Food price inflation has increased across the entire Latin American and the Caribbean region, affecting both food exporting and food importing countries. Food price inflation was high worldwide in 2007, and Latin America and the Caribbean was no exception. Seven countries in the region saw double-digit food price inflation (figure 1). This is a significant increase in food prices that follows five years of relatively subdued inflationary pressures. The increase in food prices has a direct impact on overall inflation in most countries because the consumer price index weighs food costs heavily. In addition, higher food prices can be expected to indirectly drive inflation by raising inflationary expectations and pushing wage inflation.

In 2007 food prices rose substantially faster than the overall rate of inflation for most countries in the region. Food prices grew the most in Bolivia, Brazil, Chile, Costa Rica, Jamaica, Nicaragua, Trinidad and Tobago, and Uruguay (figures 2 and 3). Only in Argentina, the Dominican Republic, and Haiti were food and overall inflation roughly equal.  International food prices are now affecting the price of Latin America food staples, even in countries where local food is consumed more than imported foodstuffs.  This may be the result of Latin American and Caribbean countries’ integration into the world economy, although there is no research to prove or disprove this.

The rise in grain prices largely explains why the price for specific food products like bread have risen sharply in the region. Food prices are higher for some countries than others.[1] In Haiti overall food price inflation was 6.8 percent in the year ending in September 2007, but the price of bread increased 19 percent during the same period. [2] Likewise, in the Dominica Republic the price of flour recently jumped 24 percent.

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Is this a structural break?

There is an emerging consensus that food prices have increased because of fundamental changes in global supply and demand. Food price inflation has been driven by several forces: high energy prices, income growth, climate change, and rising biofuel production. Income and per capita consumption are rising in developing countries and therefore so is demand. Biofuel policies in developed countries are also a key factor behind rising demand. Ethanol production will consume 30 percent of the U.S. corn crop by 2010. More than 40 percent of the increase in global maize consumption from 2000 to 2007 was due to biofuel use in the United States. There also has been an insufficient growth in the food supply while cereals stocks have fallen and land and water availability for food production has declined. Shifting global food supply and demand has had predictable price effects that have been further complicated by the rising cost of nonrenewable resources. Therefore, the combination of factors driving up food prices has led to a growing consensus that food price inflation is more a structural than cyclical phenomenon.

Real food prices are historically low, but price increases have been unusually rapid. Today’s spike in prices has few precedents. Only the early 1970s saw a sharper rise in the real prices of cereals such as wheat and corn. Food price inflation usually is accompanied by rising energy prices and falling liquidity in the grain market—the situation we have today. Grain stocks are at their lowest level in the last 30 years, following poor wheat harvests in a number of large producers (table 1). Rising energy prices have increased the cost of fertilizer, shipping and logistics (box 1). [3]  However, additional factors are at play today. Land use has shifted in response to the rising demand for ethanol—a trend likely to continue given stated policies in developed countries. [4]  By contrast, in the mid-1970s the Green Revolution helped alleviate the temporary shortage of grains on the supply side.

 Table 1. Snapshot of world grain market

 Total grains (millions of tons)

 a. Projected.

 Source: International Grains Council.

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Logistics Problems Raise Food Costs

Transport and logistics costs increase the cost of trade more than tariffs for many Latin American and Caribbean countries. The World Bank estimates the region’s logistics costs are 16–26 percent of GDP and 18–32 percent of product value, compared with about nine percent of GDP and product value for Organization for Economic Cooperation and Development Countries. For processed foods originating in Central America, domestic logistics burdens add eight to 15 percent to the cost of unitized, higher value food products.

Bilateral and regional free trade agreements and unilateral tariff reductions have reduced tariffs throughout the world since 2000, but ocean freight charges have more than doubled. For high volume, relatively low-value goods such as grains and edible oils, domestic freight and ocean shipping costs can increase the final price for consumers by as much as 30–50 percent.

Based on trends in prices for ocean freight movement of grains from South America, world tariff levels, and petroleum and food prices, it is clear that most of the rise in maritime freight rates occurred between 2000 and 2005—during the repositioning of both containerized and bulk vessels to the booming Asia trade that rippled through the shipping markets. Even after a supply response from the shipping industry took effect in 2005, the astronomical rise of shipping costs remains an important contributor to higher prices.

