The latest data on foodgrains production released by the Ministry of Agriculture, Government of India, estimate that wheat production in India would fall by 1 million tonnes to 74.81 million tonnes compared with the previous estimates. Though it is not a marked decline compared with the previous estimates, what is significant is that it comes on the back of lowest grain stocks held by the Food Corporation of India during the current year. Mirroring the Indian situation, global markets also witnessed a similar fall in grain stocks, especially of wheat, rice and corn, over the past five years on the back of fluctuating production levels leading to pressure on the global grain markets. The surge in grain prices, has, in recent years, remained a major concern among economic planners worldwide. We at our economic analysis desk sat on this issue to find out the causes which may hold the keys to addressing major challenges to food security faced by developing countries. Available global data from all the leading sources such as FAO and USDA suggest that there is widening global imbalances in demand and supply of foodgrains (particularly wheat, corn, and rice) and they have grown significantly in the last decade leading to a heavy drawdown on global grain stocks. On the demand side, growing population, rising incomes in populous Asian countries, and discovery of new uses such as bio-fuel are leading to increased pressure on global grain fundamentals. Besides, studies also suggest that rising income levels transforming into increasing purchasing power is causing a dramatic change in the lifestyle and dietary patterns of world population, more so in developing countries. For instance, the latest available FAO data release suggests that India and China are now consuming more high-value protein in the form of livestock products that are high-cost converters of cheaper grains. Driving the point home in the case of India, the statistics recently released by National Sample Survey Organisation (2004-05), India has experienced a significant rise in the demand for livestock and products over the last five years. Limited land And, remember all these requirements have to be met from a limited expanse of land, while lands are becoming increasingly uncultivable due to lack of water or turning saline because of heavy groundwater use. Added to it, global climates are becoming more unpredictable which not only makes agricultural production unstable but also affects the quality of the produce as well. Apart from the demand from the livestock sector, bio-fuel production growing at the behest of national support (especially in the US where corn-based ethanol producers are given a support of 20 cents per gallon) adding to the demand-side pressure for which there seems to be no respite unless crude oil prices fall to make this conversion uneconomical. Further, certain responsibility of the nations with grain surplus would help control this deteriorating situation keeping in mind the large income inequalities that exist in the developing countries. On the supply front, annual global production of cereals has stagnated at around 2,100 million tonnes since 1996, while population has been increasing by about 78 million every year. Consequently, annual per capita availability of cereals fell to 336 kg in 2005-07 from around 362 kg in 1997-99 as per the FAO data. A key supply-side factor behind rising grain prices is the increase in crude oil prices, which in turn raises the cost of production significantly. The high correlation coefficient as provided in the Table stands to prove the same. In 1973 too, the jump in oil prices created a situation in the foodgrains market as witnessed currently. The commodities that have been most affected by the recent surge in oil prices are, in order, rice, wheat and corn showing that production and worldwide distribution (transportation) of these crops are highly energy-intensive. Surging prices Rice prices have been the most hit directly/indirectly by the recent oil rally as it is a close substitute for corn which is being increasingly diverted to ethanol production. Wheat prices have more than doubled while those of corn and rice have soared by 80 per cent and 55 per cent respectively at CBOT over the past two years. While the surge in corn prices has been largely due to the demand pressure that originated from its diversion for ethanol manufacturing, it is the supply concern that has been affecting the prices of wheat and rice at the global level. On the other hand, compound annual growth rates of areas under these crops show that the area under corn has grown at a higher rate than that of rice, which again corroborates the substitutive nature of these two crops. Though there is a rise in their productivity too, the demand-supply gap has widened more for rice and wheat than for corn mainly on account of lower area. As a result, the world that was in surplus of rice and wheat during 1990s is now running into net deficit by almost double the surplus size that existed during the base period (1990-91). Studies also attribute it to the abrupt supply changes in major producing countries such as India, Australia, the EU, the US, and China. An analysis of the USDA grains data estimates that annual volatility in ending stocks had been increasing over the years led by increased volatility in production fuelled by a constant rise in consumption. The higher price rise in wheat than in the case of rice is due to a higher slump of 24.66 per cent in wheat inventories during the last two years, while rice and corn stockpiles have declined by only 8.38 per cent and 14.20 per cent respectively. No wonder several developing countries, including India, have become net importers from a position of potential exporters over the last few years. Imbalances Now what net picture we have is that the combined force of higher crude oil prices, a shift in dietary patterns towards livestock products, climate change-led production fluctuations, diversion of grains for bio-fuels, and dwindling global stockpiles has been driving grain prices north, especially over the past two years. The imbalances in demand and supply of these commodities have posed a threat to global food security, intensity of which has been increasing over the years. As far as the emerging demand from bio-fuel goes, we are now trapped in a new labyrinth, wherein care must be taken by nations to provide priority to human over industrial consumption of grains. What is needed to resolve the above-identified issues is a cocktail of institutional, policy, and market reforms. As the institutional and policy reforms would help in identification of appropriate technology to address challenges to increasing productivity, improving its access, better delivery, and effective adoption, market reforms would help farmers not only in realising fair prices but also in planning effective allocation of their scarce resources to optimise returns. (The authors are with the Multi Commodity Exchange of India. Their views are personal. E-mail: v.shunmugam@mcxindia.com)