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Latin America: Some Countries Vulnerable to High Food Prices

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  • High food prices pose a threat to several Central American and Caribbean countries.
  • Revenues from high commodity prices can offset food stuff spikes in Southern cone.
  • Social protection networks can be strengtened to soften blow to the region's poor.

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WASHINGTON DC, February 16, 2011 - Like two sides of the same worn coin, the spiraling costs of food stuffs across the globe have raised the specter of a new food crisis in some of Latin America’s economies while benefitting many others with windfall profits.

Global food prices are now at dangerous levels, and have pushed 44 million people into poverty in low- and middle-income countries due to the rise in food prices since June 2010, according to the Bank's Food Price Watch.

"It is already clear recent price rises for food are causing pain and suffering to poor people around the globe. We need global action to help turn that around – to help small holder farmers, with seeds and fertilizer, better weather forecasting; better means to get produce to markets; also food and effective safety nets for the most vulnerable people – pregnant women and babies under two years of age," said World Bank Group president Robert B. Zoellick.

A regional assessment of commodity price volatility states that since February 2009, international food prices have risen by more than 30 percent and agricultural raw material prices by more than 6 percent. During the same period, oil and metal prices have increased by around 100 percent.

“Virtually all the commodities that matter for the region are partaking in this strong wave of price increases. For certain countries the rise in non-food commodity prices can more than offset the increases in the prices of imported food,” says the report Vulnerability to Food Price Increases in LAC, 2011.

Clear winners from this situation are most South American countries.

Maize, soybean oil, and palm oil have registered the largest increases —over 7 percent per month in the September-November of 2010 period. Gold, sugar, copper and coffee have experienced increases of more than 5 percent per month over the same period, dramatically improving the terms of trade of South American countries heavily reliant on such food and mineral exports such as Chile, Peru, Colombia, Brazil and Southern Cone nations.

Left out of this bonanza are countries in Central America and the Caribbean where the Bank analysis found several countries highly vulnerable to a potential food crisis in light of their extreme dependence on food imports coupled with high poverty rates. Such countries include: El Salvador, Haiti, Grenada, Jamaica, Suriname, and St. Vincent and the Grenadines. A wider analysis taking into account high poverty rates combined with limited abundance of commodity exports -the lifeblood of most regional economies- expands such map to include Mexico, Guatemala, Nicaragua, Guyana and Belize.

The impact of higher food prices on the most vulnerable can be devastating, according to the report, which notes that already 44 million people have been added to the ranks of the poor globally since June 2010 following the food price spike.

“Sharply rising food prices may present a threat to the nutrition and livelihoods of vulnerable sectors of the population in the region. Food price inflation has a detrimental impact on net food consumers and particularly the urban poor, who spend a larger share of their income on food and do not derive their income from agriculture,” states the report.

While looming large in parts of the region, the threat of a food crisis can be effectively addressed with the right mix of social and fiscal responses, said the region’s top World Bank officials.

Beefing up social protection programs in the short term while improving long-term production and distribution of food stuffs can help governments avoid the pain of food shortages and price inflation says World Bank chief economist for Latin America and the Caribbean, Augusto de la Torre.

"The previous food crisis has highlighted the importance of continuing to strengthen safety nets for the poor in the region," noted de la Torre.

Countries that have well-structured, long-term antipoverty programs, such as Conditional Cash Transfers (CCT), established before the crisis, can use them to protect the most vulnerable against shocks, he added.

CCT leading practitioners such as Brazil, Chile, Colombia, El Salvador, Jamaica, Mexico, and Panama used their existing program structures during the 2007/8 food crisis by adjusting benefit levels and/or eligibility thresholds.

In Brazil for instance, the ‘Bolsa Familia’ program was extended to 12 million families and the amount of the transfer increased by 10 percent. This response is estimated to have had had a significant buffer effect, dampening the fall in consumption among the poorest by almost 8 percentage points.

De la Torre also thinks the recent global economic troubles have made governments more crisis-savvy.

“Instruments used in 2008 can be used again including contingent credit lines (DDO) and derivatives such as swaps and futures that can secure access to food prices at certain levels,” said de la Torre noting that the World Bank can support these efforts financially and by providing its global agriculture expertise.

The expert warned, however, that there isn’t a one-size fits all response to the food price increase and its potentially devastating consequences.

On a national level, while a particular set of policies may benefit countries with a large number of poor, it may not work for other economies reporting a large number of poor but also windfall profits from the current commodity-led export boom -- such as, for instance, Argentina, a large soy exporter, experiencing a significant improvement in its terms of trade, but still riddled with areas of extreme poverty across the country.

On a global level, subsidies to local food prices to protect the vulnerable can create disincentives to national food producers and international exporters alike. And, in an extreme scenario, if a particular food stuff becomes highly priced, a country might decide to block such export and channel it to local markets, further souring the international trade arena.

“It’s a balancing act where a country needs to look after its own interests, the interest of its vulnerable populations and an international economic scene that is increasingly intertwined,” de la Torre said.

Summarizing how the Bank can help, he offered these tips: Immediate response:
  • Emergency financing support and potentially scaling up existing programs.
  • Scaling up financial support to cash transfer programs without compromising efficacy.
  • Accelerating disbursements on existing loans as means to providing emergency financing.
  • The DDO instrument and commodity derivatives can provide a contingent line of credit and financial coverage respectively in case of future strain on public finances.
strong>Medium and longer term response:
  • Further develop sustainable programs and policy instruments.
  • Assist governments in incorporating risk management strategies into their food policy planning --such as catastrophe insurance for draughts, floods, etc.
  • Improving supply responses through rural development programs and measures aimed at enhancing agricultural productivity and competitiveness.
  • Lending to improve agricultural productivity to increase yields, reduce post-harvest losses, adopt better technologies and production practices, and improve links to markets.

Some of these ideas took center stage during a recent visit to the region by newly appointed director Carlos Felipe Jaramillo.

Jaramillo told Central American government and business leaders about his concerns of a food crisis developing in the region and about the tools available to address it, particularly investing more in research of new agricultural technologies, which has been low over the years.

“This will ensure that the region expands its capacity to feed itself better,” he said.

Research and innovation has yielded fruit in countries like Brazil where state-owned Embrapa has improved exponentially the Brazilian agro-industries and has become a source of agricultural knowledge for other regions in the world –notably Africa.

Latin America has comparative advantages such as good and fertile land, fantastic valleys and climate that can improve food production with a little investment in new technologies, Jaramillo remarked.

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