February 15, 2011—Three years after the 2008 food and financial crises, food prices are again surging on global markets – and the result could be another 44 million people in poverty. What is behind higher prices? Who is affected and what can policymakers do?
Hassan Zaman, Lead Economist of the World Bank’s Poverty Reduction and Equity Group, answers these and other questions, based on his findings as author of the Bank’s quarterly Food Price Watch, a series that monitors food price developments and their policy implications.
Q: Why have global food prices risen over the last several months?
A: The World Bank’s food price index indicates food prices are just 3% below the May 2008 peak of the food crisis. A series of weather shocks in key producing countries is the main reason wheat prices have more than doubled since June. Prices for maize, sugar and oils have also risen sharply on global markets. Maize prices tend to rise with wheat prices and are also affected by rising oil prices as the incentives to use corn for ethanol increase as shown by recent U.S. Department of Agriculture data. Higher corn prices increase animal feed costs, which in turn impact meat prices.
One crucial difference between now and the food crisis of 2008 is the more moderate increase in the global price of rice —the major food staple for millions of people—which remains at around half the 2008 highs.
Q: How have these global price changes affected domestic food prices?
A: What matters for poor people is local price volatility, and changes in global prices are just one factor behind domestic price changes. In fact, in countries which do not import much, local crop conditions, supply costs, and policy measures are often much more relevant than global prices. One example is sub-Saharan Africa – while global maize prices have gone up, local maize prices have declined over the past year due to excellent harvests with double digit declines in Malawi, Tanzania and Uganda. Moreover good harvests of other staples such as sorghum, millet and cassava in sub-Saharan Africa has allowed for substitution away from more expensive imported staples.
On the other hand, higher global wheat prices have led to sharp increases in the price of wheat in many other countries between June and December. These include the Kyrgyz Republic (54%), Bangladesh (45%), Tajikistan (37%), Mongolia (33%), Sri Lanka (31%), Azerbaijan (24%), Sudan (16%) and Pakistan (16%). In several Latin American countries maize prices have risen, including in Brazil (56%) and Argentina (40%), primarily due to ‘La Nina’ weather conditions.
Rice prices have risen in line with global prices in countries such as Bangladesh, Indonesia and Mozambique, with close to 20% increases since June. Rising prices for other foods, such as sugar, cooking oil, meat and vegetables, are also having an impact on household budgets. For instance, in China food price inflation is driven largely by vegetable prices.
Q: What is the impact on poverty levels and who is most affected?
A: Higher food prices help net food producers and adversely affect net consumers of food, especially poor people in urban areas who don’t grow their own food and often must depend on food imports. Using a model which takes into account both these effects, we estimate that around 68 million people will fall below the $1.25 poverty line, and about 24 million net food producers will escape poverty due to the rise in food prices since June. The net increase in poverty is around 44 million people in low- and middle- income countries.
The people hardest hit are typically in countries with pre-existing high levels of poverty and malnutrition and which lack safety net programs to cushion these impacts. Research has shown that people who are already below the poverty line tend to fall deeper into poverty when food prices surge.
What matters for poor people is local price volatility, and changes in global prices are just one factor behind domestic price changes.
—Hassan Zaman, Lead Economist, Poverty Reduction and Equity Group
It's the extreme poor who suffer the most, and that's as much of a concern as the actual number of people who fall below the poverty line. Within households, women and girls often have disproportionately less food during economic shocks— this trend is particularly worrying for pregnant women.
Food price spikes also increase malnutrition because poorer people eat less and switch from more expensive, nutritious food to cheaper staples. These changes are most serious for infants under the age of 2 as well as for pregnant women and lactating mothers. Changes in relative prices also affect obesity. For instance, the increased demand for high fructose corn syrup, as a substitute for more expensive sugar, has public policy implications in a country like Mexico, where obesity is a serious public health concern.
Q: Are countries better prepared today than in 2007/08?
A: The ability of countries to cope with a new round of food price rises is affected not only by how they have prepared since 2007/08, but what other shocks they have faced in the intervening years. For instance, net commodity importers in Eastern Europe and Central Asia are likely to have less external and fiscal space to deal with the impacts of higher food prices on the heels of the recent financial crisis. At the same time, it is clear countries which have made faster progress in broad-based growth and poverty reduction during these years are better able to cope with any type of shocks, including food price rises.
Countries that have made progress in scaling up effective safety net and nutrition programs are certainly better prepared. Brazil, Bangladesh and Ethiopia are examples where this has happened over the past few years. That said, in most countries we are not even close to where we need to be in terms of safety net coverage to ensure that a large proportion of people will be protected when the next shock comes, especially in low-income countries.
Investments in environmentally sustainable agriculture are also an important way to deal with global food price spikes. Countries in Africa have benefited from excellent maize harvests, which have led to a drop in prices. We don't know for sure how much of this increase in agricultural output is a result of good weather or due to the larger amount of investment that has gone into African agriculture by national governments, the private sector and donors over the past few years
For its part, the World Bank has boosted spending on agriculture to some $6 to $8 billion a year, from $4.1 billion in 2008. The Bank’s Global Food Crisis Response Program is helping 40 million people in need through $1.5 billion in support. In addition, the Bank set up the Global Agriculture and Food Security Program (GAFSP) in April 2010 to support country-led agriculture and food security programs.
Q: How can countries increase food security?
A: First of all, food security is about much more than food or agriculture. It's about ensuring adequate and nutritious food for every member of the household. This requires that people can afford to purchase nutritious food and so is clearly linked to income growth, particularly for the poor. Second, in order for every member of the household to benefit, and for, say, pregnant women to get preferential treatment, one needs gender-related interventions and specific nutritional programs.
Increasing agricultural productivity is crucial and technological innovations remain an important part of the story. New rice varieties called Nericas are improving yields in many parts of Africa and hold a lot of promise. There are huge yield gaps across countries and within countries and so the same amount of land can produce a lot more in an environmentally sustainable way. Investments in irrigation, strengthening land tenure and security, linking farmers to markets and improving access to finance are all critical in this area.
It will also be important to increase public access to information on the quantity and quality of grain stocks as better information helps reassure markets and calm panic induced price spikes. Having a basic minimum level of grain stocks which can be accessed in emergencies, particularly in disaster-prone, infrastructure poor areas, can also help ensure food gets quickly to those who need it most.
Finally, food security should not be confused with food self-sufficiency. The decision by the Saudis to reduce domestic wheat output over time to conserve water and rely more on international markets is the sort of far-sighted choices countries need to make. And to ensure supply on global markets one needs international pressure to reduce export restrictions and bans that really do not help anyone.