High and Rising Food Prices: Why Are They Rising, Who Is Affected, How Are They Affected and What Should Be Done?

Transcription

1 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

2 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 Page 2

3 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: Food prices in historical perspective Why have food prices risen? Immediate and structural factors Who is affected? How? What are the policy implications? Page 3

4 Historical Perspective: Agriculture Production has Outpaced Population Growth Source: FAO Page 4

5 Historical Perspective: Long Run Nominal and Real Food Prices Source: FAO and Orden Page 5

6 Long Run Oil Prices Source:add wtrg graph Page 6

7 Rice prices in Guatemala City Source: FEWSNET Page 7

8 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 Page 8

9 (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 Page 9

10 (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 Page 10

11 (3) Climatic Shocks The last two years has seen significant climatic shocks in a number of major producing, and exporting, countries including: 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 Page 11

12 (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 China India Russia Indonesia Vietnam Kazakhstan Argentina Oilseeds Indonesia China India Page 12

13 Types of Government Interventions Source: FAO Page 13

14 (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: Often poorly targeted Costly, and often crowd out other government expenditures Difficult to reform or remove Page 14

15 (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

16 Structural Factors Income growth Reductions in productivity growth Page 16

17 (1) Income growth around the world Source: IFPRI from World Bank data Page 17

18 (1) Income Growth is strongest in Developing Countries Source: IFPRI from World Bank data Page 18

19 (1) Income growth means rising food demand Source:IFPRI from FAO data Page 19

20 (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 Page 20

21 (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? Page 21

22 World Cereal Stocks, Total s tocks China * Source: IFPRI from FAO data Page 22

23 2007 World Agricultural Stocks at Low Levels Source: CRS from USDA data Page 23

24 Who is Affected? The impact of rising food prices depends on several factors: 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 Page 24

25 Distributional Impacts Differ by Country (rural population % gain/loss of welfare by income quintile from 10% price increase of staple main food) Source: FAO Page 25

26 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

27 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

28 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 : 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

29 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 Page 29

30 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 Page 30

31 Immediate Responses To address the current crisis At the national level Targeted assistance to those most badly affected : 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) Page 31

32 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 Page 32

33 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 Page 33

34 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 Page 34