High and Rising Food Prices: Why Are They Rising, Who Is Affected

High and Rising Food Prices: Why Are
They Rising, Who Is Affected, How Are
They Affected and What Should Be Done?
John Hoddinott
International Food Policy Research Institute
September 2008
High Food Prices: Introduction
We are experiencing the most sustained significant increase in
prices of basic grains and oilseeds in three decades.
This has caused significant hardship for millions of people and, in
some countries, considerable political unrest
Governments around the world have responded in a number of
ways, some more effectively than others
Failing to undertake effective responses to these prices will create
consequences that will last for decades
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Introduction
The objective of this presentation is to explain what has happened,
why it has happened and what are appropriate policy responses to
this crisis
Structure of Presentation:
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•
•
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Food prices in historical perspective
Why have food prices risen? Immediate and structural factors
Who is affected? How?
What are the policy implications?
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Historical Perspective:
Agriculture Production has Outpaced Population Growth
Source: FAO
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Historical Perspective:
Long Run Nominal and Real Food Prices
Source: FAO and Orden
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Long Run Oil Prices
Source:add wtrg graph
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Rice prices in Guatemala City
Source: FEWSNET
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Causes of Higher Food Prices
There are immediate and structural factors that have led to the rise
in prices
• Immediate
• High energy costs
• Biofuel subsidies
• Climatic Shocks
• Export restrictions
• But not speculation
• Structural
• Income growth
• Reductions in productivity growth
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(1) Energy Prices
The price of oil has risen from US $30/barrel to a high of $140/barrel,
before falling back to a current price of approximately $100/barrel
Energy prices have always affected agricultural input prices through
their effects on inputs: fertilizer, pesticides, irrigation and transport
Now that some agricultural products can be used as fuel, energy
prices also affect agricultural output prices through opportunity costs
As a result, energy demand creates a price floor for agricultural
commodities
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(2) Biofuels
This has been exacerbated by US government policy that subsidies
the use of maize for ethanol production
It is estimated that 30% of US maize production now goes into
ethanol production.
•
Other maize producers, Canada and the EU, also use maize for ethanol, though
on a much smaller scale
This has a direct impact on maize prices, and an indirect impact on
other grains (such as soybean and wheat) which can be grown on
the same land
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(3) Climatic Shocks
The last two years has seen significant climatic shocks in a number
of major producing, and exporting, countries including:
•
•
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Drought in Australia and the Ukraine
Cyclone in Burma
Flooding in maize producing regions of the United States
These events have put additional, short term, upward pressure on
prices
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(4) Export Restrictions and Other Government
Actions
In response to rising prices, a number of major producers imposed
restrictions on their agricultural exports, including:
Cereals
Oilseeds
China
Indonesia
India
China
Russia
India
Indonesia
Vietnam
Kazakhstan
Argentina
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Types of Government Interventions
Source: FAO
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(4) Government actions, cont’d
These have a direct effect on international prices, by reducing the
amount of grains available for trade.
•
And has been an especially important factor in the case of rice. The amount of
rice traded globally is a small fraction of total global production
It also creates uncertainty, and therefore price volatility, given the
imposition and the removal of these restrictions is often done with
little advance warning
Subsidies are also a poor policy response. They are:
•
•
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Often poorly targeted
Costly, and often crowd out other government expenditures
Difficult to reform or remove
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(5) The Role of Speculation
Volume of globally traded grain futures and options has increased
dramatically (by 32% in Q1 of 2008 alone). But this is not all
speculation: it includes ‘hedging’ purchases and sales.
Speculation does not affect market fundamentals. For every buyer of a
grain option, there is also a seller. The real (physical) market is
unchanged
Further, prices have risen in agricultural commodities (eg dairy
products) that are not traded on futures markets
Low stock levels and erratic government policy announcements create
market volatility and this volatility encourages speculation
So speculation has not been a major cause of rising food prices; it is a
consequence of these increases
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Structural Factors
Income growth
Reductions in productivity growth
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(1) Income growth around the world
Source: IFPRI from World Bank data
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(1) Income Growth is strongest in Developing Countries
Source: IFPRI from World Bank data
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(1) Income growth means rising food demand
Source:IFPRI from FAO data
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(1) Consequences of Increased Demand
Even though cereals demand has risen modestly, non-cereal
demand has increased dramatically.
It take approximately:
•
•
•
6 kg of grain to generate 1 kg of meat
3 kg of grain to generate 1 kg of pork
2 kg of grain to generate 1 kg of poultry
So, via increased demand for these products, cereal demand has
markedly increased. This is unlikely to change
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(2) Yield Growth
While yields continue to grow, they do so at a diminishing rate
This is a consequence of low rates of investment in agriculture by
many developing countries and by the donors who support them
So what happens when slowing supply growth meets rising demand
growth?
