120 Years of Food Price Spikes: What History Actually Shows

Commodities: Markets, Performance, and Strategies
Editors: H. Kent Baker, Gregory Filbeck, Jeffrey H. Harris
ISBN: 9780190656010

Donald Larson opens with a tension policymakers have wrestled with for over a century. High food prices hurt the poor. Low and volatile prices hurt commodity-exporting countries. This first half of Chapter 22 maps what actually happened to food prices since 1900, and why volatility matters more than most investors realize.

A century of price swings

Using a hybrid index (Grilli-Yang data before 1960, World Bank after), Larson charts real food prices deflated by manufactured goods prices. The pattern is not a smooth line. It is a roller coaster.

Standout episodes:

• Post-WWI collapse and 1930s Dust Bowl spike (+89% from 1932-1937)
• 1970s OPEC-era spike (+70% from 1972-1974)
• Long decline through the 1980s-2000s (1990s average was the lowest decade)
• 2007-2008 and 2010 twin spikes
• Partial recovery since 2010

The 1980s, 1990s, and 2000s were relatively cheap decades. The 2010s average jumped back above 100 on the index. Food got expensive again.

Do prices trend down forever?

The Prebisch-Singer hypothesis argued primary commodity prices fall relative to manufactured goods, hurting developing exporters. That idea drove international commodity agreements for decades.

Evidence is mixed and period-dependent. Some commodities trended down until around 2000. Rice, wheat, and maize showed negative trends, then reversed for rice and wheat. Yamada and Yoon found no single story across all commodities.

The bigger point: decade averages swing wildly. Betting on one permanent trend is risky.

Volatility hurts growth

Food prices are more volatile than manufactured goods prices. That has been true for over a century. Commodity-exporting countries face wilder terms-of-trade swings than diversified economies.

Research links that volatility to slower GDP growth and slower poverty reduction. Blattman, Hwang, and Williamson studied the 1870-1939 period. Aghion, Bacchetta, and Rogoff found similar results for exchange rate and growth links. Van der Ploeg and Poelhekke showed food was as volatile as petroleum between 1970-2003.

At the household level, price uncertainty makes poor farmers play it safe. They skip better seeds, avoid fertilizer, and stay on low-income paths. With 73% of global farms under one hectare, that caution has economy-wide consequences. Agricultural productivity growth is one of the strongest drivers of poverty reduction.

Has volatility increased? Not clearly. The 1920s, 1930s, and 1970s were wild. The 1960s and 1990s were calm. Recent decades are below the long-run average despite 2007-2008 and 2010 spikes.

Short-term drivers: storage and shocks

Larson turns to why food prices spike fast but fall slowly. The answer is competitive storage theory.

Market agents store grain based on expected future prices. A bad harvest or trade embargo drains inventories. Prices jump. Low stocks raise the probability of future shortages, pushing prices higher still. When supply recovers, prices ease back down.

Surpluses do not crash prices symmetrically because excess grain gets stored for next year. That creates the skewed distribution Larson documents: most months cluster at lower prices, with a thin tail of extreme spikes. Median real food price (1960-2016) was 86.65. Peak was 271.88 in November 1974. Low was 44.79 in July 2000.

The storage model also explains backwardation and convenience yield. When inventories are tight, spot prices exceed futures. When stocks are flush, the premium fades.

What about speculators and bubbles?

Financialization raised fears that index funds and hedge funds were driving food price spikes. Larson reviews the evidence carefully.

Etienne, Irwin, and Garcia studied 12 food commodities from 1970-2011. They found explosive price episodes, but only 2% qualified as speculative bubbles. Most lasted under 10 days. Bubbles did not become more frequent in recent decades.

Gilbert found index fund investment contributed to the 2007-2008 spike, but rational (if wrong) demand expectations about China were the root cause. Hamilton and Wu, Stoll and Whaley, Sanders and Irwin, and Bruno et al. found little evidence that index traders increased volatility.

Bohl and Stephan found no causal link between speculation and volatility in six agricultural and energy markets.

The consensus in this chapter: speculation can amplify short moves, but enduring food price cycles still trace to supply, demand, and storage.

Why this matters for investors

Food is not just a humanitarian issue. It is a macro variable. Price spikes trigger export bans, policy responses, and social instability. Volatility slows investment in the countries that grow the food.

If you trade agricultural commodities or hold ag-heavy indexes, you are exposed to a market structure that spikes fast and mean-reverts slowly. Storage levels and harvest news matter more than most equity-style valuation tools.

Navigation

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