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Economist David Orden discusses commodity price spikes on NPR's The Diane Rehm Show


David Orden, director of the Global Issues Initiative (GII), Institute for Society, Culture and Environment (ISCE), was invited to join a panel of experts on NPR's The Diane Rehm Show, February 16, for a discussion on "Commodity Price Spikes."  Other guests were Bob Zoellick, president of The World Bank and former deputy secretary, U.S. Department of State; Zanny Minton Beddoes, economics editor, The Economist; and David Leonhard, a columnist at The New York Times.

Orden was previously asked to discuss the topic of rising food prices as a critical global issue on The Diane Rehm Show in April 2008 when world grain prices first increased sharply after a long period at low levels. That show focused on what was behind the higher prices and what could be done about it. During last week's show, Orden referred back to that initial conversation while discussing the current situation.

"In 2008, when we had to have this discussion of sharply rising food prices, there was quite a heated debate about how important the shift towards biofuels was at that time," Orden said. "We know now that it did contribute to the rising prices. But there is a better way to think about why prices shot up in 2008 than to blame one specific dimension, and that is to recognize that a set of dimensions came together that made stocks very tight. And when stocks are very tight, food prices become very volatile. When stocks are stronger, the markets can absorb more shocks. Biofuels were a part of the 2008 price rise because the United States was shifting in a massive way into biofuels.

"Now, we have a situation where the biofuels market ties agriculture much more closely to energy prices than it has been. It's always been tied because energy is an important input into agricultural production. But, now, it's tied on the demand side as well, where, with high oil prices, it's going to pull food into fuel production. That's going to happen no matter what government policy is if oil prices are high enough. But our government policies provide some tax credits. So that pushes the price of corn up for any given price of oil," said Orden.

Orden suggested that "we ought to look at the current situation in relation to 2008 and maybe make the statement that the sense of crisis shouldn't be as severe this time. Oil prices – at least at the moment – are higher than they have been but lower than they were in 2008 by quite a bit [before the rise last week related to the Middle East political crisis]. The dollar has been relatively stable. The rice markets are in pretty good shape right now. We're more aware now of the risk of high prices. We're more geared up to try to address some of the short term and long term issues. We're more geared up to try to moderate the pressures for policies like export bans that increase price volatility in world markets."

Still there are risks in the current situation, Orden said. "One of the reasons to have concern right now is we know there have been periods where volatile food and energy prices have resulted in subsequent inflationary periods. I thought in 2008 there was some risk we were going into a stagflation period. But the financial crisis and recession were so severe that we didn't get the inflation, and we haven't gotten it yet as of today. But we're not out of the dynamics that the whole period has kicked off. Certainly for food prices, we're going to have to wait to see how this year's harvests come out to see whether markets stabilize. Until then," Orden said, "we are in a continuing volatile situation and there will be people who are suffering from high food prices."

In addressing whether there are any benefits to higher prices, Orden offered that this is a complicated issue. While some may argue that millions of people have been pushed into poverty by the high food prices recently, Orden said, "Higher prices are helping some rural countries and rural people in a lot of countries with higher incomes. Cotton farmers in Pakistan or Egypt are benefiting, if you will, from the higher prices. Egypt, as a country, in fact, is getting some help with the high prices of its wheat imports from high cotton prices and high oil prices, because it is more fortunate than some countries in having those products to export."

Orden, an expert in global agricultural policies, has recently co edited the book WTO Disciplines on Agricultural Support, being published in April 2011 by Cambridge University Press.

Posted March 3, 2011