64361 Food Price Watch POVERTY REDUCTION AND EQUITY GROUP POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK THE WORLD BANK FEBRUARY 2011 Global food prices continue to rise. The World Bank’s food price index increased by 15% between October 2010 and January 2011 and is only 3% below its 2008 peak. The last six months have seen sharp increases in the global prices of wheat, maize, sugar and edible oils, with a relatively smaller increase in rice prices. Higher global wheat prices have fed into signi�cant increases in local wheat prices in many countries. Higher maize, sugar, and oil prices have contributed to increase the costs of various types of food, though local maize prices have largely been stable in Sub- Saharan Africa. Local rice prices have increased in line with global prices in some large rice-consuming Asian countries. These food price rises create macro vulnerabilities, particularly for countries with a high share of food imports and limited �scal space, as well as increases in poverty. Estimates of those who fall into, and move out of, poverty as a result of price rises since June 2010 show there is a net increase in extreme poverty of about 44 million people in low- and middle-income countries. In the immediate term, it is important to ensure that further increases in poverty are curtailed by taking measures that calm jittery markets and by scaling up safety net and nutritional programs. Investments in raising environmentally sustainable agricultural productivity, better risk-management tools, less food- intensive biofuel technologies, and climate change adaptation measures are all necessary over the medium term to mitigate the impact of expected food price volatility on the most vulnerable. Global food prices continue to rise, though not side, there is uncertainty about the size and the quality uniformly for all grains. The World Bank’s food price of wheat exports from Australia—where crops were index rose by 15% between October 2010 and January damaged by excessive rains and floods—as well as 2011, is 29% above its level a year earlier, and only 3% concerns about China’s winter wheat crop. Demand below its June 2008 peak (�gure 1). A breakdown of the index shows that the grain price index remains 16% Figure 1. World Bank Food Price Indices below its peak mainly due to relatively stable rice prices, which are signi�cantly lower than in 2008. The increase over the last quarter is driven largely by increases in the price of sugar (20%), fats and oils (22%), wheat (20%), and maize (12%). Among grains, global wheat prices have increased the most in recent months. A confluence of weather shocks to various large producing countries, followed in some cases by export restrictions, curtailed supply and caused wheat prices to more than double between the lows of June 2010 and January 2011 (�gure 2). Currently two factors are keeping wheat prices high. On the supply Source: World Bank Development Prospects Group. Food Price Watch, produced by the Poverty Reduction and Equity group at the World Bank, is a series that aims at drawing attention to trends in domestic food prices in low- and middle-income countries and their policy implications. Contact: Hassan Zaman (hzaman@worldbank.org) Figure 2. Global Prices of Key Food the impact of global price rises as prices of nonsubsidized Commodities wheat products, as well as other basic staples, have increased. Local practices have also shielded consumers from higher global wheat prices—for instance in Cambodia bread prices have remained stable as consumers use flour made from locally produced cassava. Maize prices have increased sharply and are affected by complex linkages with other markets. In January 2011, maize prices were about 73% higher than June 2010. These increases are due to a series of downward revisions of crop forecasts, low stocks (U.S. stocks-to-use ratio for 2010/11 is projected to be 5%, the lowest since 1995), the positive relationship between maize and wheat prices, and the use of corn for biofuels. Ethanol production demand for corn increases as oil prices go up, with sugar-based ethanol less competitive at current Source: World Bank Development Prospects Group. sugar prices. Recent United States Department of Agriculture (USDA) estimates show the share of ethanol drivers center around the possibility of large wheat- for fuel rising from 31% of U.S. corn output in 2008/9 importing countries, particularly in the Middle East and to a projected 40% in 2010/11. Increased demand for North Africa, coming to the market with large orders. high fructose corn syrup from countries such as Mexico, These are related to assuring the public that adequate as they substitute away from higher priced sugar, also domestic food stocks exist during uncertain political contributes to higher demand for corn. Prospects of times in some countries. Another reason is that countries easing in this market depend partly on the size of the like Saudi Arabia are progressively reducing domestic crops in Latin America, particularly