[Disclaimer: this article contains data and ideas from different official sources like World Bank, FAO, etc and for better understanding and detailed study of the related issues, these sources are strongly recommended. Any discrepancy, error or wrong interpretation are certainly to be blamed on me]
Global Food Crisis
Food prices have continued to go up in 2008. Wheat prices were up 181% over a 36 months period (till Jan 08) while overall global food prices were up 83% over the same period. International nominal prices of all major food commodities have reached their highest levels in nearly 50 years while prices in real terms are the highest in nearly 30 years.
World bank estimates that as a result, around 110 million people could be tipped in poverty. This has forced world leaders to declare this unprecedented food inflation a global crisis with Ban Ki-moon, the UN secretary general, taking lead and issuing a gloomy warning in mid April saying that,
"If not handled properly, this crisis could result in a cascade of others ... and become a multidimensional problem affecting economic growth, social progress and even political security around the world."
He went to the extent of saying that the global food prices could mean seven lost years for the Millennium Development Goals. We are already witnessing the political ramifications with food riots breaking in more than a dozen countries and economic policies being dictated by this. As on date 29 countries have imposed some kind of restriction on food exports.
Why are the prices rising?
i. Lower level of global stock (especially of wheat and maize) following below average harvest in EU and Ukraine in 2006 and 2007 and crop failure in major exporting nations like Australia. As per FAO data, global stock came down by 4.8% last year with wheat stock down by 9.2%.
ii. Strong economic growth in developing and underdeveloped countries and rising population. Sub Saharan Africa, for example, have been growing at 4.7% in recent times (2000-2006) compared to just 2.5% in the 1990s. Rise in income and population are putting pressure on the already fragile supply.
iii. Growing demand for grain-based bio fuel production. As per a preliminary draft report of the World Bank, leaked to The Guardian, bio fuels have forced global food prices up by 75%. As per a WB report, during 2004-07, global maize production went up by 51 million tons, bio fuel use in US increased by 50 million tons and global consumption for all other uses increased by 33 million tons, causing world stock to decline by 30 million tons.
iv. Rise in input prices. One estimate suggests that around 15% of the rise in prices can be attributed to increased costs of fertilizers, seeds, oil and power.
v. Speculation. Its difficult to quantify the impact of speculation but The Commodities Futures Trading Commission reported early this year that 19% of outstanding rice contracts were held by non-commercial investors. Reports of MF Global Ltd losing $141.5 million early this year in trading of wheat contracts gave some indications of the scale of speculative trades in the food grains market.
vi. Export restrictions by a large number of exporting countries (including India, China, Vietnam, Kazakhstan and Argentina) and change in the subsidy policies of many European countries have also pushed the prices up by capping supply.
vii. Dollar weakness has worsened the matter as prices are quoted in dollar terms by majority of exporting countries. In terms of Euro and SDR, price rise, though significant, is much less.
Outlook
Considering the tight demand-supply equation and low stock levels, prices are expected to remain firm in the medium term. High prices may lead to increased planting of some crops which, weather favouring, may boost supply but that will happen at the cost of some other crops as in the short term major expansion of cultivable land is not possible. With increasingly uncertain climate (e.g, worst flood in last 15 years in US corn belt of Iowa, Illinois and Indiana), resource constraints (e.g, reported water shortage in many countries like India), and slow diffusion of existing or new technologies, any significant increase in supply looks very difficult. On the other hand, with OECD countries gradually reducing farm subsidies, surplus production in those countries will definitely come down. It is estimated that complete phase out of subsidies may push the global prices up by another 5%. With improvement in living conditions in poor countries, life expectancies and hence population growth in near term will put increasing pressure on supply. The estimates by the World Bank suggest that prices will remain well above 2004 levels for a very long period of time.
What Governments and Multilateral Agencies can do
i. Safety net and budgetary support for the most vulnerable section:
Governments are taking steps to reduce the impact on the poor and other vulnerable classes like children. Some of the common initiatives are:
Reduced tax on food grains
Releasing more food grains from existing stocks
Export restrictions
Price controls and consumer subsidies
Cash transfer
Food for work
Food ration/stamps
School feeding
ii. Targeting small and marginal farmers with input subsidies
iii. Increased budgetary support for rural infrastructure, irrigation and water services, agriculture extension services and post harvest management.
iv. Encouraging private sector led investment across the value chain.
v. Educating farmers and providing help on risk management viz crop insurance.
vi. Accelerating development of second-generation bio fuel technology to reduce competition for cropland and also identify alternate crops to reduce dependence on maize.
vii. Asking China and Japan to release rice from their huge strategic food reserves.
Impact on developing economies
1. Macroeconomic impact
i. Rising food and oil prices are applying pressure on domestic prices in many countries. Average inflation in developing countries has gone up to 7.6% from 3.9% and in many countries it is in double digit now. It means all the gains made in stabilizing the prices in the last 8-10 years are lost.
ii. Higher domestic inflation also signals an end to accommodative fiscal and monetary policies that helped the developing countries record unprecedented growth and prosperity in the last 10 years. At the same time it is bound to have an adverse impact on investment decisions and capacity formation thus effecting growth potential of these countries.
iii. A disruptive slowdown of global economy may have serious repercussions again for developing economies in terms of increased protectionism by developed countries, loss of jobs, deteriorating terms of trade and reduction in capital flows.
2. Poverty and distributional impact
It would be sufficient to quote from a letter that Robert B. Zoellick, World Bank Group President, wrote on 01st July to Japanese Prime Minister Yasuo Fukuda, the head of the G8 summit in Japan.
“What we are witnessing is not a natural disaster -- a silent tsunami or a perfect storm: It is a man-made catastrophe, and as such must be fixed by people,”
“For 41 countries, the combined impact of high food, fuel and other commodity prices since January 2007 represents a negative shock to GDP of between 3 and 10 percent…These numbers translate into broken lives, and stunted potential. For the most vulnerable, especially poor children, they mean malnutrition, reduced resistance to disease, and too often death.”
“Record oil prices and high and rising food costs threaten a growing number of countries with rising poverty and social instability. Already we have seen food riots in over 30 countries, and unrest over high fuel prices is spreading. The urban poor are especially affected by the double hit of food and fuel.”
“The international community is facing an unprecedented test in this new era of globalization: the question is whether we can act swiftly to help those most in need”
What will make the difference?
A World Bank analyst recently equated the food crisis to silent killing of millions of poor. He may not be off mark if the world community sits idle and allows the conditions to deteriorate further. Millions of poor in more than 50 countries need immediate support. World Bank’s World Food Program (WFP) has been supporting the most vulnerable classes by financing school feeding, mother to child nutrition, food for work and conditional cash transfer. Further, small farmers, especially in Africa need financial support to access seeds, fertilizers and basic inputs. Individual governments as well as other multilateral agencies are doing their best in this regard. However, as per a WB estimate, WFP alone will require $6.5 billion per year and different programmes to help small farmers in more than 50 countries another $3.5 billion. It means world community will have to make voluntary contributions in excess of $10 billion per year over next few years.
Food exporting countries will also have to allow access to local purchases for WFP and humanitarian purposes and exempt such purchases from export restrictions and taxes.
The recent suggestion by the World Bank and others to maintain a humanitarian strategic reserve for food emergencies deserves attention.
Above all, a positive and proactive approach by the world leaders, like the UN, WB and G8, to tackle the food crisis and avoid its short-term catastrophic impacts is what is needed most. This is the biggest challenge the world has faced since the two oil shocks of the 70s and next couple of years is going to test the character of the global leadership.
