Rising Food Prices: An Ominous Threat to the World’s Poor of the World Food Situation

Income growth, climate change, high energy prices, globalization and urbanization are all converging to transform food production, markets and consumption, according to a report from the International Food Policy Research Institute (IFPRI). As a result of this new food equation, global demand and prices are likely to rise, threatening the livelihoods and nutrition of poor people in developing countries. The report, entitled “The World Food Situation: New Driving Forces and Required Actions,” was presented by IFPRI Director General Joachim von Braun during the opening session of the AGM07 Science Forum.

Joachim von Braun, IFPRI Director General, addresses the audience during the opening session of the Science Forum at AGM07.

“Food prices have been steadily decreasing since the Green Revolution, but the days of falling food prices may be over,” said von Braun. “Surging demand for feed, food and fuel have recently led to drastic price increases. Aggregate prices for grains rose from US$100/tonne in 2000 to $153 in 2006 and went even higher in 2007.

Moreover, they are not likely to fall in the foreseeable future. Global food consumption currently exceeds production, resulting in the depletion of global stocks of grains, such as wheat and rice, and increasing market uncertainty and price variability. Without a dramatic boost in agricultural productivity, prices will continue to increase.

Climate change will also have a negative impact on food production, compounding the challenge of meeting global food demand and potentially worsening hunger and malnutrition among the world’s poorest people.”

Consumer Demand

Many regions of the developing world, especially China and India, have seen high economic growth in recent years. Together with an expanding urban population, income growth is altering spending and consumer preferences. Global food demand is shifting from grains and other staple crops to processed foods and high-value agricultural products, such as vegetables, fruits and meat.

Although many small farmers would like to take advantage of the new opportunities that such products offer for increasing income, they face serious obstacles to entering markets, including a limited capacity to meet safety and quality standards and produce large quantities for food processors and retailers.

Biofuels

Von Braun stressed that biofuels development to provide alternative energy sources and mitigate climate change offers both hope and threats. Part of the threat lies in the dramatic effect that increased biofuels production will likely have on the world food situation. According to the IFPRI report, poor people in developing countries will be adversely affected by both higher prices for food and greater volatility of food prices. Subsidies for biofuels, which are common, increase the negative impact on poor households, as they implicitly act as a tax on basic food.

Using state-of-the-art computer modeling, IFPRI has projected the possible price effects of biofuels for two potential scenarios up to the year 2020:

• Under scenario one, which is based on many countries’ actual plans for biofuel investment and on the assumption that high-potential countries will expand their production of bioenergy, maize prices would increase by 26 percent and oilseed prices would rise by 18 percent.
• Under scenario two, which assumes that the production of biofuels would expand greatly, to twice the level prevailing under scenario one, maize prices would increase by 72 percent and oilseeds by 44 percent.

Under either scenario, rising crop prices would lead to decreases in food availability and calorie consumption in all regions of the world, with sub-Saharan Africa suffering the most. As biofuels become increasingly profitable, more land, water and capital will be diverted to their production, and the world will face more difficult trade-offs between food and fuel. Second-generation technologies may help cope with these tradeoffs, as they utilize biomass waste and in some cases put less pressure on land and water resources.

Agricultural Trade

In addition to examining the possible effects of biofuels production, IFPRI modeled the impact of supply and demand changes on cereal prices. It projects that up to 2015, prices could further increase by 10 to 20 percent, benefiting certain countries and population groups while harming others. China and almost all African countries, which are net importers of cereals, would suffer from the resulting high prices, but India, a net exporter would benefit. Overall, the majority of poor people, who live in households that are net buyers of food, will be worse off, and increased food prices will make it even more difficult for them to eat healthy, well-balanced diets.

More open global trade in agriculture would generally benefit developing countries. IFPRI research shows that opening up and facilitating market access between industrialized and developing countries would bring significant economic gains, although poverty would not be significantly reduced except in certain situations. Yet, negotiations within the World Trade Organization are stalled, so many countries are turning instead to bilateral or regional agreements, under which global food exports from developing countries have increased.

