The World Food Situation"

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1 The World Food Situation" Máximo Torero IFPRI McGill Conference on Global Food Security September 25-26, 26, 2008 Based on presentations by Joachim von Braun and Máximo M ximo Torero

2 The food crisis: Tradeoffs and effects Energy security risks Political security risks Food security risks Mass protests in more than 50 countries The poorest suffer most and do so silently Inflation and macro-economic imbalances Environmental sustainability consequences

3 Food protests: Definitions Food protests: - Strikes, protests, riots on food or agric.- related issues since Jan Violent food protest: - Food protest involving the use of physical force and/or resulting in casualties

4 timeline of food protests Source: News reports.

5 Number of food protests by type and income group Source: Protests news reports; Income group classification World Bank 2007.

6 Government effectiveness 2007 & food protests = Food protest Source: Kaufmann, Kraay, and Mastruzzi 2008.

7 Surge in cereal and oil prices Oil (right scale)

8 IFPRI s s scenarios [Models for changes in structural supply and demand factors ( and )] US$/ton Rice Wheat Maize Oilseeds Soybean Source: M. Rosegrant (prelim. results with IMPACT-WATER).

9 Changes in food and agriculture equation Production Land Water Inputs Workforce Climate change Agrarian structure Technology and Policies Demand Income growth Poverty and inequality Consumer behavior Bioenergy Biomass (CO2) and Policies Trade and processing -Information & Standards -Supermarkets -Bioenergy & Biomass and Policies

10 Summary: major causes behind the surge in cereal prices 1. Income growth 2. Biofuels * 3. Lack of supply response* 4. Low stocks and trade policies* 5. Climatic shocks* 6. Population growth

11 Demand factors Biofuels Income growth Population growth Demand for food Investment portfolio Monetary policies Supply Causes Supply shocks Low R&D investment Oil price Infrastructure Degradation of Natural resources Climate change CONDITIONING FACTORS Price transmission: trade policies, exchange rate, infrastructure, market structure, substitutes, etc. World Prices FEED BACK EFFECTS Trade barriers Subsidies Monetary policies Speculation Effects Effects in : Local markets of traded cereals Local markets of non traded cereals - Local labor market All other markets Heterogeneous effects (-) and (+) By type of household: -Urban rich ( - ) -Urban poor ( -, large ) -Rural wage earners ( -, + ) -Rural agriculture net sellers( + ) -Rural agriculture net buyers ( - ) -Autarkic households (food) (-. +) Policy responses Monitoring Needed data b Analysis: Micro / partial equilibrium Macro / general equilibrium

12 1. Export bans and export restrictions increase market volatility In the recent past, export bans, export taxes and export quantitative restrictions for selected products were imposed for example by: Cereal Producers -China -USA -India -Russia -Francia -Brazil -Canada -Alemania -Vietnam Producers of oil seeds -USA - Indonesia - China -Malasia - Brazil - India - Argentina in red= export restrictions

13 Export bans and export restrictions increase market volatility Simulations based on MIRAGE model showed that this explains around 30% of the increase of prices in basic cereals

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15 Eliminate agricultural export bans and export restrictions: HOW? The problem of export bans cannot be addressed country by country This issue should not be added to the WTO Doha Round. This should be addressed by an ad hoc forum of global players negotiating according to a code of conduct and in spirit of mutual building. At the very least, export trade for humanitarian purposes should be reopened now even before a forum is convened.

16 Eliminate agricultural export bans and export restrictions: WHAT, WHO and WHERE WHAT could be expected from these measures: - Stabilize grain price fluctuations - Reduce price levels by as much as 30% - Enhance efficiency of agricultural production WHO will be the key actors: - G8+5 and sub regional organizations WHERE is the action more relevant: - Mainly on countries which control major exports

17 2. Calm markets with the use of market- oriented regulation: Why? Basics of price trends: - supply & demand - rising expectations - market behavior e.g. speculation & hoarding In 2007, volume of globally traded grain futures & options increased by 33 & 48% (Chicago Board of Trade) Governments increasingly curb hoarding (e.g. India, Pakistan, Philippines) Commodity exchanges can help create fair, orderly,, and efficient food markets

18 2. Calm markets with the use of market- oriented regulation: Why? Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Number of contracts for Rough Rice (Thousands) 1 contract = 5,000 bushels Source: CBOT Wheat Corn Soybeans Rough Rice Wheat Corn SOURCE: U.S. Commodity Futures Trading Commission Numeber of contracts for Wheat, soybean, and corn(millions)

19 2. Calm markets with the use of market- oriented regulation: Why? SOURCE: U.S. Commodity Futures Trading Commission COMMODITY: CORN - CHICAGO BOARD OF TRADE; 5,000 BUSHELS (contract code 2602) Description: the graph shows the total number of long/short positions by non-commercial traders as a fraction (vertical axis) of the total reportable long positions (commercial + non-commercial)

20 Evidence of causality Commodity Indicator of speculation activity Wheat Corn Soybeans Rice 1. Monthly volume (futures contracts CBOT) 2. Monthly open interest (futures contracts CBOT) 3. Ratio volume to open interest (1)/(2) (futures contracts) 4. Ratio non-commercial positions to total reportable positions (long) + + (Apr/05 - Oct/07) (Dec/04 - Jun/07) + (Sep/05- Mar/08 ) 5. Ratio non-commercial positions to total reportable + + positions (short) (Jan/05- Jul/07) (Aug/05- Feb/08) 6. Index traders net positions (long short positions)* + (Jan/06 May/08) N/A - + : evidence of causality - Starting period of evidence of causality in parenthesis - * It combines futures and options positions, data available since January Source: von Braun, Robles, Torero (2008)

21 2. Calm markets with the use of market- oriented regulation: How? - A coordinated set of pledges for a modest grain reserve to be made by the main grain-producing countries should be established at global or regional levels - A global intelligence network should be put in place - The Food Aid Convention should be renegotiate and reformed, while current grain delivery and cash commitments should be expanded - Virtual reserves concept should be studied and if agreed implemented (IFPRI Policy Brief No.4).

22 IFPRI s s proposed policy actions Emergency package: for immediate food assistance and availability needs [Implement immediately] Resilience package: to meet ongoing and future challenges in the food system [Phase in now for future impact]

23 Policy actions: Emergency package 1. Expand emergency and humanitarian assistance - international (price indexed) and national 2. Eliminate agricultural export restrictions - reduces price levels by up to 30% 3. Fast-impact production programs in key areas - Poorest 50% of farmers in Africa - partly publicly funded = US$2.3 billion per annum 4. Change grain and oil seeds bio-fuel policies - reduces maize price by 20%, wheat by 10%