Argentina, which production of wheat to conserve valuable water has been affected by unusually dry weather due to the resources and relying more on imports. La Nina effect, and the extent of import demand from Higher global wheat prices have fed into sharp China in 2011 as well as oil and sugar price trajectories. increases in domestic wheat prices in many countries. The transmission of higher global maize prices is The transmission rate of global wheat price increases to varied and has depended signi�cantly on domestic the domestic price of wheat-related products has been harvest conditions. Countries in Sub-Saharan Africa high in many countries. For instance, between June have bene�tted from excellent maize harvests, which 2010 and December 2010, the price of wheat increased have led to a sharp fall in prices. The declines from by large amounts in Kyrgyzstan (54%), Bangladesh June–December 2010 shown in table 1 come on the (45%), Tajikistan (37%), Mongolia (33%), Sri Lanka heels of even sharper price falls in the early part of the (31%), Azerbaijan (24%), Afghanistan (19%), Sudan year—on average, maize prices were lower in 2010 in (16%), and Pakistan (16%). Several of these countries comparison to 2009 in Uganda (52%), Rwanda (37%), have a large share of calories consumed from wheat- Kenya (33%), Malawi (30%), Ethiopia (22%), and based products, particularly for the poor (table 1). Tanzania (19%).1 However, these prices also exhibit In several other countries, the adjustment to higher considerable volatility, which has adverse impacts on global wheat prices has been shared by the government both producers and consumers. For instance, after a and consumers. In India, higher domestic procurement sharp decline in the early part of 2010, maize prices in prices for wheat have contributed to record domestic Rwanda have rebounded by 19% since June 2010. grain stocks, which have been released to curb prices. In Several Latin American countries saw the price of maize parallel, the subsidized wheat program has been scaled rise dramatically in the last half of 2010 as dry weather up. In Egypt, the bread subsidy is estimated to reach lowered yields—the largest increases were witnessed in around 85% of the population. Nevertheless, even in Brazil (56%) and Argentina (40%). Higher global maize these countries, consumers are not fully exempted from 1 The prices for Uganda, Rwanda, Kenya and Tanzania are in U.S. dollars. WWW.WORLDBANK.ORG/POVERTY POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK THE WORLD BANK GROUP 2 Table 1. Largest Movers in Domestic Prices, June to December 2010 Change Calorie Change Calorie in price share in price share Product by country (%) (%) Product by country (%) (%) Wheat Rice World price (US$, HRW U.S. World price (US$, 5% Thai, 75 17 Gulf Ports) Bangkok) Kyrgyzstan (retail, Bishkek) 54 40 Vietnam (retail, Dong Thap) 46 59 Bangladesh (retail, national 45 6 Burundi (retail, Bujumbura) 41 3 average) Tajikistan (retail, national 37 54 Bangladesh (retail, Dhaka) 19 70 average) Mongolia (retail, 33 42 Pakistan (retail, Lahore) 19 6 Ulaanbaatar) Indonesia (retail, national Sri Lanka (retail, Colombo) 31 14 19 50 average) Azerbaijan (retail, national 24 57 Mozambique (retail, Maputo) 14 8 average) Cambodia (wholesale, Afghanistan (retail, Kabul) 19 .. -11 65 Phnom Penh) Sudan (wholesale, Mexico (wholesale, Mexico 16 15 -9 2 Khartoum) City) Pakistan (retail, Lahore) 16 37 Maize Brazil (wholesale, São World price (US$, U.S. Gulf 14 13 73 Paulo) Ports) Bolivia (wholesale, La Paz) 10 18 Brazil (wholesale São Paulo) 56 7 Argentina (wholesale, Cameroon (retail, Yaounde) -15 6 40 3 Rosario) Sorghum Rwanda (wholesale, Kigali)a 19 5 Peru (wholesale, national World price 88 12 11 average) Guatemala (retail, national Somalia (retail, Mogadishu) 26 .. 8 40 average) Sudan (wholesale, -37 26 Kenya (wholesale, Nairobi)a -8 35 Khartoum) Ethiopia (wholesale, Addis Mali (wholesale, Bamako) -13 13 -8 21 Ababa) Beans Moldova (retail, Chisinau) -8 22 Burundi (retail, Bujumbura) 48 16 Cassava Cameroon (retail, Congo, Dem. Rep. of (retail, 43 4 -20 53 Yaounde) Kinshasa) Uganda (wholesale, Mozambique (retail, 38 5 -39 32 Kampala)a Nampula) Cape Verde (retail, Kenya (wholesale, Nairobi)a 22 4 -26 .. Santiago) Source: FAO, GIEWS. a. Prices in U.S. dollars because local currency prices unavailable. WWW.WORLDBANK.ORG/POVERTY POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK THE WORLD BANK GROUP 3 prices are also passed through to consumers indirectly These higher prices feed through to domestic prices by raising animal feed prices, meat prices, and the price quickly in many countries—for instance, sugar prices of many processed food categories. doubled in Cambodia between June and December Global rice prices have increased at a slower rate 2010 and edible oil prices increased by 15% between than other grains and the outlook remains stable. The September and December in Afghanistan. Several export price for Thai rice has increased by 8% (Thai 5%) countries have intervened to