Climate Change

World agricultural output is projected to decrease significantly as a result of global warming, and this will have a much greater impact on developing countries than on industrialized nations. Africa is particularly vulnerable to climate change, because it depends much more on low-input, rainfed agriculture than does Asia or Latin America. Greater variability in rainfall will also impact livestock production, as it mostly depends on range- and grasslands, which are strongly affected by environmental shocks.

To reduce these risks requires increased investment in the improvement of agricultural productivity. It is also important to explore innovative insurance mechanisms for compensating rural communities and small farmers when rains fail.

Policy Recommendations

Von Braun cautioned against policy responses such as stopping exports, subsidizing food for the middle class and maintaining outdated production controls. Rather, g iven the various risks and challenges posed by the rapidly changing world food situation, he urged that policymakers take five immediate actions to mitigate the negative effects on poor households:

Developed countries should eliminate trade barriers and programs that set aside agricultural resources, thus facilitating more flexible responses to drastic changes in food prices. A world facing greater food scarcity needs to trade more, not less.

• Developing countries should invest more in rural infrastructure and market institutions to improve access to critical agricultural inputs, such as fertilizers, seeds and credit, which are key to enhancing productivity.
• To counteract rising food prices, national and international research organizations, including the CGIAR, must be able to invest more heavily in science and technology to increase agricultural production on a global level.
• Policymakers should put in place social protection measures that mitigate the nutritional risks associated with reduced food access, particularly for young children in the poorest households.
• Because poor people in developing countries are especially vulnerable to the risks associated with climate change, particularly as it relates to food security, policymakers should take agriculture and food issues into account when developing national and international agendas for coping with climate change.

A world facing increased food scarcity needs to trade more, not less.

“As the world food situation is rapidly redefined by new driving forces, the global community must give renewed attention to the role of agriculture, nutrition and health in development policy,” said von Braun. “Above all, policies must favor the world’s poorest people to ensure that they do not get left behind in the wake of overall economic growth and global progress.”

Income growth, climate change, high energy prices, globalization and urbanization are all converging to transform food production, markets and consumption, according to a report from the International Food Policy Research Institute (IFPRI). As a result of this new food equation, global demand and prices are likely to rise, threatening the livelihoods and nutrition of poor people in developing countries. The report, entitled “The World Food Situation: New Driving Forces and Required Actions,” was presented by IFPRI Director General Joachim von Braun during the opening session of the AGM07 Science Forum.

“Food prices have been steadily decreasing since the Green Revolution, but the days of falling food prices may be over,” said von Braun. “Surging demand for feed, food and fuel have recently led to drastic price increases. Aggregate prices for grains rose from US$100/tonne in 2000 to $153 in 2006 and went even higher in 2007.

Moreover, they are not likely to fall in the foreseeable future. Global food consumption currently exceeds production, resulting in the depletion of global stocks of grains, such as wheat and rice, and increasing market uncertainty and price variability. Without a dramatic boost in agricultural productivity, prices will continue to increase.

Climate change will also have a negative impact on food production, compounding the challenge of meeting global food demand and potentially worsening hunger and malnutrition among the world’s poorest people.”

Consumer Demand

Many regions of the developing world, especially China and India, have seen high economic growth in recent years. Together with an expanding urban population, income growth is altering spending and consumer preferences. Global food demand is shifting from grains and other staple crops to processed foods and high-value agricultural products, such as vegetables, fruits and meat.

Although many small farmers would like to take advantage of the new opportunities that such products offer for increasing income, they face serious obstacles to entering markets, including a limited capacity to meet safety and quality standards and produce large quantities for food processors and retailers.

Biofuels

Von Braun stressed that biofuels development to provide alternative energy sources and mitigate climate change offers both hope and threats. Part of the threat lies in the dramatic effect that increased biofuels production will likely have on the world food situation. According to the IFPRI report, poor people in developing countries will be adversely affected by both higher prices for food and greater volatility of food prices. Subsidies for biofuels, which are common, increase the negative impact on poor households, as they implicitly act as a tax on basic food.

