68420 ECONOMIC AND SECTOR WORK RESPONDING TO HIGHER AND MORE VOLATILE WORLD FOOD PRICES M AY 2 0 1 2 REPORT NUMBER 68420-GLB ECONOMIC AND SECTOR WORK RESPONDING TO HIGHER AND MORE VOLATILE WORLD FOOD PRICES REPORT NO. 68420-GLB ARD AGRICULTURE AND RURAL DEVELOPMENT © 2012 International Bank for Reconstruction and Development/International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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CONTENTS iii TABLE OF COnTEnTs Lists of Figures, Tables, and Boxes v Acknowledgments vii Abstract ix 1: World Food Prices Are Higher and More Volatile Than in Recent Decades 1 2: Impacts 3 2.1 Higher Levels of Undernourishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.2 Better Production Incentives, but Weakened by Higher Price Volatility and Input Costs. . . . . . . . . . . . 4 2.3 Higher Inflation, Deteriorated Balance of Payments, and Spending Reallocations . . . . . . . . . . . . . . . 4 3: Drivers 7 3.1 Longer-term Trends in Demand and Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.2 Short-term Shocks in Demand and Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.3 Low Responsiveness of the Food System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.4 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4: Responses 17 4.1 Measures to Address the Drivers of Higher and More Volatile World Food Prices . . . . . . . . . . . . . . 17 4.2 Measures to Reduce the Negative Impacts on Food Security . . . . . . . . . . . . . . . . . . . . . . . . . 22 References 23 E C O N O M i C AND S E CT OR WORK Li S T S O f fi gu R E S , TA bL E S AND bO xE S v LIsTs OF FIguREs, TABLEs, AnD BOxEs FIguREs Figure 1: World Food Prices Spiked Again for the Second Time in Three Years . . . . . . . . . . . . . . . . . . . . 2 Figure 2: Countries’ Vulnerability to Global Food Price Shocks Tracked by Share of Cereal Imports in Domestic Consumption and Food Share in Household Expenditure . . . . . . . . . . . . . . . 5 Figure 3: The World Continues to Consume More Food. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 4: Significant Rise in Reported Droughts, Floods, and Extreme Temperatures. . . . . . . . . . . . . . . . 13 Figure 5: Maize and Wheat Exports from the Black Sea Region and Latin America Are More Volatile than from Traditional Exporters and Have Risen in Relative Importance. . . . . . . . . . . . . . . . . . 14 Figure 6: Low Stock-to-Use Ratios Have Been Associated with World Food Price Spikes . . . . . . . . . . . . . 15 Figure 7: Demand Responsiveness to Food Price Changes Decline as Per Capita Income Increases . . . . . . . 16 Figure 8: The Oil-to-Maize Price Ratio Has Increased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 TABLEs Table 1: Nominal and Real Commodity Prices Have Increased Significantly since 1990. . . . . . . . . . . . . . . . 2 Table 2: Grain Price Volatility Increased over the Last Five Years Relative to the Previous Two Decades . . . . . . . 2 Table 3: Drivers of World Food Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Table 4: Food Demand Growth Slowed from the 1970s to 1990s, Then Increased in the 2000s . . . . . . . . . . 10 Table 5: Food Supply Growth Declined, Driven by Declining Yields, but Offset Recently by Increases in Area Planted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Table 6: Main Measures to Address the Drivers of Higher and More Volatile World Food Prices . . . . . . . . . . 20 BOxEs Box 1: Actual World Grain Price Behavior 1963–2011 Is Simulated Fairly Well by a Simple Model of Supply and Demand Changes and the Responsiveness of the Food System . . . . . . . . . . . . 8 E C O N O M i C AND S E CT OR WORK A C K N O W L E D gME NT S v ii ACknOWLEDgMEnTs This report was prepared within the World Bank’s Agriculture and Rural Development Department (ARD) by a team composed of Robert Townsend, Sergiy Zorya, Iride Ceccacci, Saswati Bora, and Christopher Delgado. It has benefited from the experience and feedback of numerous World Bank staff, including regional and central unit staff working on agricultural and rural development issues, and members of the World Bank’s Rural Policies Thematic Group. It draws on the Development Committee paper of the Governors of the World Bank and the International Monetary Fund (IMF) in April 2011 prepared by the same team that benefitted from extensive review within the World Bank. Andrew Burns, John Baffes, Luc Christiaensen, and Jose Antonio Cuesta Leiva from the World Bank, and George Rapsomanikis from the UN Food and Agriculture Organization suggested improvements through peer review comments at various stages during preparation of this report. Mark Cackler (Sector Manager, ARD), and Juergen Voegele (Sector Director, ARD) provided oversight and guidance for the work. Kimberly Parent edited the report. Kaisa Antikainen provided logistical support. E C O N O M i C AND S E CT OR WORK AbSTRACT ix ABsTRACT Following the world food price spike in 2008 and again in 2011, there has been increased attention on better understanding the drivers of food prices, their impacts on the poor, and policy response options. This paper provides a simple model that closely simulates actual historical food price behavior around which the analysis of the drivers of food price levels, volatil- ity, and the associated response options is derived. Future food prices are likely to remain higher than pre-2007 levels and recent price uncertainty is likely to continue for the foreseeable future. Accelerated use of food crops for industrial purposes (biofuels) continues to offset the slowing population growth effect on food demand. World food stocks remain at relatively low levels where the likelihood of price spikes is higher. Production gains may be harder to achieve in the future than in the past, with more limited space for area expansion, declining yield growth, and increases in weather variability. The low responsiveness of the food system amplifies price spikes to shocks. Over time, world food demand will likely become more price inelastic as incomes rise and food becomes a smaller share of household budgets, and if not offset by a more elastic supply response, including more flexible biofuels policies, food price increases per demand and supply shock will be higher in the future than in the past. Policy responses matter—they can either amplify or dampen price spikes, and either prevent or increase the likelihood of price spikes. Suggested responses to reduce average food price levels are to (i) raise food crop yields, and their resilience, as the single most important action needed for an enduring solution to global food security; (ii) improve the rural investment climate to induce a private sector supply response; (iii) facilitate land markets to expand planted food crop areas and strengthen property rights to improve the use of existing cropped areas; (iv) better use price risk management tools; and (v) increase the responsiveness of the food system to price increases through better integrating markets to ensure world price signals reach more producers to induce a supply response. To reduce world food price volatility, suggested responses are to (i) develop weather-tolerant crop varieties to reduce food production shocks; (ii) improve management of foodgrain stock purchases and releases to reduce, rather than amplify, local and world food price volatility; (iii) shift to market-based biofuels policies (make biofuels mandates more flexible); (iv) open trade across all markets to diversify short-term production shocks dissipating the associated price effects; and (v) improve market transparency to reduce market uncertainty and the associated large price corrections following revisions to market information (production, stocks, and trade). Suggested measures to reduce the negative impact of price shocks on food security are (i) reduce taxes and tariffs (in some cases) to lower domestic prices; (ii) short-term food and cash transfers to preserve purchasing power; and (iii) support for agricultural production to try to prevent a next season shortfall that could add to local price increases. E C O N O M i C AND S E CT OR WORK 1: W O R L D fOOD P R i CE S ARE H igHE R AND MO RE vOLATiLE TH A N iN R EC ENT D EC A D ES 1 1: WORLD FOOD PRICEs ARE HIgHER AnD MORE VOLATILE THAn In RECEnT DECADEs International food prices spiked again in 2011 for the second incentive for farmers to shift to the production of grains and time in three years, igniting concerns about a repeat of the away from the production of other agricultural commodities. 2008 food price crisis and its consequences for the poor. By June 2008, the World Bank Food Price Index1 had increased Although seasonal and annual price fluctuations are an in- by 188 percent since January 2000 (figure 1). In February trinsic characteristic of agricultural commodity markets, 2011, it reached its 2008 peak, after a sharp decline in 2009 price volatility of major food grains has increased since 2007 (by 35 percent), and has remained above its average 2009 compared to the preceding two decades. The extent of and 2010 levels. The food price increase over the last five volatility varies depending on how it is measured, but three years is in stark contrast to the price behavior over the pre- commonly used indicators of volatility presented in table 2 vious 16 years with food prices in December 2005 being indicate that price volatility of food grains was higher during at a similar level as they were in January 1990 (table 1). the five-year period, 2007–2011 than during the previous two Since December 2005 food prices increased by 98 percent in decades (1987–2006). The recent price volatility of grains is nominal terms and by 56 percent in real terms, while the cor- now similar to the high levels experienced in the 1970s3 responding increases in grain prices were 120 percent and (Gilbert and Moran 2010), which induced the imposition of 73 percent, respectively (table 1). costly policies at that time that were subsequently difficult to remove. Concerns of similar policy responses to equiva- Broader agricultural prices also increased in 2011 exceeding lent price volatility in the recent period remain high, inducing their 2008 peak by 15 percent. The World Bank Agriculture short-term response programs for alternative options (World Price Index2 peaked in February 2011, exceeding price levels Bank 2008). As an additional measure of volatility, higher reached in 2008. The 2010/11 international price increases “call� and “put� option prices for major cereals (an implied were more widespread across agricultural commodities than measure of the market’s expectation of future cereal price in 2008 when they were mainly concentrated in grain crops. volatility)4 increased markedly in 2007–2010 (FAO 2010). Since June 2010, agricultural price increases have been broad In practical terms, this higher price uncertainty means that based, including increases in sugar, edible oils, beverages, farmers, deciding what to plant, and countries deciding when animal products, and raw materials such as cotton. World to import face less certainty in the likely distribution of world market prices of sugar and edible oil, such as soybean oil, prices and perhaps greater consequences of using past price have been rising since June 2010, being 52 percent and 31 levels and distributions to guide current decisions. percent higher, respectively, in February 2012. Broad agricul- tural price increases, rather than just grain prices, provide less 3 Two indicators of volatility in table 2, which adjust for changing average prices, suggest recent volatility was lower than that in 1 The World Bank Food Price Index includes rice, wheat, maize, the 1970s, while the standard deviation of logarithmic changes barley, soybeans, soybean oil, soybean meal, palm oil, coconut in monthly real U.S. dollar prices suggests recent volatility was oil, groundnut oil, sugar, bananas, beef, chicken, and oranges. similar to the 1970s. Unlike the well-known FAO food price index, it does not include 4 An “option� gives the bearer the right to sell a commodity (put pig meat or dairy. option) or buy a commodity (call option) at a specified price for a 2 The World Bank Agriculture Price Index includes the food price specified future delivery date. Higher options prices imply higher index, plus cocoa, coffee, tea, cotton, natural rubber, tobacco, uncertainty of the price at the specified future delivery date. See and wood. Annex A in G20 (2011). E C O N O M i C AND S E CT OR WORK 2 1 : WO R LD f OO D PR iC ES A R E H i g H ER A N D MO R E v O LAT i LE TH A N i N R EC ENT D EC A D ES FIguRE 1: World food Prices Spiked Again for the Second Time in Three Years 250 200 Food price index (1990 = 100) 150 100 50 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: World Bank. TABLE 1: Nominal and Real Commodity Prices Have increased Significantly since 1990 NOMINAL PRICE INDEX CHANGE (%) REAL PRICE INDEX CHANGE (%) TIME PERIOD AGRICULTURE FOOD GRAINS FERTILIZER OIL AGRICULTURE FOOD GRAINS FERTILIZER OIL January 1990–December 2005 +13 +9 0 +77 +177 +9 +5 -4 +70 +167 December 2005–June 2008 +91 +114 +158 +343 +133 +55 +74 +109 +259 +89 June 2008–June 2010 -21 -32 -47 -62 -43 -11 -24 -41 -57 -36 June 2010–February 2011 +45 +50 +71 +36 +31 +30 +34 +53 +21 +17 February 2011–February 2012 -15 -9 -6 +11 +15 -17 -11 -9 +9 +12 December 2005–February 2012 +88 +98 +120 +157 +100 +48 +56 +73 +103 +58 Source: World Bank. TABLE 2: grain Price volatility increased over the Last five Years Relative to the Previous Two Decades MEASURES OF WORLD GRAIN PRICE VOLATILITY FIVE-YEAR INCREMENTS RELATIVE PRICE SPREAD (%)* COEFFICIENT OF VARIATION (%)** STANDARD DEVIATION (%)*** 1972–76 108 33 6.2 1977–81 40 10 3.6 1982–86 80 21 3.5 1987–91 45 12 3.8 1992–96 69 17 4.7 1997–2001 62 18 3.0 2002–06 47 10 3.2 2007–11 74 20 6.0 Source: Authors’ estimates based on the World Bank’s grain price index deflated by the U.S. consumer price index (CPI). * Relative price spread is the ratio of the maximum and minimum real U.S. dollar price difference relative to the average real price. **Coefficient of variation is the ratio of the standard deviation relative to the average real U.S. dollar price. ***Standard deviation is a standard deviation of logarithmic changes in monthly real U.S. dollar prices. RESPONDING TO HIGHER AND MORE VOLATILE WORLD FOOD PRICES 2: i MPA C T S 3 2: IMPACTs Episodes of high prices and high volatility are a major threat The impact of world price spikes varies according to the extent to food security in developing countries.5 Less predictable these prices are transmitted locally. The transmission of world food prices reduce incentives for farmers to increase their food prices to local prices is largely dependent on the import output, the increase needed to bring food prices down. This share of local food consumption. For example Africa relies on uncertainty keeps food prices at high levels for a longer time, imports for about half its rice consumption, 85 percent of its leading to fundamental food security risks for consumers and wheat consumption, and only about 5 percent of its maize governments. For poor consumers who already spend most consumption. As a result, local wheat and rice prices in Africa of their income on food, high food prices matter, particularly are influenced more by world prices, than is the case for local for already malnourished children of preschool age. Impacts of maize prices. Inland cities with poor links to ports and high amplified undernourishment on childhood development can transport costs are also less exposed than coastal cities. But be irreversible, even with subsequent declines in food prices. while low integration with world markets may reduce the im- pacts of world food price shocks on domestic net consumers Higher prices are of greatest benefit to farmers if they can during world price surges, it also reduces the pass-through of be relativity certain about them to better inform production higher prices to net producers. In addition, domestic prices in decisions, have access to inputs at a cost that is low enough isolated markets, with infrastructure and logistical constraints, to expand production profitably, and have the resources and are typically even more volatile than world prices, exposing knowledge to expand production beyond their own subsis- consumers to more frequent price shocks. tence needs. This was not the case for many of the world’s smallholders in 2008 (Ivanic and Martin 2008). Rising food prices are estimated to have benefited some smallholder 2.1 HIgHER LEVELs OF unDERnOuRIsHMEnT farmers in developing countries, particularly in rice monocul- Higher prices of food staples lead to higher levels of under- ture systems of Asia. Yet worldwide, the majority of small- nourishment as poor net consumers find themselves unable holders are net buyers of grain or are barely self-sufficient, to purchase the minimum amount of calories, nutrients, and and overall, losers have outnumbered winners among the proteins required for their day-to-day activities. The 2008 food rural as well as the urban poor, with a net increase in the price spike increased the number of undernourished people number of poor (Wodon et al. 2008). The 2010 food price by an estimated 63 million (Tiwari and Zaman 2010). Higher spike had significant distributional impacts among the poor food prices have two main effects on net buyers of food: an with an estimated 68 million losers (net food buyers falling income effect through decreases in purchasing power of poor below the poverty line) and 24 million winners (net food households; and a substitution effect through shifts to less sellers being able to escape poverty), with an estimated net nutritious food. In response to higher prices, the poor have increase of 44 million more people in poverty (World Bank no choice but to reduce their overall food consumption from 2011a)6, adding to the 1.2 billion people already living below levels that are already low. Higher food prices also typically the extreme poverty line of US$1.25 a day. induce lower spending on nonfood items (such as education and health); lower food consumption, especially of meat, 5 FAO defines food security as a situation that exists when all peo- dairy products, and fish; and cause shifts to lower-priced and ple, at all times, have physical, social, and economic access to lower quality food. For those households that are close to sufficient, safe, and nutritious food that meets their dietary needs and food preferences for an active and healthy life (FAO, 2002). subsistence and are already consuming the cheapest sources 6 The poverty impact estimates are over the period June to Decem- of calories (for example less nutritious food), the substitution ber 2010. possibilities are more limited, with the poorest suffering the E C O N O M i C AND S E CT OR WORK 4 2: i M PA C TS most. Intrahousehold discrimination against women and chil- of supply, which have historically been larger than short-term dren disproportionately affect their access to food. elasticities (Schiff and Montenegro 1995), are lowered if long- term food prices, to which production adjustments are made, Undernourishment can tax current and future economic are more uncertain. Higher input prices can further reduce growth because it increases mortality and susceptibility to incentives to produce, with recent fertilizer price increases diseases and lowers productivity. Higher undernourishment since 2005 far exceeding food crop price increases (table 1). results in the decline in cognitive development of children, reducing school performance, increasing susceptibility to 2.3 HIgHER InFLATIOn, DETERIORATED infection and chronic diseases, and diminishing productiv- BALAnCE OF PAYMEnTs, AnD sPEnDIng ity which undermine human capital development critical REALLOCATIOns for future economic growth. Nutritional status during the first 1,000 days of a child’s life (between conception to 24 Food price inflation has accelerated in several low- and mid- months of age) is critical, and nutritional deprivation in the dle-income countries where consumers often spend more early years of life has persistent long-term effects into adult- than half of their income on food, putting further pressure on hood which are often irreversible (Maluccio et al. 2009). Child the poorest. Food price inflation in the large Asian countries malnutrition accounts for more than a third of the mortality in 2010 was in the 9 to 11 percent range, as opposed to burden of children under the age of five, and malnutrition dur- nonfood price inflation of between 0 and 3 percent.8 More ing pregnancy accounts for more than 20 percent of maternal than one-third of the countries in Eastern Europe and Central mortality. A malnourished child has on average a 7-month Asia had more than 10 percent food inflation in 2010. Food delay in starting school, a 0.7 grade loss in schooling, and prices typically account for one-third to a half of consump- potentially a 10 to 17 percent reduction in lifetime earnings tion expenditure as measured by the Consumer Price Index capacity, with damage to future human capital and potential in developing countries, two to three times more than fuel. national gross domestic product (GDP) losses of 2 to 3 per- Food price increases have fed into overall inflation in sev- cent (World Bank 2006). Malnutrition is therefore not just a eral countries. Where this leads to second-round effects on result of poverty, but also a cause of poverty. prices, countries may tighten monetary policy (as was done in Brazil, India, and China in early 2011), with a potentially negative impact on near-term growth and social stability.9 2.2 BETTER PRODuCTIOn InCEnTIVEs, BuT International cereal price spikes increase the food import bills WEAkEnED BY HIgHER PRICE VOLATILITY of some low-income food-deficit countries, putting pressure on AnD InPuT COsTs their balance of payments. The cereal import bill of low-income Higher food prices provide an opportunity to produce and food-deficit countries was US$31.8 billion in 2010–11 (29 per- invest more, an incentive weakened by higher price volatil- cent more than 2009–10), in spite of improved 2010 production ity and higher input costs. Smallholder farmers in developing and the lower volume of cereal imports required (FAO 2011a). countries produce more when output prices improve (World North Africa and the Pacific Islands experienced the largest Bank 2008). High food prices offer opportunities for many negative impact, paying higher prices and importing more poor countries to develop their agricultural sectors. This can cereals to meet the required domestic demand. Although the help link local farmers to regional and global supply chains, cereal import bills of these food-deficit countries is below the increase local consumer access to competitively priced food record level reached during the 2008 food crisis, the increase in products, and create new export sectors. However, improved cereal costs combined with that of other food and fertilizer im- output price incentives can be weakened by higher price vola- ports by these countries is eroding their balance of payments. tility and input costs. Analysis of price instability7 on a range of export crops from developing countries estimates a 23 Higher food prices can shift public spending to short-term percent decline in production when price instability doubles consumption at the expense of longer-term development (everything else held constant); this effect declines with bet- ter infrastructure, low inflation (precautionary savings), and 8 From October–November 2009 to October–November 2010, financial sector development (reflective of risk management food versus nonfood inflation on average in China was 10.9 capacity) (Subervie 2008). Longer-term own-price elasticities versus 0.1 percent, in Indonesia 11 versus 0.6 percent, in Bangladesh 9.1 versus 2.9 percent. 