Rising Food Prices in East Asia: Challenges and Policy Options Luc Christiaensen,, World Bank, presentation at the Managing Vulnerability in East Asia workshop, Bangkok, June 25-26, 26, 2008
Outline Where are food/rice prices heading? How are economies and people faring? Are there more efficient policies to secure households access to food? Is there scope for a supply response? What are the implications of the current crisis for the global food architecture?
Where are food/rice prices heading?
World cereal prices declined only marginally after having increased up to 4 times since 2000 Rice price increase outstripped increase in other cereal prices 1000 900 800 700 Rice 600 500 400 300 200 100 0 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 $/ton Wheat Maize
Increased biofuel demand a key driver for the increase in rice prices through substitution Increased demand for biofuels a key factor in the rice price explosion over the past months. Biofuel crops diverted land from wheat production. The surge in wheat prices was reflected in rice prices through substitution Rice stocks @ historical lows. Rising energy and fertilizer prices and the falling dollar estimated to contribute 1/3 3.00 2.50 2.00 1.50 1.00 240 kg of maize (100 liters of ethanol) to fill one SUV tank Ratio of rice to wheat prices Rice price forecast at $600/ton based on LR relation between wheat and rice prices 0.50 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
1200 1000 800 600 400 200 0 The Run on Rice Rice Price (100B) 2004-08US $/mt 1-Jan-04 1-Apr-04 1-Jul-04 1-Oct-04 1-Jan-05 1-Apr-05 1-Jul-05 1-Oct-05 1-Jan-06 1-Apr-06 1-Jul-06 1-Oct-06 1-Jan-07 1-Apr-07 1-Jul-07 1-Oct-07 1-Jan-08 1-Apr-08 1-Jul-08 Philippines buying > $1,000/ton Japan sells 200,000 ton WTO stocks to Philippines; record harvests forecast Philippines buying > $700/ton Vietnam imposes export restrictions India imposes export restrictions
2008 rice expected to remain at $700-800/ton Bearish Thailand s second crop larger than expected; Bangladesh s Boro harvest ahead of last year s, India s monsoon 47% above the norm Bullish Vietnam put a minimum export price of $800/ton and Thailand a support price of $825/ton India shows no sign of lifting its export ban and Pakistan is considering introducing one. Egypt plans to reduce rice plantings by 35% in favor or corn leaving an exportable suplus of only 400 TMT vs 1.2 MMT normally. Market Uncertainties How aggressive will Japan be in re-exporting its WTO stocks and will it commit to direct shipment of its 2008 import commitments. Will China agree to increase its exports by 2-3 MMT. Will Thailand fully use its gov't-held stocks or enlarge them. How aggressively will it price these stocks. When will India relax its export ban. The extent of damage from the 2008 typhoon season. first three subject to policy decisions
Food prices high well beyond 2008 Grain 2007 2008 2009 2010 2015 Maize 100 127 132 125 110 Wheat 100 139 134 130 100 Rice 100 152 157 161 145 Soybeans 100 129 124 119 105 Soybean oil 100 123 117 111 86 Sugar 100 125 133 141 137
How are economies and people faring?
Inflationary pressures follow world food prices increase The large 2008 increase in international food prices is increasingly being passed on. Food price inflation in VN (34 %), in CN (22%), in IND (16%) Food price inflation creating inflationary pressures with global food price increase an important factor. 2006 2007 Q4 2008 Q1 2008 April "Headline" consumer price inflation China 1.5 6.7 8.1 8.5 Indonesia 13.1 6.7 7.6 9 Philippines 6.2 3.3 5.5 8.3 Thailand 4.6 2.9 5 6.2 Vietnam 7.4 10.7 16.4 21.4 "Food" Consumer Price Inflation China 2.3 17.5 21 22.1 Indonesia 14.7 11.9 12.4 15.7 Philippines 5.5 4.1 7 11.4 Thailand 4.6 2.7 6.8 9.8 Vietnam 8.7 15.9 26 34.2
Household welfare under pressure, while growth and poverty reduction remains robust In general, poverty effects most hardly felt in rural areas urban poor, landless rural workers, and many poor small landholders are net food buyers and most of the poor live in rural areas (93% of 1$-day poor) Indonesia: 76% of the poor are net rice buyers, incl. 72% of the rural poor 10% increase in rice price reduces value of expenditures of the poorest 10% by 2% Vietnam: A 10% rice price increase, raises average household welfare by 0.6 percent, and reduces national poverty by 0.1 %points But, 54% of rural households are worse off and 92% of urban households; As countries continue to grow at a robust pace, poverty continues to decline, but not as fast
Are there more efficient policies to secure households access to food?
