Anatomy of the Global Food Crisis

PEDRO CONCEIO AND RONALD U. MENDOZA*

United Nations Development Programme (UNDP) June 2008

ABSTRACT: This paper offers a preliminary diagnostic of the possible factors behind the presently unfolding global food crisis. Some of these factors are more immediate and possibly short-term in nature, such as the volatility in the commodities markets due to possible short-term financial speculation. Other factors, however, are going to or have already started to impact on countries food security in the medium- to longer-term. These include rising and changing patterns of consumption in fast-growing and large developing countries like China and India, possibly increasing trade-off between biofuels and food, and the unfolding effects of climate change. In response to the present crisis and keeping in mind the possible structural features of the food landscape from here on, this paper outlines a possible framework for policy actions, describing the possible roles of unilateral and collective action in addressing the present food crisis as well as ensuring future global food security.
Key words: biofuels, cereal stocks, commodity markets, food crisis, food security JEL: F13, O13, Q18

*Correspondence Address: United Nations Development Programme (UNDP), Office of Development Studies, Uganda House, New York, NY 10017 USA. E-mail: Pedro.Conceicao@undp.org and Ronald.Mendoza@undp.org. Acknowledgements: The authors are grateful to Diego Arias, Barbara Barungi, Paola Deles, John Horton, Selim Jahan, Bashir Jama, Guido Schmidt-Traub and Shantanu Mukherjee for very useful comments on an earlier version of this paper, and to Nina Thelen for providing excellent research assistance. The views expressed in this paper are the authors and do not necessarily reflect the policies of UNDP.

Introduction Growing protests against high food prices in different parts of the developing world, including in Burkina Faso, Cameroon, Egypt, Haiti, Indonesia, Ivory Coast, Mauritania, Mozambique, the Philippines and Senegal have elevated food security as one of the top issues in the international agenda. Global food price increases in recent months have been astronomicalin March 2008, the price of traded wheat had gone up by over 130 percent compared to year before levels, while the price of traded rice had gone up by over 70 percent during the same period.1 The Food and Agriculture Organization (FAO) reports that the cereal import bill of the worlds poorest countries is expected to increase by 56 percent in 2007, which is even higher than its 36 percent increase in the previous year.2 If unabated, these price increases threaten to erase much of the gains in poverty reduction that have been achieved in the last decade.3 Governments around the world have responded to the immediate crisis by taking a number of steps to secure their food stockpiles and keep food prices within their borders down, such as by relaxing tariffs on food imports, or slapping protections on food exports. However, some of these policies may have exacerbated the broader crisis by further contributing to an already thin world food market. Furthermore, some of these policies may have undermined the very incentives that could boost food production, putting an end to the present crisis as well as possibly helping to prevent future ones. Addressing the issue of food security requires a critical understanding of the root causes of the worlds food- and agriculture-related challenges that have been brewing for some time now.4 To this end, this paper offers a preliminary diagnostic of some of the important factors both domestic and externalwhich may have contributed to the immediate crisis, and in addition, describes some aspects which may have repercussions on possible future ones as well. Some of these factors are more immediate and possibly short-term in nature (e.g. volatility in the commodities markets due to short-term financial speculation) while others are going to, or have already started to, impact on countries food security in the medium- to longer-term (e.g. rising and changing patterns of consumption in fast-growing and large developing countries like China and India, a possibly increasing trade-off between biofuels and food, and the effects of climate change). As the crisis is still unfolding, no attempt is made here to try and attribute relative importance behind any of these possible explanations behind the crisis. Figure 1 summarizes the content of this paper and illustrates a preliminary anatomy of the present global food crisis. As will be elaborated herein, two of the main transmission mechanisms that make the crisis global in nature include the trade in food (e.g. maize, rice,
1

Authors calculations based on the FAOs food production per capita indicator drawn from FAOSTAT Online [http://faostat.fao.org/]. 2 Poorest countries cereal bill continues to soar, governments try to limit impact. FAO, Rome, April 11, 2008 [http://www.fao.org/newsroom/en/news/2008/1000826/index.html]. 3 Based on rough estimates by the World Bank, a doubling of food prices in the last three years alone already threatened to push 100 million people back into poverty (Ivanic and Martin, 2008:20; World Bank 2008a). 4 For the purpose of this paper, food security is defined as: Access by all people at all times to enoug h food for an active, healthy life. See Maxwell (1996) for a review of other possible approaches to defining food security in practice.

wheat, dairy products) or inputs to produce food (e.g. oil, fertilizers), and the effects of climate change on agricultural productivity. Another potential factor relates to the behavior of financial investors in our globalized financial and commodity markets but this third aspect receives only a very preliminary treatment in this paper.