9 International food price increases led to a significant deterioration 7 In the analysis, price instability is defined as the mean deviation of democratic institutions in low-income countries, evidenced by from the trend, which is similar to the coefficient of variation an increase in the likelihood of civil conflict and other forms of used in table 2. civil strife, see Arezki and Bruechner (2011). RESPONDING TO HIGHER AND MORE VOLATILE WORLD FOOD PRICES 2: i MPA C T S 5 programs. Developing countries displayed considerable resil- are hard to stop once in place, even when no longer needed. ience during the 2008–2009 global food and financial crises Revenue measures such as cuts in import tariffs and lower in terms of preserving core spending on health, education, taxes on food entail further budget costs. and infrastructure, but this eroded much of the fiscal space that had been built over a number of years (World Bank and Aggregate impacts vary by region. Large net importers of IMF 2010). For many countries the macroeconomic space food, such as countries in the Middle East and North Africa to mitigate the effects of the recurrent global food price and West Africa, face higher import bills, reduced fiscal surge has been reduced as public debt is higher now than space, and greater transmission of world prices to local it was in 2008 because of the global economic crisis and prices for imported goods such as rice and wheat. Higher the associated countries’ response. The fiscal impact of prices have a significant impact on consumers with high food price increases depends on their impact on food tax shares of household expenditure on food (as in many African revenue and on the extent to which expenditures on mitigat- and Asian countries). Corresponding smallholder producer ing measures—such as for social protection programs—are incentives are weakened by higher price volatility and input increased. Recurrent food crises are likely to put pressure costs. Larger net exporter countries, as in Latin America and on governments to shift away from capital accumulation Eastern Europe and Central Asia, stand to benefit but may spending to arguably less productive expenditures such as also face internal pressure to impose export bans or to fix universal producer and consumer subsidies, which can be prices if populations spend significant shares of household hard to reverse (Delgado et al. 2010). Subsidies in particular budgets on food (figure 2). FIguRE 2: Countries’ vulnerability to global food Price Shocks Tracked by Share of Cereal imports in Domestic Consumption and food Share in Household Expenditure 100 Brunei Jordan Malta Mauritius Congo Israel Lebanon Saudi Arabia Botswana Cape Verde Yemen Netherlands Malaysia Gabon Japan Republic of Korea Portugal Swaziland Liberia Middle East and Tunisia Mongolia Georgia Mauritania North Africa Armenia (Net importers) Namibia Senegal Angola Belgium Colombia 50 Slovenia Venezuela Albania Morocco Lesotho Côte d'Ivoire Switzerland Peru Mexico Bosnia and Herzegovina Sri Lanka Tajikistan Gambia Guinea-Bissau New Zealand Chile Cameroon Ghana Mozambique Norway Spain Ecuador Azerbaijan Egypt Sierra Leone Ireland Iran Bolivia PhilippinesSudan Kenya DRC CAR Rwanda Italy Guinea Togo Burundi Estonia Benin Zimbabwe Belarus Kyrgyzstan Nigeria UgandaZambia Niger South Africa Net cereal imports as a share of consumption (%) Bangladesh Mali Syria Indonesia Cambodia Tanzania Luxembourg Poland Romania Brazil Laos Malawi Ethiopia Africa Burkina Faso Madagascar 0 Chad United Kingdom Croatia Turkey China India Nepal Denmark Moldova Austria Russia Finland Slovakia Latvia Pakistan Viet Nam Germany Lithuania Sweden Czech Republic Bulgaria Serbia Ukraine Asia USA Europe and Hungary Central Asia Thailand –50 Canada Kazakhstan France Uruguay Paraguay –100 (Net exporters) Latin America and the Caribbean –150 Australia Argentina (Developed countries) (Developing countries) –200 0 10 20 30 40 50 60 70 Food share of household expenditure (%) Source: FAOSTAT for net cereals import as a share of consumption, and USDA for food share in household expenditure. Note: The two dimensions reflected in the above figure are important contributors to vulnerability, while other factors include whether a country has a safety net program in place and fiscal space to scale it up and mitigate impacts on the poor. E C O N O M i C AND S E CT OR WORK 3: D R i v E R S 7 3: DRIVERs World food price changes are and have historically been as- from population growth (every year there are more people to sociated with changes in food supply and demand, and the feed) and from per capita income growth (raising the demand corresponding responsiveness of the food system. A simple for meat). Future food demand from the biofuels industry will simulation model of world grain price behavior that reflects be dependent on ethanol policy mandates, oil prices, and al- actual changes in world food demand and supply tracks ac- ternative biofuels technologies.10 tual price behavior fairly closely over the period with available data (box 1). This provides a basic framework for organizing While more food is consumed every year, slower population discussion of the main drivers of world food prices. growth has reduced the rate of food consumption growth (table 4). Aggregate consumption growth of major grains Drivers of food prices can be divided into those determin- (rice, maize, and wheat) halved from 3.4 percent per year ing average price levels and those inducing price volatility. in 1971–80 to 1.7 percent in 1991–2000 and then increased Longer-term demand increases from growth in population, in the 2000s to 2.3 percent per year in 2006–11. Slowing income, and industrial uses of food; long-term changes in population growth contributed to the decline in overall food supply from agricultural productivity growth (technical ef- consumption growth in 1991–2000. Consumption growth ficiency and technological change) inducing yield gains and in 2006–11 relative to 2001–05 was higher for all the major expanded areas; and the long-term responsiveness of the grains (rice, maize, and wheat) but was highest for maize food system drives long-term average world food price lev- driven by demand from the biofuel industry. Food and in- els. Short-term shocks such as droughts, floods, trade re- dustrial demand for maize increased from 1.7 percent in strictions, volatile demand for associated inputs and outputs 1991–2000 to 8.7 percent per year in 2006–11. The demand (such as oil and ethanol), and market expectations shaped by for feed grains from the livestock industry declined with the low stock levels tend to drive food price volatility (table 3). increased feed-conversion efficiency, using more soybeans, and managing pastures more effectively. The growth rate of meat consumption also declined, from 4.8 percent in 3.1 LOngER-TERM TREnDs In DEMAnD 1971–1980 to 2.1 percent in 2001–05 with slowing popula- AnD suPPLY tion growth. Meat consumption growth declined further in 2006–11 to 1.8 percent per year as household expenditures Longer-term Trends in Demand [Component of Dad] became more constrained with higher food prices, and Increases in aggregate global demand for food are driven by reduced incomes from the global economic crisis. Future population and income growth and by an accelerated use of food crops for industrial purposes, such as biofuels. The world population has more than doubled over the last 50 years from 3 billion to 7 billion. Aggregate food consumption over this period increased 1.4 times the population growth (2.5 10 While demand for biofuel feedstock can raise food prices, bio- percent per year food consumption growth compared to 1.6 fuels production can also have positive impacts on the environ- ment, farm incomes, and energy security, especially where percent population growth), driven by additional demand for feedstock production costs are low as is often the case in the grain as animal feeds as the consumption of meat increased interior of Brazil’s Center-South sugarcane production area, for with per capita income growth, and additional demand for example. Biofuels production through crops that do not directly compete with food consumption has less impact on food prices. food-based industrial products such as biofuels (figure 3). Each case needs to be addressed separately in a specific geo- Future food demand is expected to continue to increase graphic and temporal context. E C O N O M i C AND S E CT OR WORK 8 3: D R iv ER S BOx 1: Actual World grain Price behavior 1963–2011 is Simulated fairly Well by a Simple Model of Supply and Demand Changes and the Responsiveness of the food System A simple static world grain supply and demand model (change in intercept, αd); S is grain production, including can be expressed as previous year stocks, for an estimate of overall supply; and D is grain consumption. Grain supply and demand Supply: S = βs p + αs are inelastic (small elasticities of βs and βd ), with recent Demand: D = βd p + αd empirical estimations of βs = 0.11, and βd = -0.04 (Roberts Market equilibrium: S=D and Shlenker, 2009). Following the above model, large (αd - αs) shifts in supply and demand (the numerator) with small Market price: p= elasticities (the denominator) can lead to large price changes. Using this simple approximate model to simu- (Dαd - Dαs) Market price changes: Dp = late world grain price changes using the actual changes (βs - βd) in world grain supply and demand (using USDA data), where p is the real price index of grain; βs is the grain and a combined elasticity (βs - βd ) of 0.2 fairly closely price elasticity of supply; βd is the grain price elastic- matches actual world grain price index behavior (figure ity of demand; Dp is the change in real price of grain; below). This suggests that most of the supply and de- Dαs is the shift in the grain supply curve (change in mand changes have been from shifts in the supply and intercept, αs); Dαd is the shift in the grain demand curve demand curves (both in the short and longer run). 350 300 250 Real world price of grain index 200 150 100 50 Actual real world grain prices Simulated real world prices from the simple model of price behavior 0 64 3 66 5 68 7 70 9 72 1 74 3 76 5 78 7 80 9 82 1 84 3 86 5 88 7 90 9 92 1 94 3 96 5 98 7 00 9 02 1 04 3 06 5 08 7 10 9 1 19 /196 19 /196 19 /196 19 /196 19 /197 19 /197 19 /197 19 /197 19 /197 19 /198 19 /198 19 /198 19 /198 19 /198 19 /199 19 /199 19 /199 19 /199 20 /199 20 /200 20 /200 20 /200 20 /200 20 /200 01 /2 62 19 Source: Derived from USDA and World Bank data. meat demand is expected to vary by region, for example, grain production over the last 50 years has been similar to while meat demand growth is expected to decline globally, growth in grain consumption, but with large annual variability. it is expected to continue to increase in large economies of During 2001–11 grain production growth (1.6 percent per year) Asia and Latin America, and the oil-exporting countries. lagged grain consumption growth (1.9 percent per year), with a resulting decline in global food stocks. Production growth over the last several decades has been driven more by yield Longer-term Trends in Supply [Component of Das] improvements than area expansion. However, yield growth Increases in world food supplies depend on land area planted rates have declined from 2.6 percent per year in 1971–80 to food crops and subsequent yields. Long-term growth in to 1.1 percent in 2001–11 (table 5). The increased growth in RESPONDING TO HIGHER AND MORE VOLATILE WORLD FOOD PRICES 3: D Ri vE R S 9 TABLE 3: Drivers of World food Prices AVERAGE FOOD PRICE LEVELS FOOD PRICE VOLATILITY DEPENDENT ON: DEPENDENT ON: Long-term change in demand Long-term demand responsiveness to Short-term change in demand Short-term demand responsiveness to [component of Dαd ] prices [component of βd ] [component of Dαd ] prices [component of βd ] � Population � Share of food in consumption � Oil prices volatility � Biofuels mandates � Income � Biofuels mandates � Exchange rate volatility � Oil/maize price ratio � Biofuels � Oil/maize price ratio � Precautionary/speculative hoarding Long-term change in supply [component Long-term