The price of food: ingredients of a global crisis

Prices are surging for food commodities worldwide, posing a tough policy challenge for developing countries - can they protect poor consumers without crushing new opportunities for farmers?

Heidi Fritschel
9 April 2008

Poor consumers across the globe are protesting about their rising food bills. In December 2007, Mexicans rioted in response to an enormous jump in tortilla prices, which quadrupled in some parts of the country; in January 2008, Indonesians took to the streets to protest high soybean prices; in February, protesters in three major towns in Burkina Faso, angry about the rising cost of food and other basic goods, attacked government offices and shops; unrest linked to food markets has occurred also in Guinea, Mauritania, Morocco, Senegal, Uzbekistan, and Yemen.

The new "agflation" that has riled poor consumers marks a sharp break with the generation following the mid-1970s, a period generally characterised by years of slowly falling food prices. The Economist reports that in 1974-2005, real food prices declined by 75%; but 2005-08, they have risen by 75% percent (see "The end of cheap food", 6 December 2007). Moreover, the price increases affect nearly every food commodity. Prices of wheat, butter, and milk have tripled since 2000; those of maize, rice, and poultry have nearly doubled; those of meat, palm oil, and cassava have all gone up, too. Overall, the food-price index of the United Nations's Food and Agriculture Organisation (FAO) rose by nearly 40% in 2007, compared with a 9% increase in 2006; in the first months of 2008, prices are higher than they have been in decades.

The years of falling food prices were good for consumers, but not so good for farmers. Now, while consumers in urban areas cannot be expected to welcome soaring food prices that eat into their wallets, the higher prices should theoretically reward farmers with greater profits and better livelihoods. "Many media are reporting that high prices are good for farmers, which is true for much of the sector, but it's more complex than that", Daniel Gustafson, director of the FAO's liaison office for north America, said at a recent International Food Policy Research Institute (IFPRI) seminar. "Many poor farmers in developing countries are net food buyers."

The task for governments is to help farmers take advantage of higher prices to increase productivity - and thereby production and incomes - in order to improve their living standards and ensure that poor consumers who are already living on the edge are not pushed into destitution. This balancing-act will not be easy.

Why have they risen?

A confluence of factors underlies the dramatic rise in food prices. They include major new sources of demand for agricultural products. Millions of people in developing countries, especially fast-growing China and India, are benefiting from rising incomes; and their food preferences are shifting from grains and other staple crops to high-value products like meat, dairy, fish, fruits, and vegetables. The new urban middle class in countries where diets were once based on rice or maize is now developing a taste for products made from wheat. And demand for meat is surging - per-capita consumption of meat in China, for example, more than doubled between 1990 and 2005 and is still growing, leading to rapid increases in demand for feed-grain.

At the same time, with petroleum prices up by 19% in February 2008 alone and now hovering around an all-time high of $100 a barrel, it has become profitable to divert maize and other feed and food-crops to biofuel production; new biofuel subsidies further encourage this trend. The United States produced a record maize harvest in 2007, but one-third of the harvest went to ethanol production as a market reaction to the new subsidies. The profitability of biofuels, in turn, leads to higher prices in other commodities by causing farmers to switch from growing food-crops to growing biofuel feedstocks. "The biofuel boom is ratcheting up demand for maize and other energy crops", says Mark Rosegrant, director of IFPRI's environment and production technology division, "and farmers react accordingly." High oil prices also make it more expensive to operate farm machinery and to transport agricultural products, and raise the cost of petroleum-based fertiliser.

Climate has played a role as well. Australia, one of the world's largest wheat producers, has been desiccated by drought since 2002 - its worst drought in a century. Recent rains have led farmers to hope that the worst may be over, but the loss of much of the country's last wheat crop was a serious blow to world markets. Extreme weather in other parts of the world - such as floods in West Africa and Mozambique - has also cut agricultural production.

In addition, speculation in commodity markets, stimulated by rising commodity prices, has contributed to more volatile prices. Speculation about future commodity prices influences current prices, exacerbating price increases, which in turn encourages more speculation. The volume of traded global agricultural futures and options increased by almost 30% in 2006.

A model assessment

The factors driving food prices go beyond the "invisible hand" of self-correcting cycles of supply and demand. In such a cycle, for example, demand goes up, causing prices to rise. In response to higher prices, producers increase production and consumers reduce their demand, and prices thus fall. In this case, however, rising consumer demand from rapidly growing countries, higher energy prices, and even extreme weather related to climate change appear likely to continue. "All indicators suggest that food prices are unlikely to fall any time soon and, in fact, may rise much more depending on countries' decisions about biofuels", says Rosegrant.

IFPRI researchers have used the "international model for policy analysis of agricultural commodities and trade" (Impact) to project world food prices under various scenarios. The model projects that if countries stick with their current biofuel investment plans, by 2020 the prices of maize and oilseeds will have risen by 26% and 18% respectively over a baseline scenario, with slower growth in biofuels. If countries double their planned biofuel investments and mandates, maize prices will soar by 72% and oilseed prices by 44% by 2020. Under a longer-term scenario in which governments take no major steps to deal with climate change, world cereal prices are projected to rise 30%-40% beyond their current levels by 2050, and meat prices are projected to rise by 20%-30%.