Figure 1. Anatomy of the Global Food Crisis

Source: Authors own elaboration.

While the net impact of all these trends on the world, on individual countries, and within countries across the poor and the more well-off, are still evolving and our understanding of the entire picture still being sharpened, at least three things seem clear. First, it is likely that the appropriate policy mix to respond to these challenges must be nuanced, responding not just to the symptoms or some of the immediate manifestations of the crisis, but also the root causes including important long-term factors that have already begun to unfold. Aspects related to distribution issues are of paramount importance, not only in terms of income inequality, but also in terms of who are the net producers and the net consumers, across and within countries. For example, policies to take advantage of higher prices by increasing government revenue that could finance assistance to the most vulnerable can backlash with a strong reaction from the producers as we are seeing in Argentina and undermine the supply incentives that would be expected to come with higher prices. Second, unilateral actionincluding by some countries that we have seen in recent monthsare probably not going to be sufficient. At worst, some of these policies could even exacerbate the broader problem at hand, transforming tight food supplies into a
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protracted food crisis. If food insecurity issues are left unaddressed, we might begin to see replacing older beggar thy neighbor forms of protectionism possible new ones of a hunger thy neighbor nature. Countries are within their sovereign right to secure their foodstocks; however, with better foresight and some collective action, there are possibly better and more effective ways to address the challenges related to food security so that all countries benefit. This is a typical challenge of supra-national collective action. Third, the long-term challenge of ensuring food security is not only a simple matter of lowering prices and increasingly supplyit is fundamentally linked to the challenge of increasing purchasing power and reducing poverty. Whether one looks at this issue at the international or intra-national levels, and considering the lessons from history, food insecurity often occurs amidst abundant supplies. Even when food is plentisome, hunger, undernourishment and starvation sometimes occur (as it has in the past) when there are shocks to peoples endowments, which are meager to begin with for the poorest and most vulnerable segments in society (Sen, 1981;1982). While in the short run, the roots of the present food crisis may be related to unusually strong supply shocks and depleted stocks (at least for some grains), the long-term drivers of food security are fundamentally intertwined with the roots of poverty and inequality. We have always had a food crisis in many parts of the worlda silent crisis of poverty and hunger even when prices were not yet dramatically increasing at the global level. Hence, beyond the immediate challenge of providing humanitarian relief in the countries most ill-equipped to weather the present crisis (and future ones that are yet to come), it is the broader and long-term challenge of reducing poverty and hunger that national policymakers and the international community needs to critically address.

In what follows, section 1 discusses some of the domestic factors that could influence food security, and it takes Haiti as an illustration of some of the internal challenges faced by a net food importing low income country. This section also elaborates on how food security is fundamentally linked to the broader challenge of reducing poverty and inequality. Important distributional issues come to the fore in analyzing the possible extent and severity within countries of food crises. Section 2 reviews some of the possible external factors affecting countries on both the net exporting and net importing sides of the global food equation. These are the factors that make the present crisis truly global in nature. Short-, medium- and long-term are used as rough analytical descriptors to help distinguish factors that may be less permanent from those that countries will increasingly need to deal with. Section 3 briefly touches on the importance of national and international food market structures, and how this additional aspect could also affect food security. In its final section, this paper outlines a possible framework for policy actions, describing the possible roles of unilateral and collective action in addressing the present food crisis as well as ensuring future food security.

1. Internal Factors A variety of factors that are internal to a country affect its food security. Net food importing low income countries like Haiti are likely to face a number of distinct challenges, which, combined
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with their dependence on external food supplies, leaves them vulnerable to food price shocks. Notable among these challenges are the lack of investments in the agricultural sector. In addition, both net food importing and net food exporting countries could be broadly vulnerable because food security is not just about the abundance of food, nor a matter of being able to produce enough food to feed the entire population. As noted by Sen (1981), problems related to lack of access to food are not merely addressed through a scientific discussion of ways to boost food production, important as they might be: these problems are also critically tied to ownership and exchange, which are exacerbated in contexts of high levels of poverty and inequality.

