February 29, 2008—In Mexico City, mass protests about the cost of tortillas. In West Bengal, disputes over food-rationing. In Senegal, Mauritania, and other parts of Africa, riots over grain prices. And in Yemen, children march in public to call attention to child hunger.
This chain of events is in stark contrast to the falling food prices that consumers have come to expect over the past several decades.
On February 13, the FAO announced that 36 countries are in crisis as a result of higher food prices and will require external assistance. In many of these countries, food insecurity has been worsened by conflict, floods, or extreme weather.
Last month, in Davos and in Addis Ababa, World Bank President Robert Zoellick called for action to tackle hunger and malnutrition in a world of rising food prices. "Hunger and malnutrition are the forgotten Millennium Development Goal. It has gotten less attention, but increased food prices and their threat – not only to people but also to political stability – have made it a matter of urgency to draw the attention it needs,” he said.
While headline news about high food prices is a relatively recent phenomenon, the broader upswing in commodity prices began in 2001. Large structural shifts in the global economy—including growing demand in China and India—have been steadily reflected in commodity price increases, especially of metals and energy.
Food prices have increased in response to many factors: higher energy and fertilizer prices; increased demand for biofuels, especially in the U.S. and the European Union; and droughts in Australia and other countries. World grain stocks are at record lows and next year’s prices depend on the success of the next harvest in the northern hemisphere.
Wheat prices (US$) have increased by 200 percent, and overall food prices (US$) have risen by 75 percent since the turn of the century. Adjusting for exchange rates and domestic inflation reduces the price increases faced by developing countries—but these increases are still severe for millions of poor consumers.
“The increases in grain prices are not caused by short-term supply disruptions, as is the normal case, and it will likely take several years for supplies to increase to rebuild stocks and allow prices to fall,” said Don Mitchell, Lead Economist in the World Bank's Development Prospects Group.
If you live on less than $1 a day
Imagine a low-income family, say in Bangladesh, that might pay 20 cents for a kilogram of rice one year and 30 cents the next.
For those poor people who consume more on food than they produce, unrelenting increases in the price of staples can be devastating. Some poor people, however, will gain, notably those who produce more food then they consume. Policy needs to protect the poor losers, without hurting the poor gainers.
Yemen, which imports about 2 million metric tons of wheat a year, illustrates how rising food prices can increase poverty. After a year of record inflation, doubled wheat and wheat product prices might increase national poverty by 6 percentage points.
“If no action is taken, this could fully reverse the gains in poverty reduction that we’ve seen in the country between 1998 and 2005,” said Thirumalai Srinivasan, Country Economist with the World Bank in Yemen.
While the urban poor are most affected, it is worth remembering that most rural people are buyers rather than sellers of food. There could well be severe effects for landless rural workers whose subsistence wages may not increase apace with food prices.
No relief in sight
The root causes of the phenomenon of rising food price—high energy and fertilizer prices, the demand for food crops in biofuel production, and low food stocks—are likely to prevail in the medium term.
Energy and fertilizer prices are projected to stay high. Already, fertilizer prices have increased 150 percent in the past five years. This is very significant, because the cost of fertilizer is 25 to 30 percent of the overall cost of grain production in the U.S. (which supplies 40 percent of world grain exports).
The demand for biofuels will also probably rise. A quarter of the U.S. maize crop (11 percent of the global crop) went into biofuel production this year, and the U.S. supplies more than 60 percent of world maize exports. Notably, the U.S.—one of more than 20 countries to require biofuels use—has just doubled its biofuels mandate by 2015.
“The biofuels surge makes things worse by adding high demand on top of already high prices and low stocks,” said Mitchell, “Ethanol and biodiesel produced in the U.S. and EU don’t appear to be delivering on “green” promises either, making them very controversial.”
In addition, surplus production capacity is scarce. The E.U.’s “set aside” lands, originally intended to keep surpluses low, have already been brought into production. And U.S. Conservation Reserve lands would give low yields, even supposing legislation to move them into production was in the works.
The implications for trade
However, costly food will disrupt the trade balances of relatively few countries, because the majority will see largely offsetting gains in other commodity exports. Countries most adversely affected include Jordan, Egypt, the Gambia, Lesotho, Djibouti, and Haiti.
Looking at the global landscape, sustained high food prices could lead rich countries to be more willing to reduce agricultural subsidies and that could improve the prospects for a successful Doha Round. Trade policy, once motivated by surplus food, now faces a reversal of circumstances.
A wide range of responses
Governments are responding in a number of ways, some of which provide immediate relief but risk confounding the problem in the long term. Banning exports to keep domestic prices low, for instance, can severely affect producers who are often poor themselves. This also reduces the supply response needed to meet future demand growth.
Yet worries over the impact of high food prices on citizens have led several countries—including Honduras, India, Indonesia, Moldova, the Philippines, and Russia—to implement price controls, subsidies, and export bans.
“Governments need to take focused action, with direct subsidies for the poor rather than the whole country,” said Mitchell. “Income transfers or food assistance for poor people will work more efficiently and sustainably than more general steps at the national level.”
Of the 36 countries that the FAO now believes are in crisis over food security, 21 are in Africa. In some, such as Lesotho and Swaziland, drought has affected production; others such as Sierra Leone lack widespread access to food from local markets for various reasons, including very low income and very high food prices; and more than a dozen, including Ghana, Kenya and Chad, are undergoing severe localized food insecurity.
Thanks to the generous replenishment of IDA funds, the Agricultural and Rural Department of the Africa Region can potentially increase lending to agriculture in Africa by as much as 30 percent annually for the next two years, depending on client requests. This would help boost agricultural growth—a move recommended by the 2008 World Development Report.
The Africa Region plans to scale up support to Social Safety Net programs, extending further resources to programs such as the “food for work” and “cash for work” programs ongoing in Ethiopia. Slideshow on food security in Ethiopia.
The Bank also plans to assist countries in Africa to keep grain moving across national borders and to move better technologies (such as “zero tillage”, which lowers production costs while reducing greenhouse gas emissions and conserving soil) into the fields.
In partnership with the CGIAR and others, the Bank will help Africa invest more in agricultural research which has proven results in the form of virus-resistant cassava in Uganda and NERICA rice in West Africa.
Analytic as well as operational work is underway in other areas as well. For example, infrastructure projects can help reduce the costs of transporting food to markets and small agribusiness companies could be offered hedging instruments to deal with shocks from the price of food.
Across all regions, the Bank will encourage countries to intensify rather than expand agriculture to avoid high environmental costs. As agricultural demand increases, forests and high-biodiversity areas are at greater risk of encroachment.
Meanwhile, concern over the issue of food prices continues to mount globally, with the UN’s World Food Programme now holding crisis talks to discuss the possibility of rationing food aid—something that may be necessary if more short-term aid for food does not materialize.
Photo credits: Elena Elisseeva, Jiri Vaclavek, Scott Wallace, and Ray Witlin