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Will rising food prices derail development efforts?

Written by Simon Maxwell

Rising food prices are very much in the news.  Farmers may gain, but poor consumers are hard hit – and don’t hesitate to let the politicians know. Governments and aid agencies are under pressure to provide more robust safety nets, while simultaneously facing higher costs.

This has played out in various ways.  On 25 February, The Financial Times led on an interview with Josette Sheeran, the Executive Director of the World Food Programme, under the headline ‘High food prices may force aid rationing’. The Guardian followed up the following day.  Many other news outlets have carried stories of rising prices, hardship and food riots.  Meanwhile, wheat prices were reported as having risen by 25% in one day, amid alarming reports of record low food stocks and trade restrictions by potential exporters like Kazakhstan.

Rising food prices were a theme in Davos, as I discussed in my blog on ‘hunger and malnutrition – the forgotten MDG’. With momentum continuing to build, it may be useful to pull some material together.

First, the International Food Policy Research Institute has prepared two briefs, available here and here: they track the rapid rise and also explain the causes, estimate the impact and predict trends. The website of the US Department of Agriculture also has new ten-year forecasts. A few key points:

  • IFPRI remind us that wheat is up 240% in dollar terms since 2000 and 170% in euro terms. There has been a 40% rise in prices since last June.
  • Forecasts don’t show prices rising much more over the next decade (with the possible exception of rice), but don’t show them falling either. This is from both IFPRI and USDA models. Continued high prices are because slow growth in yields interacts with sharply rising demand associated with Chinese growth, biofuel demand etc . . . ODI has useful material on biofuels.
  • The Director General of IFPRI, Joachim Von Braun, has said that to understand future food markets it is necessary to look at the interactions between and within four separate markets: staples; high value crops; biofuels; and carbon sequestration. The energy market will be a major driver of food prices.
  • The impact on the poor is likely to be significant, because most are net food buyers and are unlikely to be compensated fully by additional employment as agriculture grows or by higher wages. Joachim Von Braun again: the key indicator to watch is not food price alone, but the ratio of food price to wages. In Bangaldesh, for example, food prices have doubled, and wages have risen, but only by 30%.
  • The biggest impact will be felt by the very poorest, those living on 50 cents a day or less, estimated as 170 million in total, falling much more slowly than dollar a day numbers, and actually rising in Africa. The analysis is in the second of the IFPRI briefs, ‘Taking Action for the World’s Poor and Hungry People’.
  • WFP is tracking the impact of rising food prices in 30 key countries, using a combination of macro data and vulnerability models. Key countries include Bangladesh, Senegal, Yemen, many others. WFP is very engaged in Egypt, for example.

All this represents a big policy challenge for governments, but also for international agencies.  US food aid has effectively shrunk by $120m since October, because of rises in procurement prices. WFP is facing about $1bn higher costs (half of this for food) on a budget for food and transport of $4.5bn – this despite holding cost increases to about 20%, by virtue of more efficient purchasing, greater use of local purchase and a shift to cheaper commodities.  This will either mean reducing by 20% the number receiving support (currently 8m) or reducing rations by 20% - in both cases cuts to already agreed programmes, not taking account of new needs.  Hard decisions are already being taken, with the possibility of major ‘pipeline breaks’ for places like Darfur and Afghanistan.  The latest information from WFP can be found here.

The responses needed of course go beyond protecting food aid, or aid for food. Joachim Von Braun has identified three major lines of attack: (a) a technology offensive, (b) a major push to make markets work better, and (c) a big investment in social protection. Within (b) he includes rethinking the Food Aid Convention and also the need for a big investment in commodity exchanges. On these diagnostic points, I would add:

  • It is good to have the projections, but they are necessarily uncertain and it would be good to work with scenarios, using well-known techniques to identify a range of drivers and outcomes, with probabilities attached (cf e.g. the Stern Report).
  • We need better modelling of the impact on poor people, in order to understand the interaction between short term price effects and medium or longer term effects through agricultural growth and consumption linkages. General equilibrium analysis is needed.
  • It is important to superimpose the impact of changes in food prices on rapid change taking place in developing countries anyway, including urbanisation and changes to supply chains (cf our work on Food Policy Old and New). 
  • The private sector will be key in how higher prices play out, esp the role of supermarkets.

On food aid specifically, it is important to understand how much WFP has changed, from an agency supplying foreign food to one working with and through food markets.  In Africa, 80% of food distributed is locally purchased, 80% of all transport is local, and 80% of staff are local.  WFP are spending $800m p.a. in Africa.

The ‘perfect storm’ of higher food prices underpins the discussion about WFP’s new strategy, due by June.  There are five strategic objectives, viz (a) meeting emergency needs, (b) assessing and preventing emergencies and famine, (c) post-conflict recovery, (d) advising governments on food policy, and (e) market development.  Note that the emergency work includes logistics supply on behalf of other agencies – e.g. transporting drugs for WHO.

There are some important points to make about the current situation:

  • The current ‘crisis’ provides an impetus to change and an opportunity. Others are active – FAO, of course, Robert Zoellick for the World Bank, NGOs like SCF (who launched a big child hunger and survival initiative this week). The window is time-limited.
  • The case-load includes both failed and fragile states, but also many other countries with some capacity to respond. It is a bit surprising that there is not more talk about what countries themselves are doing or could do.
  • The aid context is generally favourable (see the new DAC report on aid flows), with two key features – (a) an emphasis on harmonisation and alignment, under the umbrella of the Paris agenda, and (b) an interest in architecture and UN system reform. Aid agencies, including food aid agencies, need to recognise these priorities.
  • There are some key opportunities in 2008, incl the Call to Action events in May and September, Accra on Aid Effectiveness in September, and Doha at the end of November on Financing for Development.
  • What donors would really, really like to see is two things: (a) a one-UN initiative on this topic, and (b) a strong pitch from developing countries that they had plans of their own and would like aid agencies to help implement them.
  • The real challenge is not ‘Why?’ or ‘What?’ but, as usual, ‘How?’ – a collective action problem we think about and could help with. It is especially important to have strong allies among the G-77.

There is much more to do on this topic. Watch out for further contributions from ODI.