Countries Responses Country Economy wide policies Existing social protection programs Reduce import tariffs Export restrictions/ export tax Reduce food grain taxes Price controls/ consumer subsidies Increase supply using stocks Cash transfer Food for work Food ration/ stamp School feeding Cambodia X X X X X China X X X X X X X Fiji X X X Indonesia X X X X X X Lao PDR Malaysia X X Mongolia X X X Papua NG Philippines X X X Solomon Isl.X X Thailand X Timor Leste X X X X Vietnam X
Ensuring food security through social protection programs Targeted cash transfers - first best - Support purchasing power w/o distorting domestic production incentives and w/o reducing the incomes of poor food sellers - E.g. China with Indonesia and Philippines exploring the option - Feasibility depends on administrative and fiscal capacity Alternatives for more rapid deployment include: Food-for-work and public works programs (Argentina s Trabajar program, Indonesia s padat karyas (i.e. public works) less leakage than food subsidies if compensation low enough School feeding programs, but not all vulnerable groups covered Emergency food aid distribution as temporary measure b/c physical transfer of food costly and often significant leakage
Ensuring household food security by lowering domestic food prices Reducing import tariffs and other taxes on key staples Easy to implement (24 out of 58 countries) Opportunity for more long term policy reforms (Philippines) Most EAP countries reasonably well placed to address the fiscal costs Price controls or consumer subsidies Significant long run costs and hard to remove Export restrictions Limited reduction in domestic prices, while reducing the supply response Stimulates self-sufficiency in importing countries and a destruction of future export markets at a high cost to efficiency
Ensuring an environmentally sustainable supply response?
Competition for natural resources requires more production with less land and water Most of EAP is land and water constrained Urban demands for land and water are already creating conflict between rural and urban interests Facilitating transfer of water and land to non-agricultural uses without social conflict requires development of both transferable property rights systems and resource saving technologies to maintain production
Fortunately there is significant scope for rapid intensification through increased yields, Actual and potential rice yields Yield (t/ha) 9 8 7 6 5 4 3 2 1 0 Cambodia Laos Thailand Philippines Vietnam Indonesia SE Asia Self sufficiency 2025 China Rice yield gap with best practice at least 25 % More K could increase yields by 0.5 ton/ha in SE- Asian countries
better water management, and Irrigation efficiency currently only 46-65% vs 85-90% in US, Australia But there is substantial scope for improvement better leveling and higher bunds to retain wet season water increased yields in Cambodia by 27 percent shift from area based to volume based charges for irrigation water in the Tarim Basin in China resulted in a 17 % decrease in water use.
and reducing post-harvest losses Quantitative and qualitative postharvest losses amount to 25% of the value of the total crop in SE Asia Poor quality milling technology accounts for most of the losses due to excess grain breakage Grain quality losses on-farm due to poor harvest timing (discolored grain)) and drying (sun cracking) Additional losses through handling and transport process
Policy options for fostering a supply response Large scale demonstration programs Grant financing of $0.5-1 million per country needed coupled with M&E Australia's "free ton for trial" scheme in the 1990s induced Indonesia to shift fertilizer subsidies to the deficient soil nutrient Not only market smart, but also agronomically intelligent input subsidies Indonesia s N subsidization leads to imbalanced fertilizer use Public private partnerships E.g. dry seeded rice uses less water, generate higher yields but needs improved seeder equipment public sector helps with the latter, pvt sector provides coated disease resistant seeds and TA
The global food architecture under pressure
The world market as a source of food security is in doubt Optimal strategy for national food security relies on: Market based instruments Targeted safety nets Production largely based on comparative advantage and efficiency loss and fiscal costs with national buffer stocks avoided The experience has been positive especially when shocks from domestic supply shocks (Bangladesh 1998) the world markets were sufficiently supplied, The exporters interest are closely allied with the global market System recently under pressure Low world rice stocks since early 2000 Sudden demand shock following biofuel policies Absence of adequate framework of rules and cooperative institutions to govern international rice trade Confidence in international market eroded
Four policy options emerging 1. Countries fall back on rice self-sufficiency at the expense of huge efficiency losses (e.g. Philippines 100% rice self-sufficiency by 2010) 2. Bilateral trade arrangements to ensure national food supply Saudi Arabia discussing direct production by Saudi private producers in several wheat producing countries 3. Establishment of a world rice buffer stock e.g proposal by Philippines government
Four policy options emerging 4. Restoration of confidence in world rice market Prick the rice price bubble by releasing 3-4 million tons of rice stocks by Japan and China A disarmament conference between major exporters and importers to temporarily ban export restrictions Develop more reliable trading arrangements Revisit biofuel policies
Concluding remarks World rice prices will remain high Inflation is rising and especially the poor suffer Targeted cash transfers and reduced food import tariffs and taxes are first best responses Large scale demonstration plots hold a lot of promise of a rapid supply response Restoration of confidence in the international market requires pricking the price bubble, coordination among importers and exporters, and a revision of biofuel policies