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April, 2008
Rising Food Prices: What Should
Be Done?
An IFPRI Policy Brief
Joachim von Braun
April 2008.
OVERVIEW
Income growth, climate
change, high energy prices, globalization, and urbanization
are transforming the world food situation. Food prices are
rising and are becoming increasingly linked with energy
prices. Why are food prices are rising? What are the
implications for food production, markets, trade, and
consumption? What are the consequences for the livelihoods
of the poor and food-insecure?
The sharp increase in food prices
over the past couple of years has raised serious concerns about
the food and nutrition situation of poor people in developing
countries, about inflation, and—in some countries—about civil
unrest. Real prices are still below their mid-1970s peak, but
they have reached their highest point since that time. Both
developing- and developed-country governments have roles to play
in bringing prices under control and in helping poor people cope
with higher food bills.
In 2007 the food price index calculated by the Food and
Agriculture Organization of the United Nations (FAO) rose by
nearly 40 percent, compared with 9 percent the year before, and
in the first months of 2008 prices again increased drastically.
Nearly every agricultural commodity is part of this rising price
trend. Since 2000—a year of low prices—the wheat price in the
international market has more than tripled and maize prices have
more than doubled. The price of rice jumped to unprecedented
levels in March 2008. Dairy products, meat, poultry, palm oil,
and cassava have also experienced price hikes. When adjusted for
inflation and the dollar's decline (by reporting in euros, for
example), food price increases are smaller but still dramatic,
with often serious consequences for the purchasing power of the
poor.
National governments and international actors are taking various
steps to try to minimize the effects of higher international
prices for domestic prices and to mitigate impacts on particular
groups. Some of these actions are likely to help stabilize and
reduce food prices, whereas others may help certain groups at
the expense of others or actually make food prices more volatile
in the long run and seriously distort trade. What is needed is
more effective and coherent action to help the most vulnerable
populations cope with the drastic and immediate hikes in their
food bills and to help farmers meet the rising demand for
agricultural products.
The Sources of Current Price Increases
The combination of new and ongoing forces is driving the world
food situation and, in turn, the prices of food commodities. One
emerging factor behind rising food prices is the high price of
energy. Energy and agricultural prices have become increasingly
intertwined (see figure). With oil prices at an all-time high of
more than US$100 a barrel and the U.S. government subsidizing
farmers to grow crops for energy, U.S. farmers have massively
shifted their cultivation toward biofuel feedstocks, especially
maize, often at the expense of soybean and wheat cultivation.
About 30 percent of U.S. maize production will go into ethanol
in 2008 rather than into world food and feed markets. High
energy prices have also made agricultural production more
expensive by raising the cost of mechanical cultivation, inputs
like fertilizers and pesticides, and transportation of inputs
and outputs.
At the same time, the growing world population is demanding more
and different kinds of food. Rapid economic growth in many
developing countries has pushed up consumers' purchasing power,
generated rising demand for food, and shifted food demand away
from traditional staples and toward higher-value foods like meat
and milk. This dietary shift is leading to increased demand for
grains used to feed livestock.
Poor weather and speculative capital have also played a role in
the rise of food prices. Severe drought in Australia, one of the
world's largest wheat producers, has cut into global wheat
production.
The Impacts of High Food Prices
Higher food prices have radically different effects across
countries and population groups. At the country level, countries
that are net food exporters will benefit from improved terms of
trade, although some of them are missing out on this opportunity
by banning exports to protect consumers. Net food importers,
however, will struggle to meet domestic food demand. Given that
almost all countries in Africa are net importers of cereals,
they will be hard hit by rising prices. At the household level,
surging and volatile food prices hit those who can afford it the
least—the poor and food insecure. The few poor households that
are net sellers of food will benefit from higher prices, but
households that are net buyers of food—which represent the large
majority of the world's poor—will be harmed. Adjustments in the
rural economy, which can create new income opportunities, will
take time to reach the poor.
The nutrition of the poor is also at risk when they are not
shielded from the price rises. Higher food prices lead poor
people to limit their food consumption and shift to even
less-balanced diets, with harmful effects on health in the short
and long run. At the household level, the poor spend about 50 to
60 percent of their overall budget on food. For a five-person
household living on US$1 per person per day, a 50 percent
increase in food prices removes up to US$1.50 from their US$5
budget, and growing energy costs also add to their adjustment
burden.
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Policy Responses So Far
Many countries are taking steps to try to minimize the effects
of higher prices on their populations. Argentina, Bolivia,
Cambodia, China, Egypt, Ethiopia, India, Indonesia, Kazakhstan,
Mexico, Morocco, Russia, Thailand, Ukraine, Venezuela, and
Vietnam are among those that have taken the easy option of
restricting food exports, setting limits on food prices, or
both. For example, China has banned rice and maize exports;
India has banned milk powder exports; Bolivia has banned the
export of soy oil to Chile, Colombia, Cuba, Ecuador, Peru, and
Venezuela; and Ethiopia has banned exports of major cereals.