Challenges of a net food importing low income country Haiti offers an illustration of developing countries faced with an array of challenges, including that of ensuring its food security.5 Haitis economy has suffered a protracted stagnation for much of the last 30 years, and its agricultural sector has experienced a steady decline from the mid1980s to the mid-1990s, with production increasing slightly in the last few years but never really recovering to the same output levels in the 1980s. Haitis example shows the confluence of two main factors: a) low and declining incomes with b) high volatility of internal food production (due to weather shocks, low investments and low productivity). Agricultural sector growth has also been volatile throughout this period. The volatility (measured as the coefficient of variation) of the growth in agricultural production has almost doubled during the period 1990-2005, compared to the period 1980-1989.6 In addition, Haitis food production per capita has been on a declining path since 1990. The average growth rate of food production per capita in Haiti during the period 1991-2006 was negative 1.7 percent.7 Haiti transformed from a net exporter to a net importer of food8, between 1980 and 2005generating a net food export surplus of 6 percent of imports in 1980/1981, and a net food export deficit of about 14 percent of imports by 2004/2005.9 A number of factors could have impacted on Haitis agricultural sector, including the immediate (and possibly short-term) effects of floods and hurricanes, though there were no major weather-related events occurring in recent months. Medium- to longer-term factors appear to be more relevant. A first set of these factors centers around the countrys economic policies.

This section provides a brief overview of some of the key challenges faced by Haiti, notably in its agricultural sector. See Arias and others (2006), IMF (2007), and ODS (2008) for a more detailed analyses of Haitis economy, its agricultural sector, and its internal and external challenges. 6 Authors calculations based on the FAOs food production per capita indicator drawn from FAOSTAT Online [http://faostat.fao.org/]. 7 Authors calculations based on the FAOs food production per capita indicator drawn from FAOSTAT Online [http://faostat.fao.org/]. 8 Defined as raw food, cash crops, feeds and agricultural raw materials. 9 It is one of 10 low income countries in the world whose agricultural trade deficit is more than 5 percent of its imports (along with Bangladesh, East Timor, Eritrea, North Korea, Mauritania, Nepal, Niger, Senegal, and Yemen) (Ng and Aksoy, 2008:11,50).

The opening up of Haitis agricultural sector to international trade, without accompanying investments in its capability to boost the sectors competitiveness, might be a key factor behind the agricultural sectors apparent contraction. For example, Haiti imported some 16,000 metric tons of rice in 1980. After two successive phases of trade liberalizationone in the mid-1980s and another in the mid-1990sHaitis rice imports have risen to well over 270,000 metric tons by 2004, which represents an almost 17-fold increase.10 Consequently, demographic pressure, decapitalization, and low levels of human resource and infrastructure investments have all also probably contributed to the declining capacity of its agricultural sector (Arias and others, 2006). The impact of environmental damage on Haitis agricultural productivity is also an important additional factor to consider. Haiti suffers from considerable deforestation: during the period 1990-2000, its natural forest cover declined by about 50 percent. Based on one estimate (for 2000), its forest area represents a mere 3 percent of its total land area.11 Under these conditions, the impact of floods and hurricanes on Haitis agricultural sector have become more severe. It has been estimated that Haiti loses anywhere from 10,000 to 15,000 hectares of fertile land each year to soil erosion (Arias and others, 2006: 3).12 While the present focus on Haiti brings some of its unique challenges sharply into focus, declining or stagnant agricultural sectors is a stark reality for other developing countries, notably many in Sub-Saharan Africa. In addition, some net food importers are low income countries in conflict or recovering from conflict, or are mired in debt or are undergoing debt relief, all of which introduces a broader array of challenges in addition to food insecurity. Figure 2 compares the cereal yields (expressed in kilograms per hectare) in different developing regions, while Figure 3 (A-F) and Figure 4 (A-F), provide illustrations of the food production per capita and agricultural production trends, respectively, of selected net food importing low income countries. These figures help to illustrate important differences in the nature of the challenge across countries. Countries like Haiti and Eritrea have experienced declining food production, and at the same time agricultural production in these countries appears to have stagnated from previously higher levels of output. Nevertheless, in countries like Mauritania, food production has gone down, but agricultural production has gone-up, possibly signaling important structural shifts in its agricultural sector (such as from producing food crops to cash crops).13 In other countries like Bangladesh and East Timor, the challenge probably has to do more with volatility in food
10 11

FAO [http://www.fao.org/ES/ess/toptrade/trade.asp]. World Resources Institute [http://earthtrends.wri.org/pdf_library/country_profiles/for_cou_332.pdf]. 12 It is important to note here that a variety of other factors could also come into play, including the absence of a strong social safety net, lack of fiscal space which could be useful to meet rising cereal import bills, and the existing tariff and tax structure for food imports and exports. 13 On this point, calculations by Ng and Aksoy (2008:6,9) reveal that 42 of 58 low income countries had a net food deficit in 2005, but only 24 of the same low income countries had a net agricultural deficit. They define food as raw food under SITC Revision 2, and it includes meats and dairy products, grains and cereals, and vegetables and fruits (and excludes cash crops, processed food and seafood). Agricultural trade includes raw food, cash crops and agricultural raw materials in SITC Revision 2. See also annex 1 for the full table of food and agriculture trade balances.

production (and for East Timor, volatility in agricultural production in general). Country- and context-specific analyses will be essential in drawing out the array of factors behind these trends, and for many of the least developed countries that comprise the worlds bottom billion, broader challenges such as conflict, debt, and poor governance could come to the fore (e.g. Collier, 2007).

