The World's Growing Food Price Crisis: How long will it take?

(A critical Review)

By Tangible Assefa

April 30, 2008

Rocketing food prices — some of which have more than doubled in two years — have become a major concern of the entire world, particularly the poor. The issue of feeding the world's population at a time when there has been a surge in global food prices is top on the agenda of the ongoing 12th session of the United Nations Conference on Trade and Development The World's Growing Food Price Crisis (UNCTAD). The implications are quite wide-ranging. For example, world leaders, international organizations as well as experts all warn that it could have grave implications for international security, economic growth and social progress.     

The food price hikes sparked riots in numerous countries recently. Millions are reeling from sticker shocks and governments are scrambling to curb a fast-moving crisis before it spins out of control. Soaring food prices worldwide have even triggered riots in dozens of countries, such as Haiti, Egypt, Philippines, Mexico, Pakistan etc.

 Riots broke out through three cities in the West African nation of Burkina Faso last month, some days later in Cameroon, a taxi drivers' strike over fuel prices mutated into a massive protest about food prices. Similar protests exploded in Senegal and Mauritania late last year. And Indian protesters burned hundreds of food-ration stores in West Bengal last October, accusing the owners of selling government-subsidized food on the lucrative black market. This is a serious security issue.

When did grain prices start to soar?

While headline news about high food prices is a relatively recent phenomenon, the broader upswing in commodity prices began in 2001. Large structural shifts in the global economy—including growing demand in China and India—have been steadily reflected in commodity price increases, especially of metals and energy. The food price rises virtually started in 2002, but have accelerated in the past few years, especially since August 2007. In 2007 alone, international grain prices soared by 42 percent according to FAO statistics.

How severe is it? And who is the most affected?

Let’s take some statistics to see what is going on. According to the latest World Bank report, global wheat prices have jumped 181 percent over the last three years, with overall food prices up 83 percent. The UN Food and Agriculture Organization (FAO) also estimated that a total of 37 countries currently face food crises. The possible consequences brought about by the price hikes are more severe for those most needy countries in Africa, Latin America, the Caribbean and Asia. The UN predicts increase of poverty due to higher food price. Let me give an example how poverty incidence in the world will increase due to food price hikes. If food prices double and share of an individual’s income on food expenditure is between 40 and 50 percent, then real prices increase by about 45% (approximate figure). Hence an individual whose income is 1.4 USD per day will fall to less than 1 USD per day. Note that 1 USD (1.08 USD to be precise) is the conventional poverty line established by the World Bank based on cost of basic needs. The individual who has been slightly above the poverty line has now slipped below the poverty line. Therefore the major concern is that many people will fall below the poverty line increasing the world wide poverty incidence.

What Causes food price rises?

It is widely believed that natural disasters, a growing demand for food worldwide, coupled with market speculation, surging oil prices and the expansion of bio-fuels, are pushing food prices up.

First, according to the World Food Program (WFP), 57 countries, including 29 in Africa, 19 in Asia and nine in Latin America, have been hit by catastrophic floods. Harvests have been affected by drought and heat waves in a number of countries and regions (e.g. Australia and Ukrain). Lester Brown – US environmentalist, ( one time the Washington Post described him as "one of the world's most influential thinkers,")  said that the world will be facing a 96 million ton shortfall in grain this year following poor harvests in the United States and India in 2002, and a poor harvest in Europe due to scorching temperatures this year. Studies by the International Rice Research Institute and the US-based Carnegie Institution have shown that grain production can fall 10 percent with a one degree Celsius (1.7 degree Fahrenheit) increase in temperature, as the increased heat stresses the plants.

Second, a growing global population (nearing 8 billion) has also contributed to the increasing demand for food.  As China's population grows and its people demand a more meat-based diet with rising living standards, China will increasingly have to look to world markets to satisfy grain needs for both food and feed for livestock. When China turns to the world market for grain, it will need more than anyone else in the world imports. With a 100 billion dollar trade surplus with the United States in 2002, China has "enormous purchasing power" to buy grain, which could drive up prices by two times. China is expected to announce substantial grain purchases from the US in around December 2008 according to it’s Officials.

Third, in addition, many have attributed the food crisis to the surging oil prices, which has pushed up fertilizer prices, as well as the cost of trucking food from farms to local markets and shipping it abroad

Fourth, the push to produce biofuels as an alternative to hydrocarbons is further straining food supplies, especially in the U.S., where generous subsidies for ethanol have tempted thousands of farmers away from growing crops for food. The area used for biofuels is increasing each year (i.e. a quarter of the U.S maize goes to biofuel) (Bienkowski, 2008).

Fifth, as always in a crisis, there are winners. The creeping fear that the world might actually run short of food has led speculators to pour billions into commodities, further accelerating price rises. In a single day in February, global wheat prices jumped 25% after Kazakhstan's government announced plans to restrict exports of its giant wheat crop for fear that its own citizens might go hungry. Officials in India, Egypt, Vietnam, Pakistan and others are also restricting food exports.