supply responsiveness to Short-term change in supply Short-term supply responsiveness to of Dαs ] prices [component of βs] [component of Dαs ] prices [component of βs ] � Area planted � Output and input market integration � Droughts and floods � Trade openness � Yield changes � Price risk management � Share of exports in more volatile � Stock release policies production and trade regions � Trade policy responses (export bans and sharp reductions in import tariffs) � Food reserves Source: Authors’ presentation. FIguRE 3: The World Continues to Consume More food Billions of tons 2.0 Wheat−food, seed, industrial Wheat−feed, residual 1.8 Corn−food, seed, industrial Corn−feed, residual 1.6 Rice 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 96 96 96 96 96 97 97 97 97 97 98 98 98 98 98 99 99 99 99 99 00 00 00 00 00 01 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 /2 /2 /2 /2 /2 /2 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 Source: USDA. E C O N O M i C AND S E CT OR WORK 10 3: D R iv ER S TABLE 4: food Demand growth Slowed from the 1970s to 1990s, Then increased in the 2000s CONSUMPTION GROWTH RATES (%) 1971–1980 1981–1990 1991–2000 2001–2011 2001–2005 2006–2011 Total (three grains) 3.4 2.0 1.7 1.9 1.5 2.3 Rice 2.6 2.7 1.7 1.1 0.4 1.6 Maize, Total 4.2 1.5 2.4 3.1 2.7 3.5 Maize, FR 4.4 1.6 2.7 1.5 2.4 0.7 Maize, FSI 4.0 1.4 1.7 6.3 3.6 8.7 Wheat, Total 3.0 2.1 1.0 1.1 0.8 1.3 Wheat, FR 3.1 1.0 -0.3 1.0 1.2 0.9 Wheat, FSI 3.0 2.4 1.3 1.1 0.7 1.3 Meat 4.8 2.8 3.1 1.9 2.1 1.8 Population growth 1.9 1.8 1.4 1.2 1.2 1.2 Source: USDA for grains and meat, and United Nations for population. Note: FR, feed and residuals; FSI, food, seeds, and industrial use. Meat refers to beef, pork, and poultry. Growth rates are calculated as the annualized growth over the respective periods. TABLE 5: food Supply growth Declined, Driven by Declining Yields, but Offset Recently by increases in Area Planted PRODUCTION GROWTH RATES (%) 1971–1980 1981–1990 1991–2000 2001–2011 2001–2005 2006–2011 Total (three grains) 3.4 2.1 1.8 1.6 1.5 1.8 Area 0.8 0.1 0.2 0.5 0.2 0.9 Yield 2.6 2.0 1.6 1.1 1.3 0.9 Rice 2.4 3.1 1.8 1.0 -0.4 2.1 Area 0.7 0.5 0.5 0.1 -0.5 0.6 Yield 1.7 2.6 1.3 0.9 0.1 1.5 Maize 4.6 0.8 2.8 2.9 3.3 2.5 Area 1.5 0.0 0.9 1.5 0.9 2.0 Yield 3.1 0.8 1.9 1.4 2.4 0.5 Wheat 3.2 2.5 1.0 1.0 1.3 0.6 Area 0.5 -0.1 -0.4 0.3 0.1 0.4 Yield 2.7 2.6 1.4 0.7 1.2 0.2 Source: USDA. area expansion in 2006–11 was not able to fully offset the developing world, except for parts of Eastern Europe, Latin yield growth declines, with production growth subsequently America, and some countries in Sub-Saharan Africa (mainly lagging consumption growth. Future food supply will be in Sudan, Democratic Republic of Congo, Mozambique, largely dependent on yield growth as the scope for future Zambia, and Chad). The total cultivated area to all crops is area expansion is limited. about 1.5 billion hectares, and although there is about 400 million hectares that could potentially be cultivated, much of Land has become an increasingly limited resource, and food the unused land has low fertility and is distant from market demand cannot continue to be matched by an expansion of infrastructure and in areas of high disease incidence (over cultivated areas. The land frontier is closing across much of the 70 percent of land with rainfed crop production potential in RESPONDING TO HIGHER AND MORE VOLATILE WORLD FOOD PRICES 3: D Ri vE R S 11 Sub-Saharan Africa and Latin America have one of these important in many developing countries13). Crude oil prices constraints [Fisher et al. 2002]). Overall, agricultural area use rose sharply from 2002 along with fertilizer prices increas- per person to produce food has declined from 1.30 hectares ing farm production costs (e.g., agriculture is more than four to 0.72 hectares in the period 1967–2007 (Foresight Report times more energy intensive than manufacturing), increasing 2011). In the five years since 2005/06 land area for 13 major the need for more efficient use of energy-intensive inputs; world crops increased by 27 million hectares. Twenty-four and (iii) lags in development of improved food crop varieties of the 27 million hectare expansion was in six countries or (needing less water and inputs) may delay future yield gains, regions: China, Sub-Saharan Africa, former Soviet Union and the yield gains eventually made may not be as high as (Kazakhstan, Russia, and Ukraine), Argentina, India, and those achieved with more water and inputs. Brazil. In the United States, land area was fairly stable but with shifts in land use from lower-demand to higher-demand Improved use of existing technologies can lead to short-term crops. In the European Union (EU), the cultivated area under yield gains. There are still gains to be made by reducing the these crops even declined, pointing to rising land constraints yield gap between what is achievable (demonstrated through in Organization for Economic Cooperation and Development on-farm research trials) and what is currently achieved as av- (OECD) countries. Use of more marginal land lowers average erage yields. For example, better use of existing crop and nu- yields with current technologies and agricultural practices. trient management practices alone could increase rice yields in East Asian countries by at least 25 percent (Christiaensen Future long-term yield improvements may be harder to 2011). About 15 percent of the value of the total rice crop in achieve than in the past. Higher total factor productivity South East Asia could be saved through better postharvest growth will be needed to meet rising global demand to keep technology (especially drying and milling), while irrigation food prices affordable (Fuglie 2010). With continuing demo- efficiency could be bolstered through better water manage- graphic pressures, gains in land productivity, sustainable land ment, proper incentives, and regulation. A shift from area- management, and increased water use efficiency are critical- based to volume-based charges for irrigation water in the ly important. World yield growth rates have more than halved Tarim Basin in China, for example, resulted in a 17 percent since the 1970s (table 5). More binding water constraints, decrease in water use. In Cambodia, addressing poor land rising inputs costs, and lags in development of improved layout through adequate leveling and higher bunds to retain varieties may make yield gains harder to achieve: (i) water wet season water has been shown to increase yields by constraints limit the future expansion of irrigated agriculture. 27 percent (Christiaensen 2011). Future long-term supply of Approximately 1.2 billion people live in river basins with abso- food will need to rely more on productivity gains than on area lute water scarcity, with the Middle East and North Africa and expansion, and achieving these long-term productivity gains Asia facing the greatest water shortages with scope for ex- will need to rely more on technical change (improved variet- pansion of irrigated areas in Africa.11 Countries such as Saudi ies) than on technical efficiency (improving efficiency of input Arabia have explicit policies to reduce the share of domestic use), although both are important. food production and rely more on imports for consumption, due to water constraints; (ii) rising input costs (fertilizer and 3.2 sHORT-TERM sHOCks In DEMAnD energy) may reduce their use and lower yields. Crude oil pric- AnD suPPLY es underpin production costs of agricultural products relying Short-term Changes in Demand [Component of Dad] on fertilizers and fuel (particularly important in both developed Higher oil price volatility has spilled over to food prices with and emerging economies12), and transport costs (particularly a stronger integration of crude oil prices with other com- modities’ prices in recent years (Baffes 2010). The links be- tween crude oil and agricultural markets have considerably strengthened since 2005, with the pass-through elasticity from crude oil prices to agricultural prices increasing from 11 Water use projections to 2050 suggest that the water supply to 0.22 for the pre-2005 period to 0.28 through 2009. Crude oil some 47 percent of the world’s population, mostly in develop- ing countries, will be under severe stress, largely because of prices increased sharply from early 2002 to mid-2008, more developments outside of agriculture, see OECD-FAO (2011). 12 In U.S. agriculture, the share of energy-intensive inputs (fertiliz- ers, chemicals, and fuel) in total farm production costs increased 13 In most countries of Sub-Saharan Africa, a 1 percent increase in from 22 to 35 percent for maize and from 19 to 28 percent fuel costs increases transport costs by 0.5 percent, resulting in for wheat between 1996–2000 and 2006–09 (www.ers.usda. large increases in farm input costs and declines in farm output gov). prices, see World Bank (2009). E C O N O M i C AND S E CT OR WORK 12 3: D R iv ER S than doubling from early 2007 (table 1). Crude oil prices (iv) high volatility in the term structure of futures prices for have historically been more volatile than agricultural com- maize and wheat suggests a weak link between the use modities, and the greater link between oil and agricultural of futures prices as a price discovery mechanism for spot markets, through biofuels, will likely contribute to short-term prices; and (v) overall investment flows into commodities food price volatility. were 78 percent lower in 2011 than in 2010, yet food prices remained high. The Dow-Jones Grains Index declined by 14 The fluctuating value of the U.S. dollar contributed to higher percent in 2011 while the grain “spot� price index increased volatility of U.S.-dollar-denominated world crop prices, rela- 2 percent. As a result, there seems to be weak evidence of tive to euro-denominated prices over the 2006 to 2011 period. the impact of financial investments in grain futures markets From January 2002 to April 2008, the U.S. agricultural trade- affecting grain spot prices, particularly over the long term. weighted dollar exchange rate depreciated by 21 percent, appreciating again in March 2009 resulting in larger U.S. dol- Precautionary hoarding had a significant short-term effect on lar food price fluctuations than euro-denominated food pric- food prices, particularly rice. Short-term expectations about es. The extent of transmission of changes of the U.S. dollar movements in rice prices resulted in precautionary hoarding prices to local prices in other countries has been influenced by households sparking a sudden surge in demand for rice in by the extent of appreciation or depreciation of local curren- 2007–08. With nearly half the world’s population consuming cies. However, irrespective of the extent of pass-through, rice as a food staple, short-term changes in household stor- changes in the value of the U.S. dollar have a significant im- age can have significant effects on rice prices. Estimates, on pact on reference world market prices due to their U.S. dollar the base assumption that households hold about a one-week denomination (Padetzki 1985). supply of rice consumption, suggest that increasing this to a two-week supply (i.e., doubling home storage), can have Financial investment in agricultural commodities has become a dramatic impact on world prices,16 and that this is what a much discussed factor in the determinants of the recent happened in 2007–08 (Timmer 2010). food price spikes, but the evidence on its effects remains weak. Much of the recent increase in commodity financial transactions has occurred in the futures markets, including Short-term Shocks in Supply [Component of Das] for maize and wheat. This was driven mainly by demand from Adverse weather has played a significant role in the recent fund holding and continuously rolling over future positions in price spikes. In 2010, weather was a stronger factor in re- commodity markets, without taking physical delivery. There ducing production and stocks than in 2008. Simultaneous are five reasons to question the impact of financial invest- production losses in Canada, Russia, Ukraine, and EU-27 fed ments in grain future markets on their spot prices: (i) maize into world price expectations. Following subsequent pro- and wheat futures have on average historically been in con- duction declines, cereal stocks of the traditional developed tango with negative “roll returns� on continuously rolled-over country exporters fell by 27 percent in 2010–11 (FAO 2011a). futures positions (unlike some other commodities), reduc- More generally, the number of reported droughts, floods, ing their relative attractiveness as a financial investment14; and extreme temperatures seems to have increased; in 2010 (ii) there was no corresponding significant increase in maize alone a record number of 19 nations set temperature records and wheat stocks beyond additional production (a significant (figure 4). The Russian heat wave was only one of many re- increase would be expected if higher futures prices are cent extreme weather events, from dry weather in Brazil to driving higher spot market purchases in response to the stor- flooding in Australia, Pakistan, and West Africa. Floods are age arbitrage opportunity)15; (iii) the futures market for rice especially damaging as they often require large reconstruc- whose price also increased significantly, is very thinly traded; tions of irrigation systems and other infrastructure, and their frequency has been going up as also has the frequency of droughts. Overall, weather variability, possibly due to climate 14 The term structure of future prices for maize and wheat have change, is having and will likely to continue to have a signifi- been in contango (futures prices higher than spot prices) on cant impact on international food prices. 