hike in grain prices.

Hence, the prices must rise more sharply in order to sustain the demand level. In the process the poor get battered as it falls heavier on them now than ever before.