Food Crisis Far From Over

The global food crisis is not over. International food prices remain high despite their collapse from their 2008 peaks. Aggravating the food security problem of the poor, staple food prices in developing countries have actually continued to increase in recent months. Many of the structural factors that drove prices up during the food crisis are still at play and could lead to another spike in the near future. The continued increase in the use of corn for biofuels production and the likelihood of higher oil prices with recovery point to further price increases; exchange rate volatility adds to the risks. Advanced countries need to review their policies toward biofuels production, which is proving disastrous for the poor. Developing countries can undertake reforms that alleviate the problem.

International Prices Lower but Still High by Historical Standards

International prices of the major food grains—rice, corn, soybeans, and wheat—have plummeted and are now down between 40 percent and 60 percent from their mid-2008 peaks, expressed in U.S. dollars. The collapse of energy prices that followed the onset of the financial crisis helped reduce these prices. It constrained the demand for and profitability of biofuels and also helped reduce the cost of agricultural inputs. Many studies¹ cite increased demand for biofuels production as a major driver of food prices. The price of corn has been strongly and significantly correlated with ethanol production since 2006², as the use of corn for biofuels production surged. 

The dollar’s appreciation also contributed to the decline. From July 2008 to early 2009, the dollar appreciated by as much as 24 percent, and the international prices of rice, corn, soybeans, and wheat fell by between 30 percent and 45 percent over the same period. Studies have found that the elasticity³ of dollar commodity prices with respect to the dollar’s effective exchange rate is between 0.5 and 1. The fall in dollar prices can decrease the price in local currencies as well.

Nevertheless, international food prices remain well above pre-crisis and historical levels, and have been inching up recently as the above mentioned price drivers have changed course. Oil prices increased by 66 percent in 2009 and the U.S. dollar index depreciated by about 16 percent from March to December of last year. As a result, corn and soybean prices were about 40 percent above their 2002–2007 average in February, and the price of rice had more than doubled from its 2002–2007 average. The World Bank's food price index rose 17 percent in 2009, surpassing its 2007 level by 11 percent.

Developing Countries Most Vulnerable

The domestic prices of staple foods in many developing countries remain high and have even seen large increases recently, despite various policy measures taken to limit the impact of high international prices on domestic markets. Devalued national currencies, reduced harvests due to bad weather, and civil conflicts contributed to these increases. Out of the twenty developing countries⁴ with the largest poor populations, average domestic staple food prices in twelve were higher in 2009 than in 2008. Over that period, domestic prices rose most dramatically in Mozambique, where the price of cassava increased by 47 percent. The Philippines, Kenya, and Zambia saw prices increase between 20 percent and 26 percent from 2008 to 2009. Of the eight countries in which 2009 prices were lower than 2008 prices, the 2009 prices were still much higher than 2007 prices in five of them.

Countries with the Largest Increases^a in Domestic Staple Food Prices
(Local Currency)

India, which has the largest population living on less than $1.25 a day, has experienced significant increases in the price of rice. The price is about 13 percent higher this month than it was a year ago. India’s wholesale inflation rate, which has been increasing for the past seven months, reached 8.6 percent (y/y) in January, and food prices accounted for 60 percent of the surge.

Such price surges have severe implications for food security. Though poor producers and net sellers of food benefit from higher food prices, most poor people, including all the urban poor—who typically spend more than 50 percent of their incomes on food—lose as very high food prices curtail their purchasing power.

The economic crisis has made things worse by increasing unemployment and hindering remittances. According to the Food and Agriculture Organization (FAO), the global crisis pushed an additional 100 million people into hunger in 2009; the World Bank estimates that 50 million additional people were living under $1.25 a day in 2009 as a result of the crisis. The crisis also negatively affected government budgets and social assistance programs.

Another Spike?

A resurgence of many of the factors that drove prices up two years ago—the diversion of food commodities into biofuels, rising energy prices, and adverse exchange rate shifts—on top of bad weather conditions could lead to another spike in food prices in the near-term.

In the 2009/2010 crop year, approximately one third of U.S. corn will go to biofuels production, about three times the 2002–2005 average. The continued increase in the use of corn for biofuels production in the United States will have implications for international corn prices as the United States accounts for about a third of global corn production and two-thirds of global exports. According to the USDA, corn prices are projected to increase by 10 percent in 2010/2011.

