China Programme • Volume 12 • Number 3 • May 2008
Rising World Food Prices: How to Address the Problem?
Strong and new forces of change in the world food equation are transforming food consumption, production and markets. Unlike the pattern prevailing for the past few decades, today’s global agricultural system is very much driven by the demand side.
With income growth in emerging economies, globalisation and urbanisation, the demand for agricultural products will continue to grow and shift toward high-value commodities. Partly driven by the expansion of biofuels and demand for feed, strong global cereal consumption is likely to continue. The International Food Policy Research Institute (IFPRI) projects that by 2015, cereal demand will increase by up to 20 percent across all regions.1
Slow Production Response
On the supply side, global production response has been slow. The overall productivity growth in agriculture is simply too low to cope with the increase in demand. Between 2000 and 2006, cereal supply grew by a mere 8 percent and stocks declined to low levels. The production response to high prices is mainly impaired by land and water constraints, as well as underinvestment in agricultural innovation. Increased production – driven by higher yields, not by area expansion – and improved productivity require substantial investments in research and development (R&D), services and input supply systems. Climate change and rapid population growth further increase the need for more agricultural science and technology investment. Yet, growth in global public agricultural R&D expenditures, especially in developed countries, has slowed down.
Other important factors that explain the drastic agricultural price increases include production shocks (such as Australia’s drought) and low grain stocks, which make markets more volatile. The flow of speculative capital from financial investors increasingly interested in rising commodity prices also contributes to increasing food-price volatility. Trade restrictions triggered by high prices in many countries further narrow the global market.
Upward Trend Will Continue for Many Key Prices
The rise in agricultural commodity prices has indeed been dramatic. Since 2000 – a year of low prices- the price of wheat has quadrupled, the price of corn almost tripled and the price of rice more than doubled.2 When adjusted for US$ depreciation, the price increases are lower, but still dramatic, with often serious consequences for the purchasing power of the poor.
IFPRI’s global scenario analysis suggests that real world prices for cereals and meat will continue to be high. While current peaks may not remain for the long run, rice, wheat and maize prices will increase by about 20 to 30 percent by 2015, while beef, pork and poultry prices are projected to grow by up to 10 percent. These projections do not factor in the current price raises that are triggered by trade policies, such as export restrictions.
Energy and Biofuels
Biofuel production contributes to the changing world food equation and adversely affects the poor through price-level and price-volatility effects, as well as through ill-designed bioenergy programmes. Increases in ethanol and biodiesel production, which largely draws on maize and oilseeds, will have a strong effect on agricultural prices and there is now a close correlation with energy prices. IFPRI models project that, until 2020, biofuel expansion may ceteris paribus result in price increases of 26 percent for maize and 18 percent for oilseeds.3
The worrisome implication is that volatile energy prices will translate into larger food-price fluctuations. Some governments have adopted subsidy regimes for biofuels and energy crops that undermine the comparative advantage of developing countries. Subsidies for biofuels that use agricultural production resources act as an implicit tax on basic food, which constitutes a large share of the expenditures of the poor. It makes sense for many countries to wait for the emergence of more efficient technologies, and plan to ‘leapfrog’ to these technologies later.
Climate change is expected to have an adverse impact on agricultural production. Developing countries with limited adaptive capacities will experience the greatest production losses and increased food insecurity. In many African countries, for example, agricultural production will be negatively affected, thereby increasing food insecurity and malnutrition.
Viable mitigation strategies for the agricultural sector in the developing world exist, but key constraints need to be overcome. A new and more comprehensive post-Kyoto international climate change regime, for instance, must be negotiated, and fair rules of access to carbon trading are required.
Impacts on the Poor
Higher agricultural prices will have uneven impacts across countries and population groups. Net-exporting countries will benefit from improved terms of trade, although some of them are missing out on this opportunity by imposing export bans to protect consumers.
Net importers, however, will struggle to meet domestic food and feed demand or pay high subsidies to shield consumers from price increases. As almost all countries in Africa are net cereal importers, they will be hit hard.
Surging and volatile food prices most dramatically affect those who can afford it the least – the poor and food insecure. The few poor households that are net sellers of food could benefit from higher prices, but those that are net buyers – the large majority of the world’s poor – will be harmed. Although adjustments in wages, employment and in capital flows to the rural economy will take time to reach them, opportunities exist to transform the challenge into gains for the poor. The nutrition of the poor is at risk as higher food prices will induce them to limit their food consumption and shift to even less balanced diets, with adverse impacts on health.