Figure 2. Cereal Yields for Selected Developing Regions, 1961-2005 (In kilograms of cereal production per hectare)

Source: World Banks World Development Indicators Online.

Figure 3. Food Production Per Capita for Selected Low Income Developing Countries, 1980-2006 (100=1999)
a. Haiti b. Eritrea c. Mauritania

d. Bangladesh

e. East Timor

f. Sierra Leone

Source: Bangladesh, Haiti, and Sierra Leone: 1980-1989: UN Data [http://data.un.org]; 1990-2006: FAOSTAT Online [http://faostat.fao.org]. East Timor, Eritrea, and Mauritania: UN Data [http://data.un.org].

Note: Index of gross food production scaled by the population level. Base period is 1999/2001. Countries featured are the low income countries with agricultural trade deficits more than 5 percent of their imports, identified by Ng and Aksoy, (2008:11), excluding North Korea and countries not listed in the FAOs list of 37 countries requiring external assistance (as of April 2008; see http://www.fao.org/docrep/010/ai465e/ai465e02.htm).

Figure 4. Agricultural Production for Selected Low Income Developing Countries, 19802004/2006 (100=1999)
a. Haiti b. Eritrea c. Sierra Leone

d. Bangladesh

e. East Timor

f. Mauritania

Source: Bangladesh, Haiti, and Sierra Leone: 1980-1989: UN Data [http://data.un.org]; 1990-2006: FAOSTAT Online [http://faostat.fao.org]. East Timor, Eritrea, and Mauritania: UN Data [http://data.un.org]. Note: Index of gross food production scaled by the population level. Base period is 1999/2001. Countries featured are the low income countries with agricultural trade deficits more than 5 percent of their imports, identified by Ng and Aksoy, (2008:11), excluding North Korea and countries not listed in the FAOs list of 37 countries in crisis requiring external assistance (as of April 2008; see http://www.fao.org/docrep/010/ai465e/ai465e02.htm).

Nevertheless, an important part of the over-all challenge in some countries, notably in Sub-Saharan Africa, is to resuscitate their ailing agricultural sectors. A widely acknowledged aspect of any strategy to accomplish this has to do with undertaking the appropriate public investments that could underpin the broader development of these countries agricultural sectors and rural economies (e.g. Sachs, 2005; United Nations, 2005; World Bank, 2007). As the next section clarifies further, this strategy of boosting these countries agricultural sectors could generate at least two important benefitsfirst, it could enhance these countries food security which could be a recurrent challenge if unaddressed; second, and perhaps more importantly, it might also form part of a broader strategy to reduce poverty in rural areas, where 75 percent of

the worlds poor live,14 while also lowering income inequality in many parts of the developing world.

Poverty, income inequality and food insecurity Taking a long-term perspective, hunger and inadequate access to food is not just a matter of food scarcity or high food pricesthese are only some of its immediate symptoms. Food insecurity is also critically linked to poverty and low incomes. Indeed, if one looks at the industrialized world and the fast growing emerging market economies where incomes are either already high or growing fast or both, then it becomes much clearer that food prices historically did not increase as fast as real per capita income in these latter groups of countries. Real GDP per capita growth in high income and middle income countries in the last 40 years or so has actually outstripped food price growthbut this is not the case for low income countries as a group (Table 1).

Across countries, low income countries are the most vulnerable.

Table 1. Real GDP Per Capita and Food Price Growth, 1961-2006 (Annual growth in percent, and averaged over the period indicated)
GDP Growth, per group of country High Income Middle Income Low Income Food price growth 19611970 4.1 3.2 1.7 1.8 19711980 2.6 3.6 0.6 9.6 19811990 2.4 1.1 1.8 -1.9 19912000 1.9 2.4 2.2 -2.3 20012006 1.5 4.5 4.4 4.9 19612006 2.6 2.8 2.0 2.2

Source: Authors calculations based on data from the World Banks World Development Indicators Online and the IMFs International Financial Statistics Online. Real GDP per capita figures are expressed in 2000 US$; the year 2000 is the base year for the food price index.