temper this pass through. between October and January 2011, and 17% since June In Algeria, taxes and import duties on sugar and edible 2010. They remain about 70% below the peak reached oil were sharply reduced in January 2011 due to double- during the 2008 food crisis. Following good harvests in digit prices rises. In Indonesia, the government has large exporting countries, the decision by the Philippines reduced taxes on sugar and increased subsidies to local to limit imports, and the release of large stocks onto the cooking oil producers. market by Thailand, prices appear to be leveling off. One Prices of other food items essential for dietary factor limiting the downward pressure on rice prices are diversity have risen in many countries. In India, food recent announcements by large importers such as inflation stood at 18.3% in December partly due to the Bangladesh and Indonesia to signi�cantly increase higher prices of fruits and vegetables, milk, meat, and domestic stocks. �sh. In China, similarly, food inflation was driven largely Domestic rice prices have risen sharply in some by vegetables (see �gure 3). In the second half of 2010, countries and remained steady in others. The domestic beans prices increased dramatically in Burundi (48%), price of rice was signi�cantly higher in Vietnam (46%) Cameroon (43%), Kenya (38%), and Uganda (22%). In Mongolia, an outbreak of the foot and mouth disease, and Burundi (41%) between June–December 2010. coupled with a severe winter experienced in 2010, led to Indonesia (19%), Bangladesh (19%), and Pakistan (19%) a sharp increase in meat prices. Average mutton meat have increased in line with global prices. These Asian prices were 32% higher in 2010 compared to 2009. countries are large rice consumers, especially among the poor. Rice prices have increased in Vietnam despite good These food price rises create a range of macro domestic harvests. This is primarily due to the vulnerabilities. One aspect is the impact on domestic depreciation of the currency, which has fuelled overall food inflation and overall inflation. More than one-third of the countries in Eastern Europe and Central Asia had inflation and expectations of higher demand from large more than 10% food inflation in 2010. Countries with a importers and led to the minimum rice export price high share of net food and energy imports face current being raised by the Vietnamese government. Rice price account vulnerabilities. These include Tajikistan, the increases in Sri Lanka (12%) and China (9%) have been Kyrgyz Republic, Georgia, and Albania in Eastern relatively moderate in the second half of 2010, while in Europe and Central Asia, a region where limiting Cambodia and the Philippines the retail price of rice current account de�cits is particularly important remained largely unchanged during this period. Rice following the 2009 �nancial crisis. The �scal impact of prices outside Asia remained stable in many countries, these price rises depends on the extent to which food tax such as Cameroon, Guatemala, Mexico, Panama, and revenues increase and expenditures on mitigating Somalia, during this period. measures—such as for social protection programs—are Sugar and edible oil prices have increased sharply in increased. recent months. Sugar prices have risen by 73% since Our estimates suggest that an additional 44 million June due to supply shortfalls from Brazil, the largest people may have fallen into poverty in low- and middle- exporter, and weather shocks in Australia. Similarly, income countries due to the rise in food prices since edible oil prices were up on account of a number of June 2010. In order to assess the impact on poverty of weather-related shocks. Prolonged dry weather related the change in food prices in the second half of 2010, we to La Nina lowered expectations of yields in Brazil and extend a model used to estimate the impact of the 2008 Argentina, which together account for roughly 45% of food price crisis (see box 1 for the details). Net producers soybean exports. On the other hand, floods in southern of food bene�t from higher prices while net consumers Malaysia and Indonesia have hindered palm oil harvests. suffer. Our results show that extreme poverty in low- WWW.WORLDBANK.ORG/POVERTY POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK THE WORLD BANK GROUP 4 through of global staple prices and allowed for change, year-on-year) substitution away from imported wheat and rice in 40 some of the most vulnerable countries. Second, in sharp 35 Food Beans Vegetables Pork contrast to 2008 and buoyed by good harvests in 30 Vietnam and Thailand, the fundamentals in the supply 25 situation in the rice market remain strong. Rice is an important commodity not only because it is the primary 20 staple for many developing countries, but also because it 15 was the main source of the contagion that precipitated 10 the 2008 crisis when many large exporters banned its 5 export. 