Is the global food crisis over?

Ronald U Mendoza , Pedro Conceição 18 April 2009

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By how much have international food prices come down?

The international prices for the major food grains have decreased almost just as dramatically as they had increased. Expressed in US dollars per metric tonne, and based on prices at the time of writing, the prices of:

  • rice fell from its May 2008 peak by 59%;
  • maize fell from its June 2008 peak by 43%;
  • soybean fell from its July 2008 peak by 77%;
  • wheat fell from its February 2008 peak by 53%.

In addition, oil prices have also declined dramatically. Expressed in US dollars per barrel, oil prices dropped by about 65% from their July peak in 2008 (based on the price of Brent crude oil).

Nevertheless, international grain prices remain high compared to their historical averages:

  • rice in March 2009 is 49% above its ten-year average;
  • maize in April 2009 is 43% above its ten-year average;
  • soybean in March 2009 is 36% above its ten-year average;
  • wheat in April 2009 is 31% above its ten-year average.

Figures 1 through 4 illustrate how prices remain high despite having declined. Figure 5 shows that even the present price of oil appears to be above its ten-year average by about 20%.

Figure 1. Rice prices, January 1989 to March 2009

Note: Price for White Broken Rice, Thai A1 Super, f.o.b Bangkok.

Source: FAO International Commodity Price Database

Figure 2. Maize prices, January 1994 to April 2009

Note: Price for US No.2, Yellow, U.S. Gulf.

Source: FAO International Commodity Price Database

Figure 3. Soybean prices, January 1994 to March 2009

Note: Price for US No.1, Yellow, U.S. Gulf.

Source: FAO International Commodity Price Database

Figure 4. Wheat prices, January 1998 to April 2009

Note: Price for US No.2, Hard Red Winter ord. Prot, US Fob Gulf.

Source: FAO International Commodity Price Database

Figure 5. Oil prices, January 1998 to April 2009

Note: Oil prices refer to Brent, US dollars per barrel.

Source: US Department of Energy

The decline in international food grain prices accompanies the dramatic fall in international commodity prices resulting from the unfolding global economic slowdown. Grain harvests towards the latter part of 2008 also rebounded somewhat, but preliminary analysis suggests that much of the supply response was concentrated among the industrialised-country producers. The FAO (2009a) reports that: “While in developed countries the 2008 cereal output is estimated 12.3% higher than in the previous year, in developing countries the expansion was just 2.3%. This mainly reflects a weak supply response in Asia, accounting for three-quarters of the developing countries’ production, where the aggregate cereal output remained virtually unchanged.” Not surprisingly, the ADB (2008) recently warned that Asia may be one supply shock away from yet another round of food price spirals.

How have domestic food prices adjusted?

The pass-through of international food grain prices to domestic prices varies across countries, depending on factors such as currency movements (thus also the exchange rate and monetary policy), domestic physical infrastructure, market structure, and government policies to stabilise prices. In particular, governments intervened in food markets – through export controls, import tariff reductions, and food price subsidies – in varying degrees to try to blunt the impact of the international food price spikes. Domestic pass-through was therefore incomplete as international prices shot up in 2008. Nevertheless, domestic food prices spiked because of the large magnitude of the international food price increases (Dawe, 2008).

Accounts and news reports from many parts of the world indicate that food (and even fertiliser and transport) prices have remained “sticky” in many countries, suggesting that food prices faced by low-income and poor consumers are still relatively high. In rural Zambia, for example, farmers are shifting towards crops which require little to no fertiliser inputs, including cassava, sweet potatoes, and groundnuts. Farmers have raised concerns that these crops have relatively lower returns, compared to crops, like maize, that have better established market infrastructure (Hossain, 2009). The FAO (2009b) also reports that, based on the national food prices information they have collected so far, poorer countries have experienced smaller declines in food prices in recent months. Many poor and low-income people – notably children and women – continue to be adversely affected by high food prices.

This is now compounded by falling household incomes due to the economic slowdown transmitted through, among other channels, lower remittances, loss of employment, and lower investments (Mendoza, 2009). In addition, the factors that led to the food price shocks in 2008 remain largely unresolved. Biofuel policies, low global ending stocks, and thin international food grain markets are among the factors that have yet to be addressed. Most critically, lack of investments in the agricultural sector remains a challenge (Conceição and Mendoza, 2009).

Volatility in commodity prices is adding to the challenges

The sharp movements in commodity prices in a short period of time add to the challenges faced by governments and households. Stable prices help to make investment and consumption choices. For example, one of the silver linings of high food and energy prices was that there was a stronger incentive for supply responses. These included investing in enhancing agricultural productivity and production, in the case of food, and shifting to carbon energy sources, in the case of high oil and fossil fuel prices. But with volatility at levels not seen in years (see Figure 6 for the case of oil prices), uncertainty delays or cancels investments and changes in consumption that would have been more likely with more stable prices.

Figure 6. Oil price volatility

 

Note: Oil prices refer to Brent US dollars per barrel.

Source: Own elaboration based on US Department of Energy

The economic crisis may complicate the resolution of food security challenges

The global economic crisis may complicate the resolution of many of these factors. In the immediate term, the context of uncertainty feeds off of and contributes to price volatility. Short-term food and fuel price volatility will increase uncertainty in food grain markets, blunting the incentives to boost food supplies. Tighter liquidity and weak economic conditions will make it much more difficult to finance the massive increased investment in agriculture needed to enhance food security in many countries, notably those in sub-Saharan Africa.

Tighter credit conditions will also prevent many low-income farmers from boosting their production. Hence, even the expected small gain by low-income food producers has become less likely.

The challenge for policymakers is to address many different challenges – notably those related to ensuring food security – at the same time, even as the global economic crisis makes this task much more complicated and difficult. Indeed, actions to address many global challenges have been postponed for far too long, and the recent spate of crises we now face is a stark reminder that inaction will plant more seeds for future crises.

References

ADB (Asian Development Bank). 2008. “Asian Development Outlook: September 2008 Update.” Manila: ADB

Conceição, Pedro and Ronald U. Mendoza. Forthcoming. “Anatomy of the Global Food Crisis.” Third World Quarterly.

Dawe, David. 2008. “Have recent increases in international cereal prices been transmitted to domestic economies? The experience of 7 large Asian countries?” ESA Working Paper 08-03.

FAO. 2009a. “Crop Prospects and Food Situation 2009, 1.” Rome: FAO.

FAO. 2009b. “National basic food prices: Data and analysis tool.” Rome:FAO.

Hossain, Naomi. 2009. “Accounts of Crisis: Poor People’s Experiences of the Food, Fuel and Financial Crises in Five Countries.” Report on a pilot study in Bangladesh, Indonesia, Jamaica, Kenya and Zambia, January-March 2009. London: Institute of Development Studies.

Mendoza, Ronald U. 2009. “Aggregate income shocks, poor households and children: Transmission channels and policy responses.” UNICEF Social Policy Working Paper. New York: UNICEF.

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Topics:  Global crisis Global economy

Tags:  global crisis

Director of the Office of Development Studies, UNDP

Ronald U Mendoza

Associate Professor of Economics, Asian Institute of Management