In many past cases of famine in certain countries, over-all production or availability of food was often a poor predictor of the amount of food that the poor segments of the population could acquire (Dreze and Sen, 1995; Sen, 1982).15 Thus, important distributional issues within countries also become relevant. Haiti, for example, is characterized by high income inequality its Gini index is 59.2 placing it among the countries with the highest income inequality in the world. This also suggests that a significant portion of the purchasing power of the population is skewed towards a small segment of its population. And because the share of food in the
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World Bank (2007: 45). Amartya Sen developed the entitlements approach to analyze food problems, in order to better explain how a person could starve even during periods of high abundance of food. Entitlements, in a market economy, refers to the different commodity bundles that a person can acquire in society given his original bundle of ownership, or his endowment. A person could thus starve (even under conditions of abundant food supplies) through such events as a fall in his or her endowment (e.g. loss of assets such as land and livestock), or detrimental changes in the conditions of exchange (e.g. unemployment, wage cuts, food price increases, etc.) (Sen, 1981; 1982). For a discussion of some of the critiques and counter-critiques to Sens entitlements approach, see also Devereux (2001).

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consumption of the bottom quintile in Haitis population is large (over 50 percent), then this suggests that the poorest are particularly vulnerable to a food price shock.16 The populations in net food importing low income countries are thus not the only ones vulnerable to food price shocks. There are two main reasons for this: First, international trade either in food or in the inputs to produce food (like oil and fertilizers) implies that factors affecting these international markets could also be transmitted to any country that trades, spanning both net food importers and net food exporters. The pass-through of international prices to domestic prices is probably going to vary across countries depending on factors such as the relative exchange rate movement vis--vis the recently weakening US dollar (thus also the exchange rate and monetary policy), domestic physical infrastructure, market structure and government policies to stabilize prices. Second, in many other developing countriesincluding large ones like India, Indonesia and even food exporting onesthe impact of higher food prices will be greatest among the low income population, and notably the poorest segment of the population, since food is a large share of their consumption. As table 2 shows, both poverty and inequality are high not only in low income countries like Bolivia and Sierra Leone (with poverty rates of 42 and 75 percent respectively, and Gini indexes of 60 and 63 respectively), but also in middle income countries like South Africa (with a poverty rate of 34 percent and a Gini index of 58 percent).

In all the countries listed in Table 2, large segments of both the rural and urban populations are poor, and a large share of their expenditures is devoted to food. For people living on less than $1.4 (in 2005 PPP $) a day in Nepal, Sri Lanka and India, for example, over 70 percent of household expenditures is devoted to food. Even if we relax the cut-off, to include a larger swath of the population, i.e. the so-called base of the economic pyramid or BOP composed of people living on less than $8.2 (in 2005 PPP $) a day,17 the food expenditure shares is still large, ranging from about 60 to 70 percent of the BOPs expenditures. In development economics, this is of course a reflection of the Engel curve, to the extent that lower income households have a higher share of food in their expenditures, while for higher income households it is the reverse. A significant portion of the developing world is comprised of low income householdsby some measures numbering about 4 billion peopleand this helps to shed further light on why food is such an important distributional and also political issue in many countries, given that a significant majority of their populations are likely harmed by adverse movements in food prices.18
16

As is the case in most developing countries, a larger proportion of household expenditure among poor households is allocated towards foodthe bottom quintile of Haitis population allocates 53.4 percent of its expenditures on food, while the top quintile allocates about 10 percent (IMF, 2007:19). 17 This is one possible definition of the BOP, and others have been used. For further discussion, see for example Hammond and others (2007). 18 Recent analysis by the Asian Development Bank has also revealed how the share of rice expenditures not just in food expenditures but in total expenditures is much larger for the poorer households compared to richer onesbased on a sample of four rice-consuming countries in the region (Bangladesh, India, Indonesia and the Philippines), they

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The foregoing examines the potential impact from the expenditure side. Another way to analyze the distributional issues related to the food crisis would be to examine the sources of income of different segments of the population. Figure 5 (A-F) help to illustrate the relative importance of farm and agriculture-related income compared to other income sources for different expenditure quintiles of the populations of six sample countries. For Ghana, Nepal and Nigeria, farm and agriculture-related income is clearly a more prominent income source for the poorest expenditure quintile, while not as much for Bangladesh, Pakistan and Indonesia, where other incomes sources are also relatively large. However, these rough income categories allude to, but do not yet precisely ascertain the impact of food-related shocks.

found that spending on rice accounts for as much as 20-35 percent of total household expenditures for the bottom income quintile, while for the top quintile, the share could be as small as 5-10 percent (ADB, 2008:14).

