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Impact of the global financial and economic situation on agricultural markets and food security

Working paper

Written by Steve Wiggins, Sharada Keats

Working paper

Agricultural prices have fallen heavily since their peaks in the first half of 2008: some are already at the levels seen in early 2007 before the recent spike began. Thanks in part to economic downturn, prices are expected to continue falling in 2009. Prices of inputs such as fertiliser and oil, and ocean freight rates, have also come down; and by even larger fractions than those of outputs.

Increasingly it seems that the price spike was an extraordinary event caused by an unusual combination of mainly short-term factors, including harvest failures, higher oil prices and the associated acceleration of US ethanol production exacerbated by excessive reactions to rising prices by limiting exports and restocking in tight markets. The spike, however, was superimposed on a medium term trend of rising real prices caused partly by the falling value of the US dollar, rising aggregate demand and monetary expansion, and the slow-down in the growth of cereals outputs since the mid-1980s in which production has fallen behind population growth.

The economic downturn and outright recession in OECD countries can be expected to depress growth in the developing world, through reduced financial flows — investment in stock markets, banking capital, foreign direct investment and remittances, and through lower demand in markets pushing down commodity prices and reducing tourism receipts. Some countries will see their currencies depreciate as their current accounts weaken. While this will raise the threat of inflation, it will also stimulate exports and depress demand for imports and so help correct trade imbalances.

Overall, the impacts will be almost certainly be deflationary. World Bank forecasts see reduced growth across all regions of the developing world, although growth will still be positive and recessions are not expected.

Wider variations in impacts can be expected from country to country, depending on economic structure, integration into global financial markets, and the strength of the economy as seen in foreign exchange reserves, fiscal deficits, and external debt. Marked differences between middle and low income countries are likely, with further differentiation depending on the trade balance in oil and foods.

Food security and nutrition depend on the incomes of the poor and local price levels of foods, as well as general health conditions. So many intermediate variables intervene that making ex ante predictions risks too much guessing. Hence here the experiences of Indonesia, Mexico and Zambia when facing economic recessions in the 1990s have been reviewed.

This shows the expected correlation between economic recession and rising rates of poverty. But there are some signs in these cases that the poor found ways to buffer themselves a little against hard times. Less obviously, the nutrition data for young children does not show any clear sign of deterioration in these economic crises, suggesting that while poverty and hardship may have intensified, long-term damage to the prospects of infants did not take place — or at least not on a scale large enough to show up in national surveys.

Steve Wiggins, Sharada Keats and Marcella Vigneri