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It’s an ill wind… This time, rising agricultural prices mean windfalls for some in 2011

Written by Steve Wiggins, Sharada Keats

In 2008 developing countries, and poor people within them, were hit hard by the price spike in the international cereals market. Once again food prices are moving up, not that far short of the levels seen three years ago, so does this mean another bout of hardship? Some think so. Last Thursday The Guardian ran with the headline “World food prices enter 'danger territory' to reach record high”.

Is this right? Not quite: there’s a difference this time.

It is not just cereals prices, nor just food prices, that are rising, but almost all agricultural prices — including those of the main tropical exports: cocoa, coffee and tea; cotton; palm oil; sugar; and rubber. Most low income countries, leaving aside the few with minerals and oil, depend heavily on these for their export earnings. Often much of the production comes from small farmers. Higher prices mean windfall gains for them, gains that are likely to be spent on local goods and services, with strong multipliers in additional jobs and incomes for others on low incomes.

On the other hand, most of these countries are net importers of cereals and will suffer from higher prices on these items.

So where will the balance between extra costs and windfall gains fall?

Let’s consider five countries: Burkina Faso; Ghana; Indonesia; Kenya; and Nicaragua; then see the likely impact through changes in the value of their trade in ten of the most commonly traded items — maize, rice, wheat; palm oil; tea, coffee, cocoa; sugar; cotton, and rubber. The calculation is simply to compare recent volumes of imports and exports priced at November 2010 levels, compared to the average prices for 1999 to 2008. 

The results, see Figures A to C, are instructive. All five countries get a large boost to their export revenues — by around 20% in two cases, by 40% in another two, and by more than 100% in Burkina Faso — this last thanks to being so heavily dependent on cotton, the price of which has risen dramatically over the last six months.

On the downside, see Figure B, import costs rise; but in all cases by less than the export windfall. Increased costs of cereals, and in some cases sugar, palm oil account for these increases.

The net effect is thus a considerable injection to the economy, see Figure C: in four cases worth more than 1.5% of GDP with Burkina showing a 3% gain from changing agricultural prices.