It is possible that the impact of biofuel production on food prices could be reduced. The high prices for energy crops like maize and soybeans could restrict the profitability of biofuel production and thus push down demand for these crops for biofuel. Some processing plants have already been shut down. Cristina Amaral, senior agronomist at FAO's investment centre, says that scientists are working to develop economical ways of producing biofuels using feedstocks like grasses and agricultural-waste products.

These second-generation biofuels could reduce the pressure on foodcrops - but only if they do not compete with land and water for food and feed (see James Painter, "Indonesia: the biofuel blowback" [30 August 2007]). Joachim von Braun, director-general of IFPRI, points out that simply becoming more productive in biofuels will not reduce the competition between food and fuel but will actually increase it if farmers find it is more profitable to grow fuel rather than food.

An opportunity for farmers?

High food prices should present a golden opportunity for poor farmers to increase both production and profits. The FAO's Daniel Gustafson sees evidence that certain countries will significantly raise agricultural production. South Africa is expected to increase its planted area by 8%, he says, and farmers in Malawi and Zambia are likely to increase their production owing to subsidised input programmes in those countries.

A number of countries, especially in Asia, have been producing record harvests in recent years anyway, so future large harvests may not represent large increases over past production. "We could see some significant increases in Indian cereal production", says Gustafson. "The price rise really is quite dramatic, and there are many parts of India where even if the local rise in prices doesn't match international ones, there could still be a big jump. There are other areas where people have left the farm, or some members of the family have left the farm, leaving land fallow, so if high prices prevail, which they probably will, we could see some of these people returning to what now may be a better option."

Still, national agricultural-pricing policies and the remoteness of some rural areas often prevent world prices from reaching domestic markets, and thus farmers may not have as much incentive to boost production as world price increases may imply. But some countries behave differently. India, for instance, has increased its investment in agriculture in its 2008-09 budget and has raised prices for farmers, while protecting its consumers from high price increases.

"In a perfect world, where producers have access to seeds, fertilizers, and other inputs and where marketing and transportation systems work well, the response to higher prices is higher output", says Stacey Rosen, agricultural economist at the United States department of agriculture's economic-research service (ERS). "In the real world, however, this isn't always the case."

David King, secretary-general of the International Federation of Agricultural Producers (IFAP), lists a host of steps that governments can take to exploit the current situation for farmers and agricultural development:

* allowing price signals to reach small-scale farmers

* improving services like research and development, extension, and veterinary services

* establishing a sound regulatory environment on issues such as food-safety systems and respect for contracts

* improving infrastructure like roads, communications, and small-scale irrigation

* setting policies that will translate any trade opportunities negotiated through the World Trade Organisation into real income gains for the poor.

"We agree that rising food prices are a golden opportunity to improve poor farmers' livelihoods", says King. "However, this opportunity will not be realised if farmers are not organised in the market, consulted as partners on policies to attract investment for modernising agriculture, and provided with improved services and infrastructure." Unfortunately, investments in agricultural infrastructure, institutions, and science and technology take time to put into operation and to bear fruit.

In the meantime, there is no guarantee that small farmers will be the ones to benefit from productivity increases and high prices. In many cases, larger landowners are in a better position to respond to market signals. And Regina Birner, an IFPRI senior research fellow, worries that higher food prices will raise the value of land in developing countries so much that there will be fierce competition for that resource, to the detriment of smallholder farmers and pastoralists. "Even now, new players like corporate enterprises are knocking on the doors of African governments to get access to land for primary production and energy plantations", she says.

The poor consumers' burden

High food prices are gouging the budgets of poor consumers, who spend a much larger share of their income on food than do wealthy consumers. Moreover, staple grains like maize and rice are often the main food source for the poorest people: they account for 63% of the calories consumed in low-income Asian countries, nearly 50% in sub-Saharan Africa, and 43% in lower-income Latin American countries. A study by the ERS shows that five low-income countries (Burundi, Eritrea, Haiti, Liberia, and Zimbabwe), whose people subsist on an average of less than 2,200 calories per day per person, import more than 40% of their food. For these countries, a decline in imports stemming from high prices could deal a serious blow to the diets of people who are already nutritionally vulnerable.

An expansion of biofuel production would - according to IFPRI's Impact model - lead to substantial declines in calorie availability in some countries. If biofuel production undergoes a drastic increase, calorie availability in sub-Saharan Africa is projected to fall by more than 8% in 2020, and the number of malnourished children in the region is projected to increase by 3 million. The World Bank offers a sobering comparison: 450 pounds of maize can be converted into enough ethanol to fill the twenty-five-gallon tank of an SUV with pure ethanol one time - or used to provide enough calories to feed one person for a year.