Other countries are reducing restrictions on imports: Morocco,
for instance, cut tariffs on wheat imports from 130 percent to
2.5 percent; Nigeria cut its rice import tax from 100 percent to
just 2.7 percent.
How effective are these responses likely to be? Price controls
and changes in import and export policies may begin to address
the problems of poor consumers who find that they can no longer
afford an adequate diet for a healthy life. But some of these
policies are likely to backfire by making the international
market smaller and more volatile. Price controls reduce the
price that farmers receive for their agricultural products and
thus reduce farmers' incentives to produce more food. Any
long-term strategy to stabilize food prices will need to include
increased agricultural production, but price controls fail to
send farmers a message that encourages them to produce more. In
addition, by benefiting all consumers, even those who can afford
higher food prices, price controls divert resources toward
helping people who do not really need it. Export restrictions
and import subsidies have harmful effects on trading partners
dependent on imports and also give incorrect incentives to
farmers by reducing their potential market size. These national
agricultural trade policies undermine the benefits of global
integration, as the rich countries' longstanding trade
distortions with regard to developing countries are joined by
developing countries' interventions against each other.
Sound Policy Actions for the Short and Long Term
The increases in food prices have a dominant role in increasing
inflation in many countries now. It would be misguided to
address these specific inflation causes with general
macroeconomic instruments. Mainly, specific policies are needed
to deal with the causes and consequences of high food prices.
Although the current situation poses policy challenges on
several fronts, there are effective and coherent actions that
can be taken to help the most vulnerable people in the short
term while working to stabilize food prices by increasing
agricultural production in the long term.
First, in the short run, developing-country governments should
expand social protection programs (that is, safety net programs
like food or income transfers and nutrition programs focused on
early childhood) for the poorest people—both urban and rural.
Some of the poorest people in developing countries are not well
connected to markets and thus will feel few effects from rising
food prices, but the much higher international prices could mean
serious hardship for millions of poor urban consumers and poor
rural residents who are net food buyers, when they actually are
exposed to them. These people need direct assistance. Some
countries, such as India and South Africa, already have social
protection programs in place that they can expand to meet new
and emerging needs. Countries that do not have such programs in
place will not be able to create them rapidly enough to make a
difference in the current food price situation. They may feel
forced to rely on cruder measures like export bans and import
subsidies. Aid donors should expand food-related development
aid, including social protection, child nutrition programs, and
food aid, where needed.
Second, developed countries should eliminate domestic biofuel
subsidies and open their markets to biofuel exporters like
Brazil. Biofuel subsidies in the United States and ethanol and
biodiesel subsidies in Europe have proven to be misguided
policies that have distorted world food markets. Subsidies on
biofuel crops also act as an implicit tax on staple foods, on
which the poor depend the most. Developed-country farmers should
make decisions about what to cultivate based not on subsidies,
but on world market prices for various commodities.
Third, the developed countries should also take this opportunity
to eliminate agricultural trade barriers. Although some progress
has been made in reducing agricultural subsidies and other
trade-distorting policies in developed countries, many remain,
and poor countries cannot match them. This issue has been
politically difficult for developed-country policymakers to
address, but the political risks may now be lower than in the
past. A level playing field for developing-country farmers will
make it more profitable for them to ramp up production in
response to higher prices.
Fourth, to achieve long-term agricultural growth,
developing-country governments should increase their medium- and
long-term investments in agricultural research and extension,
rural infrastructure, and market access for small farmers. Rural
investments have been sorely neglected in recent decades, and
now is the time to reverse this trend. Farmers in many
developing countries are operating in an environment of
inadequate infrastructure like roads, electricity, and
communications; poor soils; lack of storage and processing
capacity; and little or no access to agricultural technologies
that could increase their profits and improve their livelihoods.
Recent unrest over food prices in a number of countries may
tempt policymakers to put the interests of urban consumers over
those of rural people, including farmers, but this approach
would be shortsighted and counterproductive. Given the scale of
investment needed, aid donors should also expand development
assistance to agriculture, rural services, and science and
technology.
Conclusion
World agriculture is facing new challenges that, along with
existing forces, pose risks for poor people's livelihoods and
food security. This new situation calls for policy actions in
three areas:
- comprehensive social
protection and food and nutrition initiatives to meet the
short- and medium-term needs of the poor;
- investment in agriculture,
particularly in agricultural science and technology and in
market access, at a national and global scale to address the
long-term problem of boosting supply; and
- trade policy reforms, in
which developed countries would revise their biofuel and
agricultural trade policies and developing countries would
stop the new trade-distorting policies with which they are
hurting each other.
In the face of rising food prices,
both developing and developed countries have a role to play in
creating a world where all people have enough food for a healthy
and productive life.
Full report:
http://www.ifpri.org/pubs/bp/bp001.pdf
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