70 to 80 percent of the trading days since 1970. A continu- ously rolled-over futures position which buys futures contracts at a “higher� price and sells before maturity at a “lower� price (reflective of the term structure) will yield a negative “roll 16 Timmer (2010) estimates that world rice prices would have return.� to rise by 167 percent to get to a new equilibrium following a 15 World maize and wheat production in 2008/09 were, respec- sudden and unexpected 25 percent increase in short-term rice tively, 12 and 15 percent higher than in 2006/07, and about 40 demand in world markets (using short-run price elasticities of percent of this increase is reflected in higher stock levels. -0.1 for demand and 0.05 for supply). RESPONDING TO HIGHER AND MORE VOLATILE WORLD FOOD PRICES 3: D Ri vE R S 13 FIguRE 4: Significant Rise in Reported Droughts, the U.S. maize crop, which was used for ethanol production, floods, and Extreme Temperatures increased from 31 percent in 2008 to a projected 37 percent in 2011 according to the U.S. Department of Agriculture 250 (USDA) (Trostle et al. 2011). The higher but more variable Number of reported occurrences of droughts, fllods, share of production and exports from the Black Sea region 200 and Latin America, coupled with the more positive correla- tion of production and exports with OECD countries in 2005 and extreme temperatures to 2011 led to an increase in world wheat production and 150 export volatility.19 With the changing geographic distribu- tion of production away from traditional exporters and more 100 frequent use of export taxes and bans by the new world food exporters, supply may become more variable over time, 50 contributing to potentially higher world food export and price volatility. For example, when factoring extreme forecasts of 0 climate events, food production shortfalls in Russia are pro- 19 0 91 19 2 93 94 95 19 6 19 7 19 8 99 20 0 20 1 02 03 20 4 05 06 07 08 20 9 10 jected to triple by 2070 (Alcamo et al. 2007). 9 9 9 9 9 0 0 0 0 19 19 19 19 19 20 20 20 20 20 20 20 Source: www.emdat.be. Trade policy responses further raised the amplitude of the grain price spikes. Export bans and tactical reductions in im- A larger share of world exports is being produced in the port duties20 used by many countries in 2008 accounted for an countries with more variable production and trade perfor- estimated 45 percent of the world price increase for rice and mance. Major expansion of world grain exports in the last 30 percent of the increase for wheat (Martin and Andersen twenty years is in large part due to rapid increases in pro- 2011). These impacts were compounded by governments duction for exports in the Southern Cone of Latin America. aggressively building up grain stocks in the face of high and More recently, world markets have become more dependent escalating prices (Dawe 2010). Exporters and importers have on supplies from the Black Sea region (Kazakhstan, Russia, been more restrained with respect to insulating trade interven- and Ukraine).17 The world export shares of wheat from the tions in 2010 and 2011 compared to 2008, but some were still Black Sea region and Latin America doubled from 14 percent using them. Although export bans and reductions in import to 28 percent in the period between 1990–95 and 2006–10. tariffs could be pragmatic answers to the food price spikes For maize, the share has more than tripled from 9 percent in individual countries, both instruments insulate domestic to 29 percent over the same period. The recent OECD-FAO economies and shift the adjustment cost to the rest of the agricultural outlook predicts a further shift of export shares world, with their impact depending on the size of the econ- away from OECD countries to the Black Sea region in par- omy. While a single individual food tariff reduction can serve ticular (OECD-FAO 2011). Production and exports are more to lower the domestic price of imported food for that country, variable in these newer export regions than in the traditional if the same tariff reduction is pursued by a larger number of breadbasket areas of the developed world where better importing countries, it would put upward pressure on global natural conditions, applications of the most up-to-date tech- nologies, and management practices have increased and stabilized yields (figure 5).18 In addition, the increased use of 19 The impact on world wheat export volatility of the rising share grain for industrial purposes by traditional exporters is further of exports from these newer more volatile production regions reducing their world export shares. For instance the share of was muted in 1998–2004 due to their high negative correla- tion with OECD exports. However in 2005–11, with a further increase in export share and a more positive correlation (more similar to 1991–97), world wheat export volatility increased. Its 17 Although Kazakhstan is located in Central Asia, for grain ex- coefficients of variation for the seven-year periods, 1991–97, ports it is often said to belong to the Black Sea region due to its 1998–2004, and 2005–2011, was 4.5 percent, 4.4 percent, and use of the seaport facilities in Russia and Ukraine for overseas 10.3 percent, respectively. The corresponding world wheat pro- exports. duction coefficient of variation for the same periods was 5.2 18 For example, for wheat, the volatility of production and exports percent, 3.8 percent, and 6.2 percent, respectively. from 2005/06 to 2011/12 was higher in the Black Sea region 20 Reducing import tariffs as part of a program of overall liberaliza- and Latin America than in the OECD. For wheat production, tion should be pursued under the Doha Round of World Trade the respective coefficients of variation for the three regions Organization (WTO) negotiations, which would help limit the were 17, 11, and 8 percent. For wheat exports, the respective negative externalities of selective temporary reductions in tar- coefficients of variation were 34, 20, and 12 percent. iffs for the rest of the world. E C O N O M i C AND S E CT OR WORK 14 3: D R iv ER S FIguRE 5: Maize and Wheat Exports from the black Sea Region and Latin America Are More volatile than from Traditional Exporters and Have Risen in Relative importance Maize Wheat 1000 500 900 450 Black sea region Black sea region Latin America 800 400 Export volume index (1990/91 = 100) Export volume index (1990/91 = 100) Latin America OECD exporters 700 OECD exporters 350 600 300 500 250 400 200 300 150 200 100 100 50 0 0 1990/1991 1995/1996 2000/2001 2005/2006 2010/2011 1990/1991 1995/1996 2000/2001 2005/2006 2010/2011 Source: USDA PSD online database. prices and offset the tariff reduction. Insulating policies re- France, a major exporter to North Africa, had a 7 percent duce the role that trade between nations can play in bringing stock-to-disappearance ratio in 2010–11, which is very low stability to the world’s food markets.21 National trade policies compared to the global stock-to-use ratio of 29 percent.24 are key to providing positive incentives to national producers of food and to attracting investment from all sources. Historical evidence suggests that the likelihood of grain price spikes is higher when global stock-to-use ratios, a measure Short-term supply is influenced by carryover stocks, which of physical liquidity of grain markets,25 decline to low levels can add to available production to meet consumption de- (Wright 2009; Stigler and Prakash 2011).26 Fiscally sustain- mand. Since the 1980s there has been a decline, with annual able carryover stocks held by major grain producers were not variation, in the relative size of grains stocks (figure 6) as large large enough to compensate for recent production shocks stocks able to fully offset production shortfalls had become that contributed to the recent food price spikes. This reem- fiscally unsustainable. A series of policy reforms to reduce phasized the role of trade as a vital mechanism to smooth grain stock levels and subsequently more recent changes prices. Weather-related production disruptions reduced cere- in producer income support mechanisms were undertaken al stocks in developed countries by an estimated 28 percent in the United States and the European Union (Mitchell and between 2009–10 and 2010–11, in contrast to a 4 percent Le Vallee 2005). Over half of global stocks of rice and wheat increase in stocks in developing countries. According to the are estimated to be held by China and India, where public Food and Agriculture Organization of the United Nations (FAO) sector stocks play a major role.22 In addition, the United (2011a), the stocks of major grain exporters in 2011–12 are States, which accounts for 55 percent of global exports of maize, had a domestic maize stock-to-disappearance ratio of 24 The global stock-to-disappearance ratio for wheat was about 7 percent in 2010–11, lower than the recent past.23 For wheat, 17 percent. 