A resurgence of many of the factors that drove prices up two years ago could lead to another spike in food prices in the near-term.

The strength and sustainability of the global economic recovery could also drive food prices up as the demand for energy rises. Oil prices are projected to rise 25 percent (y/y) in 2010 and are not expected to come down in 2011. This increase will also further boost the demand for biofuels, raising the demand for—and price of—grains even more.

Projections also point to a depreciating dollar, which would mean an increase in the dollar prices of commodities. This rise will spill over into higher domestic food prices in countries whose currencies do not fully follow the dollar up. If the recent increase in risk aversion—the result of greater sovereign risk concerns in emerging markets and countries in the Euro zone—decreases, the dollar could depreciate sharply.

Droughts, floods, and other natural disasters could also drive up world food prices. For example, India’s rice production is projected to fall by 11.7 percent in the year ending in June due to very weak rainfall.

Policy

Advanced countries need to reassess policies that promote biofuels production, which is economically inefficient, adds to carbon emissions, and is proving disastrous for poor countries. Advanced countries must take account of the impact these policies have on food prices.

While developing countries can do little to change the agricultural policy of advanced countries, they can lower the burden on the poor by improving their infrastructure, institutions, and domestic policies. Successful implementation of the latter will depend in part on improvements in the former, as well as increased aid from international development agencies.

Transport infrastructure is key for managing food prices in developing countries. Strengthening transport links can work to mitigate price spikes by lowering the cost of domestic distribution. Better links can also help domestic food supply flow from surplus to deficit areas.

Good institutional arrangements that ensure domestic production and distribution will help minimize exposure to price volatility as well, particularly in those countries that meet a large portion of their food requirements through domestic production. Properly regulated commodity exchanges can play a role by filling the institutional gap.

Advanced countries need to reassess policies that promote biofuels production, which is economically inefficient, adds to carbon emissions, and is proving disastrous for poor countries.

Liberalizing trade will also help improve food security. Some major food-importing countries have already lowered tariffs on food imports in an effort to reduce the burden on the poor. However, market imperfections—such as weak transportation and distribution infrastructure that isolates local people and hinders lower tariffs from translating into lower prices in local markets—must be addressed.

Developing countries must also implement programs to support the poor who lose purchasing power due to high prices. Many countries already engage in cash transfer programs. But, again, a lack of good institutions, well-developed infrastructure, and sufficient fiscal space has constrained the effectiveness of such programs. Policy makers must address fraud and corruption if they hope to increase the impact of these and other social protection programs.

Finally, effective state intervention for food price stability and food security requires fiscal resources, yet attention to agriculture has declined in the past few decades. The World Bank’s lending to agriculture declined from about 30 percent of total annual lending in 1980 to 12 percent in 2007. Only 4 percent of overall Official Development Assistance is now going to agriculture. International development agencies can play a significant role in limiting future food crises by making agriculture a greater priority, improving lending for agriculture in developing countries, and supporting safety nets and cash transfer programs. Countries must drive the priority-setting, however, to make this aid most effective.

Shimelse Ali is an economist in Carnegie’s International Economics Program.

^{1 The IMF estimates that increased demand for biofuels accounted for 70 percent of the increase in corn prices and 40 percent of the increase in soybean prices. According to the USDA, ethanol production accounted for 29 percent of the corn price rise from the 2005/2006 to the 2007/2008 crop years.}

^{2 The correlation coefficient between the U.S. corn price and ethanol production is about 0.78 for the period 1990–2008, compared to 0.48 for 1990–2004.}

^{3 Gilbert (1989) and Baffles (1997). This implies that, for every 1 percent that the dollar appreciates, commodity prices fall 0.5 to 1 percent.}

^{4 Countries were ranked according to the size of their population living under the $1.25 a day poverty line. The list includes India, China, Nigeria, Bangladesh, Pakistan, Ethiopia, Vietnam, the Philippines, Mozambique, Nepal, Uganda, Brazil, Madagascar, Malawi, Niger, Burkina Faso, Zambia, Kenya, Colombia, and Guinea.}