Using state-of-the-art computer modeling, IFPRI has projected the possible price effects of biofuels for two potential scenarios up to the year 2020:

• Under scenario one, which is based on many countries’ actual plans for biofuel investment and on the assumption that high-potential countries will expand their production of bioenergy, maize prices would increase by 26 percent and oilseed prices would rise by 18 percent.
• Under scenario two, which assumes that the production of biofuels would expand greatly, to twice the level prevailing under scenario one, maize prices would increase by 72 percent and oilseeds by 44 percent.

Under either scenario, rising crop prices would lead to decreases in food availability and calorie consumption in all regions of the world, with sub-Saharan Africa suffering the most. As biofuels become increasingly profitable, more land, water and capital will be diverted to their production, and the world will face more difficult trade-offs between food and fuel. Second-generation technologies may help cope with these tradeoffs, as they utilize biomass waste and in some cases put less pressure on land and water resources.

Agricultural Trade

In addition to examining the possible effects of biofuels production, IFPRI modeled the impact of supply and demand changes on cereal prices. It projects that up to 2015, prices could further increase by 10 to 20 percent, benefiting certain countries and population groups while harming others. China and almost all African countries, which are net importers of cereals, would suffer from the resulting high prices, but India, a net exporter would benefit. Overall, the majority of poor people, who live in households that are net buyers of food, will be worse off, and increased food prices will make it even more difficult for them to eat healthy, well-balanced diets.

More open global trade in agriculture would generally benefit developing countries. IFPRI research shows that opening up and facilitating market access between industrialized and developing countries would bring significant economic gains, although poverty would not be significantly reduced except in certain situations. Yet, negotiations within the World Trade Organization are stalled, so many countries are turning instead to bilateral or regional agreements, under which global food exports from developing countries have increased.

Climate Change

World agricultural output is projected to decrease significantly as a result of global warming, and this will have a much greater impact on developing countries than on industrialized nations. Africa is particularly vulnerable to climate change, because it depends much more on low-input, rainfed agriculture than does Asia or Latin America. Greater variability in rainfall will also impact livestock production, as it mostly depends on range- and grasslands, which are strongly affected by environmental shocks.

To reduce these risks requires increased investment in the improvement of agricultural productivity. It is also important to explore innovative insurance mechanisms for compensating rural communities and small farmers when rains fail.

Policy Recommendations

Von Braun cautioned against policy responses such as stopping exports, subsidizing food for the middle class and maintaining outdated production controls. Rather, g iven the various risks and challenges posed by the rapidly changing world food situation, he urged that policymakers take five immediate actions to mitigate the negative effects on poor households:

• Developed countries should eliminate trade barriers and programs that set aside agricultural resources, thus facilitating more flexible responses to drastic changes in food prices. A world facing greater food scarcity needs to trade more, not less.
• Developing countries should invest more in rural infrastructure and market institutions to improve access to critical agricultural inputs, such as fertilizers, seeds and credit, which are key to enhancing productivity.
• To counteract rising food prices, national and international research organizations, including the CGIAR, must be able to invest more heavily in science and technology to increase agricultural production on a global level.
• Policymakers should put in place social protection measures that mitigate the nutritional risks associated with reduced food access, particularly for young children in the poorest households.
• Because poor people in developing countries are especially vulnerable to the risks associated with climate change, particularly as it relates to food security, policymakers should take agriculture and food issues into account when developing national and international agendas for coping with climate change.

A world facing increased food scarcity needs to trade more, not less.

“As the world food situation is rapidly redefined by new driving forces, the global community must give renewed attention to the role of agriculture, nutrition and health in development policy,” said von Braun. “Above all, policies must favor the world’s poorest people to ensure that they do not get left behind in the wake of overall economic growth and global progress.”