25 Both FAO and USDA publish stock-to-use estimates. They re- flect the difference between estimated production and carry- over stocks on the one hand, and estimated consumption and 21 While export bans imposed by larger exporting countries with trade on the other. The stock-to-use measure thus includes a readily available surplus have a greater impact, all export bans (conceptually) all commercial, public, and household stocks, have a market impact as it leads to a perception of larger-than- whether or not the stocks in question are actually available for actual shortages and could result in beggar-thy-neighbor actions. international sale. 22 The USDA made major revisions to its estimates of Chinese 26 Stigler and Prakash (2011) using a volatility regime-switching stocks in 2001, but this had little impact on global price behavior model concluded that in the absence of market tightness, com- at the time, possibly because China in 2002–03 was a signifi- modity prices do not appear to be influenced by inventories. cant grain exporter (see Wright 2009, op. cit). However, when inventories fall low, agricultural commodity 23 The global stock-to-disappearance ratio for maize was also prices become highly linked to information on stocks and espe- about 7 percent. “Disappearance� is domestic utilization plus cially to supply and demand disturbances that reduce the stock- exports. to-disappearance ratio further. RESPONDING TO HIGHER AND MORE VOLATILE WORLD FOOD PRICES 3: D Ri vE R S 15 FIguRE 6: Low Stock-to-use Ratios Have been Associated with World food Price Spikes 0.6 350 Stock-to-use Real world grain price index 300 0.5 250 0.4 Real world grain price index Stock-to-use ratio 200 0.3 150 0.2 100 0.1 50 0.0 0 00 99 02 1 04 3 06 5 08 7 10 09 1 62 1 64 63 66 5 68 7 70 9 72 1 74 73 76 5 78 77 80 9 82 1 84 3 86 5 88 7 90 9 92 1 94 3 96 5 98 7 20 /200 20 /200 01 19 196 19 196 19 /196 19 /196 19 /197 19 /197 19 /197 19 /198 19 198 19 /198 19 /198 19 /198 19 /199 19 /199 19 /199 19 /199 20 200 20 /200 20 /20 19 /19 19 /19 19 /19 20 /19 /2 / / / / 60 19 Source: Derived from USDA and World Bank. projected to decline further, causing the global stocks-to-use (figure 7).27 The increased demand for agricultural com- ratio to be 2.2 percent lower than in 2010–11. Added to this modities for producing biofuels can partially compensate is global uncertainty on the exact size and quality of stocks, for that decline, but the net effect on price responsiveness uncertainty on the triggers for their release or buildup, and will depend on a number of factors. On the one hand bio- measurement revisions that can have significant market im- fuels mandates act to fix demand for maize-based ethanol, pacts. For example when the USDA downsized its estimates thereby reducing overall demand responsiveness to price of U.S. maize production in Fall 2010, the upward impact on changes. On the other hand, if long-term oil prices rise dra- global maize prices was sharp and immediate. matically making maize-based ethanol profitable beyond the mandates, then the overall demand responsiveness to price 3.3 LOW REsPOnsIVEnEss OF THE FOOD sYsTEM changes would increase (oil prices relative to maize have on average been higher since 2005 than from 1990 to 2004) The inelastic nature of world food demand and supply leads (figure 8). The net effect will be dependent on which of these to large price increases from shocks to the system (i.e., the two effects dominate (GAO 2009). system has limited flexibility to respond, at least in the short term). Over time, world food demand will likely become more price inelastic as incomes rise, and if not offset by a Supply Responsiveness to Prices [bs] more elastic supply response, price increases per demand Long-term supply responsiveness to price changes is in- and supply shock will be higher in the future than in the past fluenced by output and input market integration, and price (following the simple framework in box 1). Demand Responsiveness to Prices [bd] 27 The elasticity estimates are from the USDA. They are based Demand responsiveness to price changes is influenced by on data from the 2005 International Comparison Project (ICP), which allows for comparisons of consumption across 146 coun- per capita income, biofuels mandates, and oil prices. Demand tries. Details of the methodology used to calculate the demand responsiveness is relatively low and declines as per capita in- elasticities are provided in Seale et al. (2003), http://www.ers. comes rise with declines in the share of household budgets usda.gov/publications/tb1904/tb1904.pdf, that used the earlier 1996 ICP data, but the same methodology was used with the spent on food, especially in counties with rapid urbanization updated 2005 data. E C O N O M i C AND S E CT OR WORK 16 3: D R iv ER S FIguRE 7: Demand Responsiveness to food Price markets increases price risks and likely lowers the produc- Changes Decline as Per Capita income tion response to higher prices (Subervie 2008). The longer- increases term supply response may go up as countries develop (with 0.2 greater output and input market integration), but this may be partly offset by lower supply response induced by higher 0.1 price volatility. 0.0 Short-term supply responsiveness to price change is influ- Own-price elasticity of demand –0.1 enced by trade policies and food reserve operations. Sudden changes to output market integration can have significant ef- –0.2 fects on short-term world supply responsiveness. For exam- –0.3 ple, export bans reduce supplies to world markets and raise world prices, as they did in 2008, contributing a substantial –0.4 share of world price increases for rice and wheat (Martin and –0.5 Anderson 2011). Food reserve levels and purchase and re- lease policies impact supply responsiveness (i.e., impact the –0.6 2.40 2.90 3.40 3.90 4.40 4.90 price elasticities of supply). For example, a large food price GDP per capita PPP, constant 2005 intl $ (log scale) increase that induces food stock releases, increases supply Source: USDA and World Bank. responsiveness more than in the absence of stocks, thus increasing to overall immediate price elasticity of supply. FIguRE 8: The Oil to Maize Price Ratio Has increased 3.4 OuTLOOk 0.70 The bottom line is that the recent agricultural commodity 0.60 price uncertainty is likely to continue for the foreseeable fu- Oil price [$/barrel]/maize price [$/mt] ratio ture, largely due to persistent uncertainty on the supply side, 0.50 projected rising aggregate demand, and the inherent low responsiveness of the global food system. The prevailing for- 0.40 mal medium-term outlook suggests the perpetuation of global 0.30 prices higher than pre-2007 levels driven by fundamental factors (OECD-FAO 2011; World Bank 2011b). Accelerated 0.20 use of food crops for biofuels continues to offset the slow- ing population growth effect on food demand. World stocks 0.10 remain at relatively low levels where the likelihood of price spikes is higher. Production gains may be harder to achieve 0.00 in the future than in the past, with more limited space for 19 0 91 19 2 19 3 94 19 5 19 6 97 19 8 99 20 0 20 1 20 2 03 20 4 05 20 6 20 7 08 20 9 10 11 9 9 9 9 9 9 0 0 0 0 0 0 0 19 19 19 19 20 20 20 20 20 area expansion, declining yield growth, and increases in Source: World Bank. weather variability. The low responsiveness of the food system amplifies price spikes to shocks, and if the declining volatility impacts on production decisions. World food supply demand responsiveness with per capita income growth is response in the short run is estimated to be fairly low (i.e., not offset by more flexible biofuel policies and higher food estimated price elasticities of 0.1). Price elasticities tend supply responsiveness, then the amplitude of price spikes to be larger in developed than in developing countries, in per shock will likely be higher. Policy responses matter, they part because of more developed and integrated input and can either amplify or dampen price spikes, and either prevent output markets. In addition, higher price volatility in food or increase the likelihood of price spikes. RESPONDING TO HIGHER AND MORE VOLATILE WORLD FOOD PRICES 4: R E S P O N S ES 17 4: REsPOnsEs 4.1 MEAsuREs TO ADDREss THE DRIVERs needed for an enduring solution to global food security. OF HIgHER AnD MORE VOLATILE WORLD More and better investments are needed to narrow the yield FOOD PRICEs gap between average farm and experimental yields, gener- Demand and supply-side responses can help in reducing ate yield-enhancing technologies, promote less energy– future food price escalation. Responses are needed at both intensive inputs, and improve water management. Some of global and local levels (table 6). Stimulating a sustainable sup- this increase in investment will be induced by higher prices ply response is a priority in order to meet the steadily growing (Hayami and Ruttan 1985), but a long-term sustained com- demand for food. While a few of the large and technology-in- mitment (from donors and governments) is necessary to pre- tensive exporters such as the United States retain significant vent future food crises, rather than simply responding with capacity to expand production in the near- to medium term, cyclical commitments to technology development after food there is no substitute for improving agricultural productivity price spikes (e.g., the 1970s and 2000s) (Timmer 2010). and facilitating trade in most developing countries. ƒ Narrow the gap between average farm and experi- Measures to Reduce Average World mental yields: Average crop yields in many countries Food Price Escalation are well below experimental farm yields. Closing the A broad range of actions are needed across both developed yield gap requires (i) use of well-adapted, high-yielding and developing countries to sustainably reduce world food varieties with resistance to biotic (e.g., pest and prices. In spite of the high level of farm productivity, many disease) and abiotic (e.g., drought and flood) stresses; OECD countries can further increase productivity and effi- (ii) improved soil fertility through crop rotations and ciency of their agriculture by reforming their farm and biofuel judicious use of organic and inorganic fertilizer; policies.28 Middle- and low-income countries can also play a (iii) better integrated management of pests, diseases, significant role in supply response, enhanced by improved and weeds; and (iv) more efficient water management policies and investment in productivity growth. Middle- (FAO 2011b). Investments will be needed to better income countries, including Argentina, Brazil, Uruguay, align extension services with farmer needs, comple- Russia, Ukraine, and Kazakhstan, have significant potential mented by better use of information and communica- for productivity gains and have accounted for a larger share tion technologies; increased use of matching grants of recent global food exports. With lower conflict, macroeco- for technology adoption; and strengthened seed and nomic stability, and lower agricultural taxation, agricultural fertilizer markets. Improved access to these services growth in Africa is also improving. But more is needed, par- by women can help raise productivity growth. For ticularly through more and better public policies, as well as example, if women farmers were to have the same public and private investments. access as men to fertilizer and other inputs, maize yields would increase by almost one-sixth in Malawi Longer-term Trends in Supply [Das] and Ghana (World Bank 2011c). ƒ Generate yield-enhancing technologies: Increased Raise Crop Yields attention is needed on generating new and improved Raising food crop yields through sustainable intensification, yield-enhancing varieties of the main staple crops and their resilience, is the single most important action important for smallholder farmers in regions with a high prevalence of hunger, particularly Africa and South Asia. 28 World Bank (2007). Investments are needed in national agricultural research E C O N O M i C AND S E CT OR WORK 18 4: R ES PONS ES TABLE 6: Main Measures to Address the Drivers of Higher and More volatile World food Prices MEASURES TO REDUCE AVERAGE FOOD PRICE ESCALATION MEASURES TO REDUCE FOOD PRICE VOLATILITY Long-term change in supply Long-term supply responsiveness to Short-term change in supply Short-term supply responsiveness to [component of Dαs ] prices [component of βs ] [component of Dαs ] prices [component of βs ] � Raise crop yields � Strengthen market integration � Develop more weather-tolerant � Trade openness � Facilitate land markets � Better use of price risk management varieties � Efficient food reserve management � Improve rural investment climate tools Long-term change in demand Long-term demand responsiveness to Short-term change in demand Short-term demand responsiveness to [component of Dαd ] prices [component of βd ] [component of Dαd] prices [component of βd ] � Shift to market-based (more flexible) � Increase transparency of agricultural � Shift to market-based (more flexible) biofuels policies markets biofuels policies Source: Authors’ presentation. systems, particularly for adaptive research, and as many through incorporation of broader river basin manage- developing countries are too small to achieve efficient ment aspects, and through improved use of shared scale in basic research, regional and global research