0 -5 There are several short- and medium-term policy implications of this recent round of food price rises. -10 There are certain key commodity markets, such as rice, -15 where informational uncertainty (for example, of stocks Nov-09 Nov-10 Feb-10 Sep-10 May-10 Oct-10 Aug-10 Jun-10 Jul-10 Apr-10 Mar-10 Dec-09 Jan-10 held by large exporters) and ‘panic buying’ may keep prices from falling to the levels expected by the good Source harvests. The publication of regular, accessible data on stocks as well as commitments by larger exporters not to impose export restrictions would help maintain and middle-income countries may have increased by 44 stability, which is crucial to prevent further increases in million people in net terms as a result of the food price poverty. At the same time, safety net and nutritional increases between June and December 2010. This programs need to be scaled up in vulnerable countries— reflects 68 million people who fell below the $1.25 and the international community may need to focus on poverty line and the 24 million net food producers who countries like Afghanistan, Burundi, the Democratic were able to escape extreme poverty. Republic of Congo, the Kyrgyz Republic, and Mongolia, There are nutritional implications related to higher to name a few, that are facing large price spikes. Countries food prices. Higher poverty is associated with increased that are large net commodity importers with low reserve malnutrition as poorer people eat less and substitute cover and limited �scal space will need to be monitored away from more expensive, nutritious food and into to assess their external �nancing needs. The frequency cheaper staples. These nutritional setbacks are of extreme weather-related events over the past year and particularly severe for infants between the ages of zero their impact on food prices underscores the vulnerability and two as well as pregnant women. The complex of the poor to climate change. Over the medium term, linkages across food markets also affect obesity—for investments in raising environmentally sustainable instance, the increased demand for high fructose corn agricultural productivity, climate change adaptation syrup, as a substitute for more expensive sugar, has measures, and �nding less food intensive biofuel public policy implications in a country like Mexico, technologies are all necessary to mitigate the impact of where obesity is a serious public health concern. food price volatility on the most vulnerable. Finally, There are two factors limiting the poverty impact of these spikes underscore the importance of efforts to the current global price spike. In many countries in raise incomes of the poor so that they spend a lower Africa, good harvests of domestic crops—like maize, share of their budgets on food and are less vulnerable to sorghum, millet and cassava—have limited the pass such shocks. Box 1 next page WWW.WORLDBANK.ORG/POVERTY POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK THE WORLD BANK GROUP 5 Box 1. Estimating the Poverty Impact of Recent Food Price Rises To quantify the poverty impacts of the recent rise in food prices, we use a global computable model (Global Trade Analysis Project [GTAP]) with a sample of 28 household surveys with data on individual households’ expenditures and income sources. These national surveys are drawn from low- and middle- income regions from around the world and represent 41% of the population living in these countries (see table 1).We use local food price changes for the commodities where we have data for the June–December 2010 period. For the commodities where the local price data do not exist, we work out the pass through of global commodity price changes on local prices using the share of that commodity’s import in total consumption. In the second stage of our calculations, we apply the expected domestic price changes to Combining these two impacts, we calculate the net impact on each household and determine whether it The results show that in half of our sample, we observe an increase in poverty greater than 0.5 percentage points, and in eight countries an increase of more than 1 percentage point, including Tajikistan, where poverty is expected to have risen by more than 3.6 percentage points, and Pakistan, where the 1.9 percentage point increase in poverty is mostly due to higher wheat prices, with the impact on consumers expected to have declined because a large portion of poor households are net producers of rice and population in low- and middle-income countries, we infer that the recent rise in food prices may have put poverty line and the 24 million net food producers who were able to escape extreme poverty. Share of the population Poverty rate Total population Sample population covered by change, Poverty rate Country type (millions) (millions) sample (%) percentage points change (millions) Low-income countries 828 286 34.5 1.1 9.5 Middle-income countries 4,758 1,987 41.8 0.7 34.1 Total 5,586 2,272 40.7 0.8 44.0 Source Agricultural Economics WWW.WORLDBANK.ORG/POVERTY POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK THE WORLD BANK GROUP 6