An era of unprecedented opportunity?

• Author: Diouf, Jacques

The world is experiencing a dramatic rise in food prices. It began gradually in 2006 and has now escalated into a massive surge. It has caused hunger, protests, riots and even fears for international security. Low-Income Food-Deficit Countries have been hardest hit but the problem is global. Reports of the impact of dearer food on the poor in many developing countries have led to calls for international action to reverse the slide towards increasing poverty and malnutrition. Aid agencies have encountered difficulties in meeting the higher costs of purchasing food for distribution and have appealed for additional funds.

Almost all agricultural commodities have been affected. The most dramatic increase is in the cost of wheat and maize, which more than doubled in the last year, as well as of rice, and to lesser extent, of dairy products, tropical products and agricultural raw materials. These current high prices should, in principle, be good news for farmers around the world, but the cost of key agricultural inputs, such as seed, fertilizer and power, have also surged, making it difficult for farmers to reap the benefits of selling food at higher prices Subsistence farmers in developing countries even stand to lose. They face higher input prices without producing a marketable surplus that would earn them higher revenues. Urban dwellers have to cope with price surges on several fronts, not just for food but also for fuel, electricity, and transportation.

The food crisis raises important and urgent questions:

How can we swiftly address the problems of the most needy in order to avert a deeper and more widespread crisis?

What can be done to allow subsistence farmers to weather high input prices and reap the benefits of higher food prices?

How can we improve food security and lessen the adverse impacts of high prices on nutrition?

How can we restrain food price inflation and achieve lasting improvement inn national food security while maintaining incentives and creating a favourable market for producers?

We also need to understand fully what factors have caused the surge in prices and whether food prices will remain high for years to come. Sustainable solutions can only work when the causes of these problems have been properly understood.

These questions will be discussed in this paper, which will first take stock of the main manifestations of the crisis and report on the magnitude of price surges and their impact on hunger, poverty and inequality; it will then discuss the main causes of these surges, distinguishing between supply and demand factors, as well as long-term trends and short term swings; and finally, it will present possible actions that would help to ease the most urgent and grave consequences, eventually putting the world food market back onto a more sustainable path.

TAKING STOCK OF A GLOBAL SHOCK

Food prices highest in 50 years: During the first four months of 2008, international prices of all major food commodities reached their highest levels in nearly 50 years while prices in real terms, i.e. actual purchasing capacities after removing the effect of inflation, were the highest in nearly 30 years. The Food and Agriculture Organization of the United Nations (FAO) food price index rose, on average, by 12 percent ini 2007. The increase in the average of the index for the first four months of 2008, compared with the same period in 2007, stands at 52 per cent. The continuing surge in prices is led by vegetable oil, which showed an overall increase of over 94 per cent during the same period, followed by grains at 80 per cent and dairy products at 49 per cent.

Prices for some commodities, notably maize, continued to rise over the entire first half of 2008. By mid-June, maize prices had risen more than 70 per cent, approaching a record level of nearly $8 per bushel. Likewise, prices for soybeans and soybean oil, after a short retreat, returned to record or near record levels in mid-2208. Meat prices also rose but not to the also point to increased uncertainty in the market. According to a joint report by FAO and the Organisation for Economic Co-operation and Development, although food markets differ from commodity to commodity and country to country, and although the future remains highly uncertain, best projections suggest that food prices are likely to remain high in the next few years and high prices are expected to affect most developing country markets. (1)

Looking at prices in real terms, the increases are not quite so dramatic, although they are still significant. Real prices have shown a steady, long-lived downward trend, punctuated by typically short-lived spikes. There is some suggestion of a flattening out since the late 1980s, with a gradual recovery beginning in 2000 before the sharp increase in 2006. The average annual growth rate of 1.3 per cent over the 2000/05 period has jumped to 15 per cent over the 2000/05 period has jumped to 15 per cent since 2006. It is an interesting question whether the current sharp increases are fundamentally different from earlier price spikes, and another whether the long-term decline in real prices already noted has halted, signalling a structural change in agricultural commodity markets.

It is too early to decide, but I will revisit these questions later.

The current high prices are in sharp contrast to the downward trend and the prolonged slump in commodity prices from 1995 to 2002, which had even prompted calls for the revival of international commodity agreements. However, the question of whether the current price levels are consistent and prolonged slumps--or whether they represent a break with past behaviour patterns is difficult to assess. However, some feature of the present situation, notably the historically low levels of cereal stocks and a strong demand for biofuels suggest the current high prices, far from being short-lived, could persist for some years.

Costly seed, fertilizer and power: Since 2006, prices of inputs such as seed, fertilizer and animal feed have risen by 98. 72 and 60 percent, respectively. For some inputs, these increases rose even higher in 2008. On average, the FAO input-price index doubled in the first four months of 2008, compared with the same period in 2007. The United States dollar prices of some fertilizers more than tripled. Small farmers in developing countries have always been particularly hard hit by soaring input prices: they have to pay much more for seeds, fertilizers and diesel without being able to benefit from much higher output prices.

Rising inflation--erosion of purchasing power: The rise in food prices hit the poorest consumers and countries the hardest. As poorer consumers spend a larger share of their disposable incomes on food, they are particularly vulnerable to dearer food.

What makes individual consumers vulnerable to rising food prices renders entire countries susceptible to inflationary pressure. In places where food consumption accounts for a large share of overall expenditures, dearer food translates into an overall inflationary pressure. In poor countries, food expenditures often account for two thirds of the overall consumer price index--loosely translated as the cost of living index--whereas food has a weight of merely 15 per cent or less in rich countries. The effects are already highly visible: in Sri Lanka, for instance, where food accounts for 62 per cent of the consumer price index, rising food prices have boosted food price inflations by 26 per cent and overall inflation rose by 19 per cent. In South Africa, by contrast, food accounts for only 23 per cent of consumer price index so that food prices translated into a 14-per cent increase in food price inflation and 9 per cent overall inflation.

In addition to the direct burden on the cost of living, there are other mechanisms through which rising food prices can become increasingly harmful. For example, they may raise non-food prices through a wage response to higher food prices--higher wage demands have been at the core of several recent protests.

Protests and riots: In many developing countries dependent on international markets, substantial increases in food prices and the cost of living have posed a threat to the overall economic growth. The most visible and immediate consequences were social unrest and riots that have taken and continue to take place on most continents. In some cases, soaring food prices even acted as a trigger for protests against wider economic and political problems.

In countries heavily dependent on food imports, and when food takes up a large share of spending, high prices erode the purchasing power of urban consumers who are caught in a social unrest. There is also growing evidence that rural populations have been adversely affected. While high agricultural prices and normally good news for farers, higher input prices have allowed only commercial producers to benefit significantly. Subsistence farmers have been squeezed by soaring costs without being able to recoup losses from higher output prices.

Soaring import bills: The combination of rapidly rising food prices and higher transport costs has resulted in sharply higher food-import costs. Globally, food import bills surged to $820 billion in 2007, the highest in history. (2) Costs are projected to reach an all-time high of $1,035 billion in 2008. The Least Developed Countries and Low-income Food-Deficit Countries are likely to bear the highest burden in the cost of importing food, with total expenditures anticipated to climb 40 per cent from 2007, after rising by 30 and 37 per cent, respectively that year. In 2008, the annual food-import basket in these countries could cost four times as much as it did in 2000.

Rich-poor gap is widening: Soaring food prices, in conjunction with soaring fuel prices, have deepened poverty and inequality. (3) A recent World Bank study suggests a surge in poverty levels due to rising food prices, even though those...