Food products entering a Caribbean or Central American country often are subject to multiple delays, unnecessary direct costs, and losses and damages that further harm consumers. According to the Bank’s logistics performance index, customs clearances are particularly poor in the Caribbean, typically taking three to five days (compared with one day for Chile and three days for all of Latin America). The lead time needed for imports that have been unloaded to reach the consignee also is high in several countries in both sub-regions, particularly Costa Rica, Haiti, Jamaica, and Panama. Clearly, shipping efficiencies stop at the dock. This factor, exacerbated by port labor strikes, is to blame for recent food shortages in Haiti. Finally, the high average cost of domestic trucking for Costa Rica, Haiti, Honduras, and Nicaragua is due to poor inland transport corridors and high port costs. In Nicaragua the domestic costs of moving a 40 foot container or a semitrailer are double the region’s average, despite the country’s small size, and in Haiti domestic shipping costs are double those of Chile and 20 percent more than China.

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What is the affect of food inflation on Latin America and the Caribbean countries?

The Latin America and the Caribbean region in general is a net food exporter, although Caribbean countries are net food importers. The region has the largest surplus in food trade across all regions (left side of figure 11). Only 10 countries in the region—all Caribbean countries except Venezuela, El Salvador, and Mexico --are net food importers (right side of figure 11).

From 2002 to 2005 approximately half the countries in the region experienced a decline in the food trade balance even though aggregate indexes of food prices went up during the period. This suggests a need for deeper country-specific analysis to understand how individual food price trends affect the balance of payments. Guatemala saw its food trade balance decline by four percent of GDP from 2002 to 2005. By contrast, Nicaragua’s food trade balance improved by more than four percent during the same period. These contrasts highlight the importance of individual commodity prices. Between 2002 and 2005 coffee prices rose the most—up 87 percent—helping Nicaragua more than Guatemala because coffee is a larger share of Nicaragua’s trade balance relative to GDP (table 2). In addition, Nicaragua benefited more than Guatemala from stagnant cereals prices from 2002 to 2005 because Nicaragua imports more cereals.

  Table 2. Structure of food trade in Guatemala and Nicaragua

Honduras, which experienced an increase in the food trade surplus from 2002 to 2005, is more exposed to the recent spike in cereals prices because cereals accounted for 30 percent of its food imports in 2006. Other countries where cereals account for a relatively large share of food imports include Colombia (41 percent), Brazil (40 percent), Peru (36 percent), and Bolivia (34 percent).

Flooding in some countries will add to import needs, and domestic substitutes may be limited. Countries with localized flooding in late 2007 and early 2008— Bolivia, the Dominican Republic, Ecuador, Haiti, and Nicaragua—will see domestic substitute availability reduced further. Overall, the import-to-domestic food consumption ratio in 2008 is expected to be 41 percent for the region, with the highest ratio in Costa Rica (86 percent).

Fuel costs will influence food prices the most in fuel importing countries. Energy is a key input in the production of fertilizers, and high energy prices can thus have a substantial indirect impact on food prices (figure 14). Fuel-exporting countries, by contrast, highly subsidize domestic fuel prices, insulating fertilizer prices from high energy costs. This is typical of Bolivia or Ecuador, both net exporters of fuel and food, but importers of refined petroleum products (figure 15).

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Simulations of the food trade balance suggest a substantial change in 2008 for many countries.

To explore elevated food price impacts on trade balance, Bank economists simulated the food trade balance for 2008 using the quantity of individual food exports and imports for 2006 and the prices for February, 2008 (figure 13). The model is intended to capture the impact of the different trends in prices, such as the stable price of sugar but rising price of wheat or cereals (see annex table II.7 for details). The results suggest that the food trade balance will deteriorate in 2008 for most countries in the region—even net food exporters—due to differences in food trade. The simulations assume no change in the amount of food goods imported and exported even though consumers and producers will likely respond to price changes by adjusting demand. However, the high price and limited quantities of substitute products may limit this response.

[1] Unlike for the overall food price index – which is collected in the LABORSTA database for many countries – there is no single data source for the prices of food subgroups and individual items across countries. If available at all, such data is often available country-by-country only with a time lag.
[2] Banque de la République d’Haïti, Bulletin Statistique 64: Juillet-Septembre 2007.
[3] The increase in shipping costs is due to both rising fuel prices and increasing demand for shipping services because of booming trade with Asia.
[4] In the United States each gallon of ethanol blended into gasoline receives a federal tax credit of 51 cents, and several states have additional tax incentives. The 2005 Energy Policy Act mandates consumption of 7.5 billion gallons of ethanol by 2012 (around 10 percent of total expected gasoline use). The stated policy goal is 35 billion gallons of renewable and alternative fuels in 2017. Imports of Brazilian ethanol are subject to a 54 cents per gallon tariff.

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