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Within countries, large segments of the low income population (especially the poorest) are most vulnerable.
Table 2. Poverty Rate, Gini Index, and Share of Food in Bottom and Top Quintiles Consumption for Selected Low Income and Middle Income Developing Countries (In rank, percent or index value)
Population below national poverty line (%)d Share of household expenditure devoted to food (%)e People living on X 2005 PPP $ per day, where X is: HDI Ranka Bangladesh Bolivia Cote d' Ivoire Nepal Sierra Leone Sri Lanka 140 117 166 142 177 99 Gini Indexb 33.4 60.1 44.6 47.2 62.9 40.2 Poverty Ratec 84.0 42.2 48.8 68.5 74.5 41.6 People living below the national poverty line 54 31 47 53 52 55 22 68 52 24 46 28 27 BOP Population Share (% of National) e 99.6 82.7 98.2 97.3 98.8 95.5 70.7 95.0 99.1 69.6 90.4 74.4 75.4

Rural 53.0 83.5 n.a. 34.6 79.0 7.9

Urban 36.6 53.9 n.a. 9.6 56.4 24.7

National 49.8 65.2 n.a. 30.9 70.2 22.7

X<1.4 65 61 61 70 60 72

1.4<X<2.7 59 57 54 64 59 67

2.7<X<4.1 51 49 46 56 55 60

X<8.2 55 47 49 59 53 58 30 71 53 33 50 43 37

70 57.0 21.2 41.0 17.5 21.5 37 37 33 Brazil 128 36.8 80.4 30.2 24.7 28.6 74 75 73 India 107 34.3 52.4 n.a. n.a. 16.7 63 57 51 Indonesia 52 46.1 11.6 27.9 11.3 17.6 47 41 36 Mexico 87 52.0 30.6 72.1 42.9 53.1 59 59 53 Peru 121 57.8 34.1 n.a. n.a. n.a. 54 50 45 South Africa 78 42.0 25.2 n.a. n.a. 13.6 57 48 43 Thailand Sources: a Of 177 countries in total. Data for 2005, from UNDP (2007:234-7). b Value of zero represents absolute equality; and a value of 100 absolute inequality. Data for various years, from UNDP (2007:281-4). c People living on less than $2 a day. Data for the most recent available year during the period 1990-2005, from UNDP (2007:238-40). d Population below national poverty line. Data for the most recent survey year, from World Bank (2008b:64-6). e Hammond and others (2007). f Categorized by the FAO, as of April 2008 [See http://www.fao.org/docrep/010/ai465e/ai465e02.htm]

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Figure 5. Sources of Income by Expenditure Quintile (In percent share of mean household incomes) a.Bangladesh 2000 b. Nepal 1996
100% 100%

80%

80%

60%

Transfers & other Nonagricultural income

60%

Transfers & other Nonagricultural income

40%

Agricultural wage labor

40%

Agricultural wage labor

Onfarm income
20% 20%

Onfarm income

0% Poorest 2nd 3rd 4th Richest

0% Poorest 2nd 3rd 4th Richest

c. Pakistan 2001
100% 100%

d. Indonesia 2000

80%

80%

60%

Transfers & other Nonagricultural income

60%

Transfers & other Nonagricultural income

40%

Agricultural wage labor

40%

Agricultural wage labor

Onfarm income
20% 20%

Onfarm income

0% Poorest 2nd 3rd 4th Richest

0% Poorest 2nd 3rd 4th Richest

e. Ghana 1998
100% 100%

f. Nigeria 2004

80%

80%

60%

Transfers & other Nonagricultural income

60%

Transfers & other Nonagricultural income

40%

Agricultural wage labor

40%

Agricultural wage labor

Onfarm income
20% 20%

Onfarm income

0% Poorest 2nd 3rd 4th Richest

0% Poorest 2nd 3rd 4th Richest

Source: Davis and others (2007:56-8). Note: For each country, columns represent the bottom fifth to the top fifth of the expenditure distribution.

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To get at a much finer analysis of the potential impact among potentially vulnerable groups it is necessary to use a more detailed disaggregation of the poor. Table 3 presents data that first shows the share of the poors food basket that is internationally traded (thus establishing the transmission mechanism from international to domestic food markets); and then it disaggregates the poor according to different categories, spanning urban (i.e. food buyers), rural landless (i.e. food buyers) and rural smallholder farmers who are either net buyers of food, selfsufficient, or net sellers of food. Based on this small, but illustrative sample of countries, it is clear once again that the distributional impact even among the poor will not be homogeneous. For instance, in some countries like Cambodia and Vietnam, a large number of net sellers of food among the rural poor (at over 30 percent of the entire poor population) could benefit from higher prices. However, for other countries, net sellers of food comprise a much smaller fraction of the total poor. In Bolivia, for example, only 7 percent of the poor are food self-sufficient and only 5.6 percent are net sellers, so that a majority of the poor (and indeed a majority of the entire population according to Table 2 also) could be adversely affected by food price increases.