Some very poor countries - such as Ethiopia, Malawi, and Sierra Leone - have relied heavily on food aid even when food prices were low. Food aid will be more important to these countries than ever, but as food prices rise, food aid tonnage falls. "Food aid providers like the US Agency for International Development (USAID) and the World Food Programme (WFP) are going to be hit hard as long as food aid is budgeted in dollars", says IFPRI research fellow Marc Cohen. Because aid donors such as the United States allocate a certain dollar amount to food aid each year, those dollars buy less food when prices are high.

In fact, food aid is already on the decline. The cost of commodities for USAID's office of food for peace (FFP) rose 41% in the six months up to February 2008, according to Jonathan Dworken, deputy director of FFP. "With these higher than anticipated prices, FFP now needs to set aside up to an additional $120 million for commodities already purchased, or in the process of being purchased, for emergency programmes", he says. "This means that up to $120 million must be cut from emergency food-aid contributions planned for the second half of the fiscal year."

Dworken points out that poor urban consumers, who purchase all of their food, will feel the most pain. Meeting their food needs through careful targeting of food-aid programmes will raise new challenges for food-aid agencies, which have traditionally worked in rural areas. But rural people also suffer from higher food prices. Millions of small farmers are, in fact, net food buyers, so higher food prices hurt them more than they help.

A coordinated approach

Poor developing countries face a thorny policy problem as they confront higher prices. A number of countries - Argentina, China, Egypt, Mexico, Morocco, and Russia among them - have responded by adopting price controls on food, which will limit the prices farmers receive for their goods. Many have also reduced restrictions on imports of staple foods while limiting or even banning exports of staple foods. "[Banning exports] will make the situation worse, especially for importing countries", says Amaral, the senior agronomist at FAO's investment centre.

Developed countries, on the other hand, have a responsibility to reduce the trade barriers that harm poor developing-country farmers and to expand and rethink their aid programmes. "Higher commodity prices may offer an unbeatable opportunity to conclude the protracted WTO Doha round negotiations", says Charlotte Hebebrand, chief executive of the International Food and Agricultural Trade Policy Council (IFATPC). "Higher food prices take away countries' arguments for their trade-distorting policies, be they price-linked domestic support, export subsidies, or inordinately high tariffs."

Also in openDemocracy on food security, trade and development:

Kevin Watkins, Jean-Pierre Lehmann, "World trade, poverty and the environment in the age of global governance"
(11 June 2002)

Zhou Qing, "China's food fears"
(29 September 2006)

Geoff Andrews,
"The slow revolution" (26 October 2006)

Stephen Haggard, Marcus Noland, "Famine in North Korea: markets, aid and reform"
(3 May 2007)

Paul Collier, "The aid evasion: raising the ‘bottom billion'"
(11 June 2007)

Stephen Browne,
"A green wall? Kenya, organics, and ‘food miles'"
(25 January 2008)

Also our debate, "food without frontiers" - from GM to wine, Sweden to India, biotech to allotments...

Economists generally agree on how developing countries ought to proceed: by providing income support to the poorest people via cash or vouchers to help them purchase the food they need. Then farmers can benefit from the higher prices, which should help raise production. At the same time, governments should increase their investments in agriculture, which have been in long decline. "The real solution lies in improving agricultural productivity through policy and development", says Dworken, "not just in providing food aid."

More specifically, developing countries need to strengthen their rural infrastructure and improve market access for small farmers, argues Maximo Torero, director of IFPRI's markets, trade, and institutions division. Africa in particular lacks the infrastructure that farmers need to get agricultural inputs like fertiliser into rural areas and to get their products out to markets. A study of rural transportation in the mid-1990s found that transport costs in Ghana and Zimbabwe were at least double those in Pakistan, Sri Lanka, and Thailand. With such costs, farmers often cannot profitably produce for the market, even when prices are high. "Market-oriented reforms alone are not enough to provide complete access to infrastructure in remote, poor rural areas", says Torero. "Public intervention is needed to close this gap."

The scientific community must also play a central role by focusing agricultural research and technology on increasing crop productivity through crop- breeding and water and soil management. IFPRI director-general Joachim von Braun points out that the "green revolution" of the 1960s led to cheaper and more plentiful food, benefiting both farmers and consumers in much of the world. "These accomplishments were spurred by significant investment in agricultural research and development", he says. "Unfortunately, from the 1990s agriculture fell from the priority list. After enjoying a half century of falling food costs, we now are paying the price for these years of neglect."

Joachim von Braun believes that most of the needed action must take place at the national level through a dual approach: social protection of the poor and productivity enhancement in agriculture. But a globally coordinated approach is also needed to bring together key players in agriculture - Europe, the United States, Brazil, China, India, and the major foundations and research institutions - to accelerate agricultural productivity to meet the current challenge. "Agricultural power has become more spread out around the world, with the result that there is no governance architecture that can generate appropriate political responses to the food and agriculture price and productivity crisis at the global and national levels", von Braun says. "A new agriculture, food, and nutrition governance architecture is needed. With so much at stake - the world's food supply, environmental threats to agriculture, and unacceptably high rates of hunger and poverty - a fresh response is needed. We cannot afford to be complacent."

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