watercourses, including support for cooperation be- programs such as those carried out by the International tween different riparian states on the water use from Agricultural Research Centers of the Consultative transboundary rivers and lakes. Expanding irrigated Group on International Agriculture Research (CGIAR) areas and improving water use efficiency of existing ir- are needed to support national efforts. rigation schemes are both needed as are better water ƒ Promote less energy–intensive technologies. With the control and erosion prevention at both field and river steadily rising energy prices, it is essential to promote basin levels. technologies that can help deliver significant yield gains while lowering the use of more expensive Facilitate Land Markets energy-intensive inputs. A greater adoption of im- Facilitating land markets can expand area planted to food proved seeds is one example of reducing the energy- crops, and strengthening property rights can improve the use intensity of input use. Another example is biotech- of existing cropped areas. Land sales and rental markets, and nology. In 2011, developing countries, mainly China strengthened property rights can improve the productive effi- and India, grew similar amounts of biotech crops as ciency of existing land areas, and better use remaining areas developed countries (ISAAA 2011). The increased use available for crop production. Attention is needed to ensure of biotech cotton varieties has reduced chemical ap- responsible agro-investment from rising interest from foreign plications by 40 to 50 percent while increasing yields investments, including secure land rights of poor farmers. by 15 to 20 percent, with relatively larger benefits accruing to cotton growers in developing countries ƒ Promote responsible agro-investments from foreign (Baffes 2011). Transgenic varieties offer significant investors interested in land acquisition: Large-scale opportunities for poverty reduction; however, to miti- investments create opportunities and risks for gate potential risks, they should be used in situations recipient countries. Increased investments (includ- where international biosafety standards are in place ing by multinationals, sovereign wealth funds, or and are being implemented. A greater use of such government-owned corporations) may spur agricul- technologies also requires strengthening capacity for tural productivity growth, fiscal revenue, employment, assessing the potential risks and benefits of transgen- and local incomes, but may also result in local people ics, and for developing cost-effective and transparent losing land on which their livelihoods depend. Country regulations and production programs with expertise capacity strengthening is needed to ensure terms and competence to manage their adoption and use. and conditions of land deals seize opportunities and ƒ Improve water management, including irrigation: mitigate risk. Investments in improved and sustained water man- ƒ Secure land rights for poor farmers: Making land rights agement can enhance the returns to investments in more transferable increases investment incentives; other soil and crop management practices. Greater allows access to land through sales, rental markets, or attention is needed to ensure sustainable water man- through public transfers; and is a precondition for land agement practices through water user associations, consolidation needed to apply more capital and exploit RESPONDING TO HIGHER AND MORE VOLATILE WORLD FOOD PRICES 4: R E S P O N S E S 19 economies of scale. In some countries, particularly in ƒ Improve the productivity and quality of production Latin America and Southern Africa, inequality in land throughout the agribusiness supply chain: Investing to ownership often leads to underutilization and deep- improve the food retail infrastructure, including mod- rooted rural poverty. In these cases, increased access ern processing, packaging, and storage can enhance through targeted programs of financial assistance to food safety, traceability, and environmental sustain- smallholders to enter land markets can potentially ability, and ensure competitive pricing. Investing in increase productivity and promote equality. Land agribusiness logistics and distribution infrastructure programs also help agricultural regions to rebuild after with both the private and public sectors (through conflicts and natural disasters, such as in Sri Lanka private-public partnerships) can facilitate trade, lower and Aceh, Indonesia. Significant gains can therefore costs, and reduce postharvest waste. be generated from (i) land policy and legal reforms; ƒ Strengthen producer organization: Strengthening the (ii) increasing security of existing customary or infor- bargaining power of smallholder farmers, especially mal land tenure; (iii) modernizing land administration; women, through their producer organizations can (iv) land redistribution through socially manageable help reduce transaction costs, overcome economies processes; and (v) preventing and reducing land con- of scale, and hence better link them to markets. flicts, including due to foreign investment in large- Technical assistance and financing can help strength- scale agriculture, an issue of growing significance. en producer organizations. Improve Rural Investment Climate Better Use Price Risk Management Tools Improving the rural investment climate can help induce a Ensuring food supply response to higher prices, and ensuring private-sector-led supply response. Issues that often affect that smallholder farmers participate more in this supply, re- the rural investment climate include access to finance, land, quire better use of price risk management tools. Earlier anal- and other property rights; various licensing and registration ysis showed that developing-country crop supply response requirements; sector-specific regulations; and taxes and tax declined significantly when price instability doubled, but that administration. Addressing these potential bottlenecks will use of risk management tools (precautionary savings, access reduce the cost of doing business, will increase competition, to financial services) reduced the negative impact of price and will help to induce a private sector response. volatility on production decisions. Improved farmer access to price risk management tools can help ensure supply re- sponse to higher prices (and help prevent a decline in the Long-term Supply Responsiveness to Prices price elasticity of supply). [Component of bs] Strengthen Market Integration ƒ Create an institutional environment that enables farm- Better market integration ensures world price signals reach ers to have better access to price risk management more producers to induce supply response, thereby increas- instruments, including finance and savings mobiliza- ing the responsiveness of the food system to price increas- tion. Improving smallholder farmer and microenter- es. By linking farmers more closely to consumers, marketing prises access to financial services for agriculture and systems better transmit signals to farmers on new market- food retail through direct service provision, market ing opportunities and guide their production choices to meet facilitation, and an improved enabling environment will consumers’ preferences. Strengthening the links between likely have broader impacts than focusing on improv- local suppliers and food retailers can help to provide locally ing access to more formal price hedging instruments produced goods at more competitive prices. (e.g., commodity exchanges, warehouse receipts), although both are important and require an improved ƒ Improve market infrastructure and market information policy environment, improved access to information, to better integrate markets: Investments are needed awareness-raising, and training. Traders have typically to expand the reach and quality of rural roads, improve used formal hedging instruments more than farm- the collection and dissemination of market informa- ers, although basis risks (price correlation between tion, and improve technologies for postharvest stor- domestic markets, and the closest futures market) age to reduce product losses. are often too high to justify their use. These risks can be lowered but often require significant long-term E C O N O M i C AND S E CT OR WORK 20 4: R ES PONS ES investment in transport infrastructure and a nondistor- Diversion could be triggered by specified indicators tive price policy environment. of food shortages (with the overall objective being to assure the needs of poor and vulnerable consumers, Long-term Demand Responsiveness to Prices rather than to stabilize prices), and the biofuels sup- [Component of bd] plier would commit to making a corresponding reduc- Shift to Market-Based Biofuels Policies tion in output (rather than substitute other foodgrain Curbing biofuels mandates can reduce food price volatility as feedstock) (Wright 2010). More research would be through improving the responsiveness of the food system. If needed on the feasibility and design of this mecha- less land is “mandated� for biofuels production it will allow nism taking into consideration political economy more flexibility (more land to be used) to respond to shocks. issues. In the United States alone, about 37 percent of maize planted area, which is about 10 percent of total planted area, is pro- Measures to Reduce World Food Price Volatility jected to have been used for ethanol in 2010–11 (Trostle et Some measures to reduce average world food price escala- al. 2011). Supportive policy measures by governments have tion may also serve to dampen price volatility, while there are promoted biofuels: crop production subsidies, infrastructure several actions that can directly address the source of volatili- for biofuels storage, blending and production mandates, ty. These include more weather-tolerant varieties (to respond import tariffs, and tax incentives; which for ethanol equates to more variable weather), more efficient stock management to US$0.28 per liter in the United States, and US$0.60 per (both to ensure sufficient stock levels to reduce the likelihood liter in Switzerland; and for biodiesel, to US$0.20 per liter in of price spikes, and to reduce stock purchase and release Canada, and US$1.0 per liter in Switzerland (Steenblik 2007). policies amplifying volatility), trade openness (to reduce trade Even though biofuels offer a source of renewable energy policy responses from amplifying food price spikes), and and possible large new markets for agricultural producers, market transparency (to reduce market uncertainty). current biofuels programs have a mixed record of financial viability without subsidies.29 Short-term Change in Supply [Component of Das] ƒ Reduce mandates and subsidies for biofuels produc- Develop More Weather-Tolerant Varieties tion to improve the responsiveness of the food sys- Weather-tolerant crop varieties can reduce shocks to both tem to shocks. As ethanol demand and corresponding food production and prices. Yield advantages of existing prices have been raised by government regulation, drought tolerant maize varieties can be up to 20 percent deregulation is part of the solution to reducing food under drought conditions in Sub-Saharan Africa (CIMMYT, price escalation. Removing both nonmarket actions 2006), similar to millet and sorghum. There also remains sub- that raise demand for biofuels and subsidies for its stantial room for research on transgenic methods to improve production can reduce competition for grains among crop drought resistance in semiarid regions. Transgenic fuel, food, and feed. The recent abolishment of tax drought-resistant maize varieties have been found to yield credits for biofuels production and import tariffs by the up to 20 percent more than nontransgenic drought-resistant United States has been an important step in the right varieties (Kostandini et al. 2011). direction, but more remains to be done to increase flexibility of the mandate, reduce it, or eventually ƒ Increase