Table 3. In Some Countries Most of the Poor are Net Consumers of Tradable Food Staples
Bolivia (2002) Internationally traded staples (In percent share of the poors food consumption) Distribution of poor (In percent) Urban (buyers) Rural landless (buyers) Smallholders net buyers Smallholders self-sufficient Smallholders net sellers 50.9 7.2 29.1 7.1 5.6 22.3 n.a. 30.1 39.5 8 14.9 53.3 18.8 4.6 8.4 30 7.4 28.8 20.8 13 8.4 11.5 25.8 18 36.3 17.9 14.8 18.9 27.3 21.1 6.1 5.8 35.1 19.4 33.6 Ethiopia (2000) Bangladesh (2001) Zambia (1998) Cambodia (1999) Madagascar (2001) Vietnam (1998)

25.5

24.1

41.2

40.4

56.3

62.7

64.4

Total 100 100 100 100 100 100 100 Source: World Bank (2008c:109). Note: Data refer to people below the national poverty lines. Rice, wheat, maize, and beans comprise tradable staples, while cassava, potatoes, plantains, sorghum, and teff are excluded. Numbers in parentheses refer to the survey year.

Furthermore, using household data for a sample of 9 developing countries, Ivanic and Martin (2008) undertake preliminary simulations of the possible direct impacts of changes in the prices of staple foods on households expenditures, as well as the impacts on poor households through changes in the wage rate for their net sales of unskilled labor. Their estimates, based on different assumptions on the over-all food price increase (including the actual price increases in
15

2005 and 2007), reveal initial evidence that poverty measured as people living on less than $1 a day in most of the countries they study would increase. Peru and Vietnam are potential exceptions, however, given that the decrease in rural poverty could potentially make-up for the increase in poverty among net food buyers.19 All this might help to explain why many countries (including Bolivia) have taken immediate steps to try and temper the effects of food price inflation, even as they might also have some segments of the population possibly benefiting from higher prices on the supply side. As for the future, a recent study of rural and urban poverty over the period 1993-2002 provides evidence that, globally, the poor are urbanizing faster than the population as a whole (Ravallion, Shen and Sangaraula, 2007). This in turn suggests that more and more poor people will be concentrated in urban centers and they will constitute a growing population segment that are net buyers of food and vulnerable to food price shocks. To briefly recap, the transmission mechanism through trade allows international price movements to affect not just net food importers like Haiti, but also net exporters of food, like India and Thailand are for rice. Trade connects domestic food supplies and prices to international market conditions, and it is because of this that rising international prices might be transmitted to the developing worlds domestic markets. To illustrate, depending on a countrys food trade balance, higher international food prices could either exert pressure on domestic prices by directly making imported food more expensive, or by making it more profitable to export crops instead of selling domestically. Given this, high poverty and inequalityspanning both net food exporters and net food importers, as well as low income and middle income countriessuggest that large segments of the developing worlds population remain vulnerable to food price shocks. While in some countries, some of the poor could benefit from food price increases, in many countries, a vast majority of the poor and the national population will clearly be adversely affected. Hence, as will be discussed further in the next section, in an attempt to secure domestic supplies and also keep domestic prices low, many countries have recently liberalized their imports of food, and at the same time curbed their exports of food.

2. External Factors A variety of external factors could also be behind the presentas well as possible futurefoodrelated crises. There are at least two main transmission mechanisms to consider. One, described earlier, has to do with the international trade in food and the inputs to produce food, such as oil and fertilizers (some of which also requires oil to produce). Factors affecting the demand and supply (hence also prices) of these items will thus affect both net exporters and net importers of these items, as the present crisis has amply demonstrated. Also, important and possibly rising environmental externalities linked to climate change and its effect on agricultural productivity and the worlds food supply is another factor to consider.

19

Countries in the study by Ivanic and Martin (2008) include Bolivia, Cambodia, Madagascar, Malawi, Nicaragua, Pakistan, Peru, Vietnam and Zambia. To assess the impact of changes in commodity prices, they turn to a partial equilibrium analysis of the welfare impact of small price changes based on an expenditure function characterizing household consumption and factor supply behavior, and a profit function representing household production activities.