A 1-percent increase in the price of food in low-income countries typically leads to a 0.75-percent decrease in food spending.4 At the household level, the poor spend about 50 to 60 percent of their overall expenditures on food. For a five-person household living on US$1 per person per day, a 50- percent increase in food prices removes up to US$1.50 from their US$5 budget, and growing energy costs add to their adjustment burden. In Bangladesh, Pakistan and Kenya, for instance, the poor are increasingly experiencing shortages due to rising food prices.
About 160 million people continue to live in extreme poverty, on less than 50 cents a day. In times of hardship, the poorest suffer silently, but the middle class typically has the ability to organise, protest and lobby. Since early 2007, social unrest related to high food prices has occurred in more than 30 countries.
Government Responses So Far
In an attempt to minimise the effects of high food prices on their populations, many countries are taking desperate steps that can add up to policy failures.
Argentina, Bolivia, Cambodia, China, Egypt, Ethiopia, India, Indonesia, Kazakhstan, Mexico, Pakistan, Russia, Senegal, Tanzania, Thailand, Ukraine, Venezuela and Vietnam are among those that have imposed restrictions on exports or price controls or both. For instance, China has banned rice and maize exports, while India has banned exports of non-basmati rice and pulses, and raised the minimum export price of basmati rice. Argentina has raised export taxes on soybeans, maize, wheat and beef; and Ethiopia and Tanzania have banned exports of major cereals. Other nations, including net food-importing developing countries have reduced import barriers. Morocco, for example, has cut tariffs on wheat imports from 130 to 2.5 percent; Nigeria has slashed duties on rice imports from 100 to 2.7 percent; Peru has removed import taxes on wheat and maize. Senegal has waived duties on cereal imports.
These policy responses may reduce risks of food shortages in the short-term, but they are likely to backfire by making the international market smaller and more volatile. Price controls reduce farmers’ incentives to produce more food and divert resources towards helping people who do not really need it. Export restrictions and import subsidies have harmful effects on import-dependent trading partners and also give wrong incentives to farmers by reducing their potential market size. Any long-term strategy to stabilise food prices will need to include increased agricultural production.
Needed Policy Actions
Food price increases now play a dominant role in increasing inflation, and undermining livelihoods and food security in many countries. It would be a misguided policy to address these specific inflation causes with general macroeconomic instruments. Rather, specific market- and productivity-related policies are needed to deal with the causes and consequences of high food prices. This new situation calls for effective and coherent policy actions in five areas:
• Developed countries should facilitate flexible responses to price increases by eliminating trade barriers. Biofuel subsidies and excessive blending quotas should be revoked and a full-scale moratorium on biofuels from grains and oil seeds considered for some months. Programmes that set aside agricultural resources, except in well-defined conservation areas should be terminated. While some progress has been made in reducing trade-distorting policies, many remain, and poor countries cannot match them. The new food situation is changing trade regimes in many countries and this will inevitably have important implications for the current Doha Round negotiations, which should be completed.
• Developing countries should increase their short- and medium-term investments in agricultural research and extension, rural infrastructure and market institutions to achieve long-term agricultural growth. New trade-distorting policies with which countries hurt each other should be ended. Government interventions and investments should be supported by good governance practices.
• Investment in agricultural science and technology at a national and global scale is needed to address the long-term problem of boosting production response. A global R&D initiative for accelerated agricultural productivity makes economic sense, is pro-poor and sustainable, and serves security.
• Global actions are needed to calm markets quickly. These should include making futures trading more costly at the commodity exchanges and appropriate regulation of exchanges; a temporary moratorium for grain and oilseeds based biofuels, as mentioned above; establishment of a global public grain stock, for instance as a coordinated set of pledges among a to be established ‘coalition of the caring’ consisting of main grain producer countries (including co-ordinated releases from such a reserve when prices increase excessively).
• Comprehensive social protection and food and nutrition initiatives are required to address the acute risks facing the poor due to reduced food availability, high prices and limited access to income-generating opportunities. Increased resources for the World Food Programme are needed as part of a global response. Social safety nets such as food or cash transfers should target the poorest people with a focus on early childhood nutrition.
Joachim von Braun is Director General of the International Food Policy Research Institute in Washington D.C.
ENDNOTES
1 von Braun, Joachim. 2007. The World Food Situation – New driving forces and required actions. IFPRI. Washington D.C.
2 FAO. 2008. International commodity prices database
3 von Braun, Joachim. 2007. When Food Makes Fuel – The promises and challenges of biofuels. Crawford Fund. Canberra
4 Regmi, Anita et al. 2001.‘Cross-country Analysis of Food Consumption Patterns’ in Changing Structure of Global Food Consumption and Trade. US Department of Agriculture Economic Research Service. Washington D.C.