Recent increases in basic food prices are severely impacting vulnerable
populations worldwide. Proposed causes such as shortages of grain due to
adverse weather, increasing meat consumption in China and India, conversion of
corn to ethanol in the US, and investor speculation on commodity markets lead
to widely differing implications for policy. A lack of clarity about which
factors are responsible reinforces policy inaction. Here, for the first time,
we construct a dynamic model that quantitatively agrees with food prices. The
results show that the dominant causes of price increases are investor
speculation and ethanol conversion. Models that just treat supply and demand
are not consistent with the actual price dynamics. The two sharp peaks in
2007/2008 and 2010/2011 are specifically due to investor speculation, while an
underlying upward trend is due to increasing demand from ethanol conversion.
The model includes investor trend following as well as shifting between
commodities, equities and bonds to take advantage of increased expected
returns. Claims that speculators cannot influence grain prices are shown to be
invalid by direct analysis of price setting practices of granaries. Both causes
of price increase, speculative investment and ethanol conversion, are promoted
by recent regulatory changes---deregulation of the commodity markets, and
policies promoting the conversion of corn to ethanol. Rapid action is needed to
reduce the impacts of the price increases on global hunger.