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World Cereal Stocks, 2000-2007
700
Total s tocks
600
China
500
400
300
200
100
0
2000
2001
2002
2003
2004
2005
2006
2007*
Source: IFPRI from FAO data
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2007 World Agricultural Stocks at Low
Levels
Source: CRS from USDA data
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Who is Affected?
The impact of rising food prices depends on several factors:
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Are households net purchasers or net sellers of food?
• Net sellers benefit from higher prices
Is food a “large” or a “small” share of household consumption budgets?
Suppose prices rise by 50%
• If food makes up a small share, say 15%, of budgets, then rising food prices
mean that budgets fall by 7.5% in terms of purchasing power
• If food makes a large share, say 50%, of budgets, then rising food prices
mean that budgets fall by 25% in terms of purchasing power
Are household incomes rising sufficiently quickly so as to compensate for this rise
in prices?
These factors imply that the worst affected households will be those
who are net purchasers, whose budgets are dominated by
expenditures on food and whose incomes are not rising
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Distributional Impacts Differ by Country
(rural population % gain/loss of welfare by income
quintile from 10% price increase of staple main food)
Source: FAO
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What are the consequences?
At the macroeconomic level, for most countries rising prices are
leading to increasing government and current account deficits
At the household and individual level, we have far less information
that we need. There are ongoing surveys, and considerable
anecdotal information, but solid information is lacking.
However, based on studies of ‘shocks’ and how households respond
to these, it is likely that the following are occurring:
• Households are searching for additional income generating activities.
This includes increased labor market participation by women
• Dietary diversity is reduced as households try to reduce the cost of
calories
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Consequences, cont’d
Deterioration of nutritional status of women and preschool children
Withdrawal of children esp. girls from school
Distress sale of productive assets and decrease of purchasing
power
All have irreversible consequences and
compromise future ability to escape poverty
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Consequences, cont’d
For example, ongoing research using the Guatemalan Oriente study
undertaken by INCAP, IFPRI, Emory University and the University of
Pennsylvania shows that individuals who were stunted as preschoolers :
•
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Score significantly lower on tests of reading/vocabulary and cognitive ability as
adults. For example, not being stunted has the same effect on
reading/vocabulary scores as does four grades of formal schooling
Earn 40% lower wages than earned by comparable individuals who were not
stunted
These results imply that increased stunting that results from the rise
in food prices will lower human capital levels and income in the next
generation
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Policy Issues: Overview
Policy response is conditioned partly by expectation around future
prices and partly by consequences of current rise.
There are good educated guesses on future prices but no one
knows for sure. What is clear:
• Food prices and energy prices will remain interlinked
• So if energy prices fall (rise), food prices will do the same
• Structural factors associated with rise are likely to persist
My guess:
• Food prices will fall from their recent highs (indeed, they have begun to
do so in developed countries) but will not quickly return to their pre-crisis
levels
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Policy Issues: Overview, cont’d
Policy response, therefore, needs two components:
•
Immediate actions to address the current crisis (an ‘emergency’ package)
• Longer term actions to ensure that the current crisis is not repeated
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Immediate Responses
To address the current crisis
At the national level
Targeted assistance to those most badly affected :
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Cash transfers to affected households
Interventions to keep children in school
Interventions that protect nutritional status of pre-schoolers
As needed, undertake fast-impact, targeted production stimulating
programs such as fertilizer vouchers
At the international level
Eliminate agricultural export restrictions
Change biofuel policies (reduce mandates, subsidies and trade
barriers)
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Longer Term Policy Responses
To prevent such a crisis from re-occurring
At the national level
Invest in social protection for of the poor
Scale up investments in sustainable agricultural growth
At the international level
Reduce market volatility via real and virtual international grain
reserves, import financing facilities (as needed) and reliable food aid
Support increased investments in sustainable agricultural growth
Re-invigorate the Doha Round WTO negotiations
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Conclusion
We are experiencing the most sustained significant increase in
prices of basic grains and oilseeds in three decades.
This is a result of six factors:
•
•
•
•
•
•
Rising energy prices
Increased use of maize for biofuels
Climatic Shocks
Export restrictions
Income growth in developing countries (which is a good thing)
Reductions in productivity growth
“Best guess” is that prices may not stay at current levels, but also
that they are unlikely to fall back to pre-crisis levels
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Conclusion
The worst affected households are those who are net purchasers,
whose budgets are dominated by expenditures on food and whose
incomes are not rising
There is a real danger that a “temporary” crisis will have permanent
consequences through the creation of poverty traps or irreversible
losses of human capital
Policy responses must address the current crisis while putting in
place measures to prevent it from re-occurring
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