public investment to develop more weather- abandon it. Open international markets should be tolerant varieties through national systems and encouraged so that production of biofuels could occur at regional and global levels through International where it is economically, environmentally, and socially Agricultural Research Centers such as the CGIAR. sustainable to do so (G20 2011). Short-term Supply Responsiveness to Prices ƒ An alternative consideration is for governments to pur- [Component of bs] chase call options on grain from biofuel producers to be exercised when food markets are under pressure. Trade Openness Open trade across all markets can diversify short-term pro- duction shocks dissipating the associated price effects. Price 29 National biofuel strategies need to be based on a thorough insulation reduces the effectiveness of world markets to dis- assessment of financial viability and the opportunity costs of biofuel policies. One recent case that was viable on a significant sipate shocks, and trade policy responses in 2007–08 acted scale is the use of sugarcane for ethanol in Brazil. to amplify the food price spike rather than reduce it. Trade RESPONDING TO HIGHER AND MORE VOLATILE WORLD FOOD PRICES 4: R E S P O N S E S 21 is even more important when food stocks are low as more Short-term Change in Demand [Component of Dad] countries need to enter markets as net buyers. Increased Transparency of Agricultural Markets ƒ Strengthen social protection systems of net exporters Greater market transparency is needed to reduce market to reduce the risk of export bans when food prices uncertainty and the associated large price corrections fol- spike. This is particularly relevant for large net-export- lowing revisions to market information (production, stocks, ing countries such as Argentina, Kazakhstan, Russia, and trade). Clearer and more accurate monitoring can help to and Ukraine (figure 2). reduce food price spikes. ƒ Continue analytical support highlighting possible gain- ƒ Increase public access to information on the quantity ers and losers from trade policy changes as inputs for and quality of grain stocks to reduce uncertainty. The short-term action, and longer-term policy dialogue on capacity of international and national food market identification and eventual implementation of coopera- information providers to monitor market develop- tive trade solutions to reduce the adverse impacts of ments and disseminate timely and accurate informa- unilaterally chosen policies on trading partners. tion in relation to food prices and food security should Efficient Food Reserve Management be strengthened. A good step in this direction is the Ensuring sufficient stock levels can reduce the likelihood of establishment of the Agricultural Market Information price spikes and good management, particularly purchases System (AMIS).30 AMIS is a major partnership effort and releases can reduce, rather than amplify, local and world of multilateral international organizations to lever- food price volatility. Historically, when the world grain stock- age their scarce resources and use the comparative to-use ratio fell below 20 percent, the likelihood of a world advantage and expertise of different organizations to food price spike increased (Wright 2009). Purchasing stocks (i) improve global short-term agricultural outlook and as food prices are increasing, amplifies food price increases policy analyses of global production, trade, stocks, and (as was the case with major rice importers in 2007–08). price developments; and (ii) promote early informa- While higher world ending stocks are often associated with tion exchange and discussion on crisis prevention lower world food price volatility, this is not always the case at and responses among policy makers through a Rapid the country level. The ability of public stocks to stabilize local Response Forum. More efforts are needed to ensure prices and promote pro-poor growth depends on how stocks that better market information is shared and used for are managed (World Bank forthcoming). Further technical agricultural policy decisions. and consistent guidance to national governments on levels ƒ Deepen our understanding of the relationship be- and use of food stocks is needed. tween international prices and local prices in poor countries. Better monitoring and analysis of links ƒ Provide technical guidance (good practice examples) between international, national, and subnational food of optimal stock levels. Small emergency public grain prices are required to improve the speed and targeting reserves, related to the consumption needs of the of responses to problems, and the tools available. most vulnerable, have an important role to play in al- leviating the consequences of high and volatile prices, provided that they are well targeted to this specific 30 AMIS and the associated Rapid Response Forum decided by the G20 Ministers of Agriculture Meeting in Paris on June 23, purpose (most vulnerable people). In contrast, using 2011, were launched by the French Presidency of the G20 in stocks as an instrument of domestic price stabilization Rome on September 15–16, 2011. The Secretariat is housed has proven difficult because of their high costs, both in in FAO, Rome. The participants of AMIS are the G20 counties, Spain, and seven developing countries that together (all 28) ac- terms of financial costs (implicit interest, hidden quality count for more than 90 percent of world food production and losses, physical storage losses, and transaction costs consumption. Initial commodities to be tracked are wheat, rice, on stock rotation), as well as efficiency costs through maize, and soybeans. The AMIS seeks to (i) improve market transparency through better information on commodity bal- disincentives to (generally more efficient) private sec- ances, especially stocks; (ii) strengthen capacity of participat- tor storage and trade (Dorosh 2009). Clear technical ing countries for global market assessment; and (iii) accelerate early policy discussion among key players when price spikes guidance on balancing these trade-offs is needed. are likely, to avoid the beggar-thy-neighbor policy responses to ƒ Provide technical guidance (good practice examples) price uncertainty observed in 2008 and 2010. Policy discussion on optimal stock management, particularly on stock would occur through a Rapid Response Forum composed of senior officials for ministries of agriculture in G20 countries and purchases and releases, what triggers them, to up to eight other associated countries, meeting on an ad hoc whom, and at what volumes. basis. E C O N O M i C AND S E CT OR WORK 22 4: R ES PONS ES Short-term Demand Responsiveness to Prices prices are increasing rapidly, food transfers may be [Component of bd] a more effective means of providing assistance to Shift to market-based (more flexible) biofuels policies. As the poor and vulnerable (WFP 2008). Cash or food indicated earlier, this would improve the long-term demand for work programs that develop infrastructure should responsiveness to price changes and will also improve consider implications for future maintenance, and the short-term responsiveness allowing more short-term opportunities to develop skills in the types of work se- flexibility in production (with more land to use). Removing lected (e.g., road paving). Physical food transfers need both nonmarket actions that raise demand for biofuels and to be exempted from arbitrary movement restrictions provide subsidies for its production can reduce competition that tend to arise in rural areas in times of crisis. for grains among fuel, food, and feed. As indicated earlier Cash transfers combined with nutritional services are an alternative consideration is for governments to purchase effective ways to mitigate the effects on the nutri- call options on grain from biofuel producers to be exercised tional status of the poor. Continued effort is needed, when food markets are under pressure, but more research especially in stable times, to develop social safety would be needed on the feasibility and design of such as nets that are flexible and able to respond to shocks. A mechanism. systemic approach involves developing various capaci- ties such as (i) data to identify vulnerable groups; (ii) a targeting system to ensure the right group is reached; 4.2 MEAsuREs TO REDuCE THE nEgATIVE (iii) payment mechanisms; (iv) monitoring and evalua- IMPACTs On FOOD sECuRITY tion systems; and (v) coordinated programs tailored to Should the previous actions prove insufficient in preventing different groups of poor and vulnerable. future food price spikes, measures to mitigate adverse im- ƒ Short-term agricultural production. Actions to induce pacts can be taken.31 These include interventions to ensure next season agricultural supply response can help re- food access through trade and fiscal policy, better targeting duce interseasonal impacts of price spikes on food se- and faster mobilization of safety nets, and promotion of curity. Targeted input support can enhance the ability short-term supply response through increased fiscal space of smallholders to respond. Provision of inputs works or in some circumstances “market-smart� subsidies.32 The best when it mobilizes the private sector (through choice of actions should not undermine longer-term farm vouchers, for example) and is complemented by re- incentives to invest and produce more (such as ad hoc provi- ductions in logistical overheads, especially in ports and sion of inputs). on roads. Anticipating and enlisting policy support for ƒ Trade and taxes: Lower taxes and tariffs (in particu- dealing with potential bottlenecks that restrict delivery lar cases) can lower food costs to poor consumers. of inputs to national borders is essential. In addition, Short-term budget financing can provide necessary demand estimates for fertilizer and seeds need to and rapid offsetting funds to compensate for associat- be periodically reviewed in an environment of rapidly ed revenue losses and prevent cuts in public spending changing inputs prices to prevent waste from overesti- on key social assistance programs. mates and constrained impacts from underestimates. ƒ Food and cash transfers: Temporary food and cash While there are many measures to respond to higher and transfers help households facing food price shocks more volatile world prices, the single most important one is avoid irreversible losses, allowing them to maintain to raise food crop yields, and their climate resilience, par- household assets, on which their livelihoods are ticularly in low-income countries. This requires focused ef- based, and to adequately nourish and school their chil- forts to ensure (i) scaling up of investments (by governments dren. Where markets are functioning well, cash may and donors) to improve food crop productivity growth, and be a more cost-effective means of providing assis- (ii) maximizing returns to investments through support to tance but leaves poor people exposed to price risks. irrigation expansion and water management (particularly in When food markets are functioning poorly, or where Africa), to adoption of improved seeds (particularly in more arid regions), and in the development of improved higher- yielding weather-tolerant crop varieties (through investment 31 World Bank (2008). 32 World Bank (2007). in agricultural research). RESPONDING TO HIGHER AND MORE VOLATILE WORLD FOOD PRICES REfERENCES 23 REFEREnCEs Alcamo, J., N. Dronin, M. Endejan, G. Golubev, and A. Kirilenko. Fuglie, K. 2010. “Total Factor Productivity in the Global Agricultural 2007. “A New Assessment of Climate Change Impacts on Food Economy: Evidence from FAO Data. 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RESPONDING TO HIGHER AND MORE VOLATILE WORLD FOOD PRICES A G R I C U L T U R E A N D R U R A L D E V E L O P M E N T Agriculture and Rural Development (ARD) 1818 H Street, NW Washington, D.C. 20433 USA Telephone: 202-477-1000 ARD AGRICULTURE AND RURAL DEVELOPMENT Internet: www.worldbank.org/ard