It is to be recalled that in Ethiopia the price of salt (a local resource readily available in quantities needed) grew by 800% to 1,300% in one day.  According to Mathza’s article published in Aigaforum (http://www.aigaforum.com/oppositionsMPs2.htm), considering the role of salt in the food people eat, she conjectured that this was probably meant to incite an uprising leading to instability for political consumption and nothing else could explain the situation. PM Meles in his report on the Ethiopian Economy to the parliament in March 2008 announced establishment of a task force to prosecute businesses engaging in what he called "persistent illegal exploitative activities". Same measure has been taken by other countries such as the Philippines, which has vowed to crack down on rice hoarders.

Recently, as a result of this threatening crisis, all people ask one question: How long will the crisis last?

The forecast is grim. There seems a consensus among food researchers and analysts on the severity of the problem. Governments might control the protests, but bringing down food prices could take at least a decade. Billions of people are buying ever-greater quantities of food — especially in booming China and India, where many have stopped growing their own food and now have the cash to buy a lot more of it. Increasing meat consumption, for example, has helped drive up demand for grain, and with it the price.

What are the possible solutions?

Though the general causes of grain price hikes are those I stated above, the contribution of each factor to inflation may differ from country to country and so are the solutions. Therefore, I will state the general solutions and will take specific solutions undertaken by some countries. The general possible solutions include

· Cooperation among countries in efforts to increase aid for agriculture and abolish rich-nation subsidies on agriculture is of vital importance to finding a long-term solution to the food price crisis.

· Global food production needs to be increased urgently to ease skyrocketing world food prices that could destabilize developing nations, particularly in Africa 

·  The richest nations should stop subsidizing their farmers and to open market access to agricultural products from the developing world.

Governments are responding in a number of ways, some of which provide immediate relief but have costs in the long term. Banning exports to keep domestic prices low, for instance, can severely affect producers who are often poor themselves. This also reduces the supply response needed to meet future demand growth. Yet worries over the impact of high food prices on citizens have led several countries—including Honduras, India, vietnam, Moldova, the Philippines, and Russia—to implement price controls, subsidies, and export bans. Meanwhile food importers such as Indonesia, Korea, and Mongolia have cut or reduced import tariffs. Ethiopia has introduced an immediate end to sales taxes on food grains, and sharp restrictions on the growth of the money supply to curb the problem.

The Philippine government (world's top rice importer for 2008) is drawing up an emergency scheme to offer the poor household the access to the limited government-subsidized rice by issuing out "access cards".

The World Bank and FAO recommends that governments need to take focused action, with direct subsidies for the poor rather than the whole country. Income transfers or food assistance for poor people will work more efficiently and sustainably than more general steps at the national level. In light of this, Ethiopia has been subsidizing the urban poor directly by providing some grains and recently edible oils and soaps at lower prices. In addition, in Ethiopia, infrastructure projects (that has shown fast growth and widely undertaken) can help reduce the costs of transporting food to markets and small agribusiness companies could be offered hedging instruments to deal with shocks from the price of food. Apart from this, the recently established Ethiopian Commodities Exchange Market is believed to revolutionize the traditional transaction system leading to a more transparent and efficient (i.e. lower transaction cost) commodity market system by integrating the different stakeholders of the market.

However, though income transfers or food assistance for poor people works more efficiently and sustainably, the poor need to be vigilant once cheap grain becomes available in their communities, as there could be "leakages" in the system, in which privileges would be handed to the people with connection or resources rather than the poor. There is always a danger in any system where the target is the poorest of the poor. 

So how long will the crisis last?

The FAO expects food prices to stay high for the next three to five years, presenting a challenge for governments trying to keep domestic food prices low in order to keep poor citizens properly fed and avoid mass protests and social unrest.

According to Don Mitchell, Lead Economist in the World Bank's Development Prospects Group, the increases in grain prices are not caused by short-term supply disruptions, as is the normal case, and it will likely take several years for supplies to increase to rebuild stocks and allow prices to fall. The FAO expects food prices to stabilize and eventually drop as farmers plant more grains. That’s already starting to happen with wheat and corn. But the next few years could be difficult. The root causes of the phenomenon of rising food price—high energy and fertilizer prices, the demand for food crops in biofuel production, and low food stocks—are likely to prevail in the medium term.

Therefore, it (the long term solution) is going to take time as the root causes are not expected to end shortly. For example, it is possible that new oil explorations could be realized or agricultural production could boost or alternative less useful raw materials could be obtained for biofuel instead of using maize and sugarcane, but all these take time. Is not this a severe crisis, so to say?

Tangible Assefa,

tangiblea@yahoo.com

Tokyo