16

Short-term external factors exacerbating the crisis Consumer prices for food in Haiti have experienced a considerable increase over the last years and are relatively high by regional comparison. In addition to country-specific reasons behind these food-price increases, there are also other factors that are quite possibly related to the global commodities markets, which could also influence the price of food in Haiti given that food products are among its top imports (e.g. rice and wheat). Figure 6 shows the food price increases in key commodities based on the period from March 2007 to March 2008. Indeed, the FAO has recently reported that the cereal import bill of the worlds poorest countries is expected to increase by 56 percent in 2007/2008, which is even higher than its 36 percent increase in 2006/2007 (FAO, 2008a). Furthermore, based on preliminary calculations of monthly price increases, there is evidence to suggest that food price increases in recent months are indeed historically high. For example, the FAOs food price index growth rate of 8.1 percent in February 2008 is the highest it has been since October 1974 (8.5%). The February 2008 increase in the price of rice, about 22 percent, has not been as high as it was in November, 1993 (25.7%).20 What could be driving these historically high growth rates in global commodities prices? Recent analyses point to several potential drivers, and these are classified here as possibly short- to medium-term external factors that may have played a role in the food related challenges not just in Haiti, but in many parts of the developing world.21 Figure 6. Commodity Price Increases from March 2007-March 2008

Source: Corn, Rice, Soya, Wheat: Bloomberg (except rice: FAO/ Jackson Son & Co) as quoted in BBC (2008). Dairy, Meat, Oils and Fats, Sugar: FAO (2008b:13).
20

Authors calculations based on the FAOs food production per capita indicator drawn from FAOSTAT Online [http://faostat.fao.org/]. 21 In addition to this, the FAO (2007a) also notes that movements in exchange rates, notably in the US dollar, has resulted in higher demand for US agricultural exports. This brisk demand is keeping pressure on supply, even as prices of most commodities have been increasing.

17

Financial speculation. Recent years have seen how increased liquidity in international financial markets buoyed investments in securities and derivatives linked to commodities markets. In more recent months, with the decline in stock markets and depressed housing values, this has helped to accentuate the lure of commodity futures as an asset class. Thus, financial speculation is likely to have played an important role in the volatilityand sharp increases during some periodsfor some agricultural commodity prices (Domanski and Heath, 2007; FAO, 2007; Helbling and others, 2008). There is suggestive evidence that there is indeed a speculative bubble at least in some commodities. The evidence for metals is very strong (Domanski and Heath, 2007; Veneroso, 2008). Ultimately, whether the drivers are fundamentals or speculation is an empirical question, and at least qualitatively it is possible to argue that both fundamentals (Tulpule, 2008) and speculation (Veneroso, 2008) are playing a role. It is nevertheless difficult to reconcile such abrupt volatility and sharp increases in some commodities with changes in fundamentals. The role of index investors who take long positions and are largely price insensitive, as long as their portfolio has a desired exposure to commodity indices has increased substantially, bringing a new class of investor and a new way of investing into commodity markets. The effects are being felt not only in price volatility, but are also affecting the extent to which hedging is economically feasible. Recently Bloomberg ran a story that highlighted that farmers are no longer using exchanges for hedging, because margin calls and the widening of the spread between spot and futures prices (the basis) widened, making both short and long hedging expensive; these factors had increased the cost of hedging in May of 2008 for corn to be delivered in December by three times compared with the same period a year earlier (Wilson, 2008). As a response, regulators have stepped in by raising margins and pushing for compulsory delivery of grains in order to help facilitate more orderly price discovery (GabreMadhin, 2008), even though it is difficult for regulators to avoid large speculative inflows, since often these move into exchanges via over-the-counter derivatives (Epstein, 2008). In fact, the overwhelming majority of positions are taken in over-the-counter derivatives markets, rather than in organized exchanges (Domanski and Heath, 2007). Higher oil prices. On the input side, the higher price of petroleum has helped raise the costs for producing agricultural commodities (namely the costs of fertilizers, some of which are petroleum based), thus creating knock-on effects on the cost of production and productivity. Shipping and freight costs could also have been affected, thus also potentially influencing the final price of imported agricultural commodities. The Baltic Exchange Dry Index, an indicator of shipping costs for bulk commodities such as grains and oilseeds, breached the 10,000 mark in 2007, implying that freight rates have increased by over 80 percent from the previous years levels. In addition, higher oil prices, and the growing political mandate to respond to this trend, have both helped to boost the demand for agricultural crops that are being used to produce biofuels, thus creating an additional link on the output side.22 Government policies. Clearly, the challenges related to the broader food crisis should also be understood in greater depth by focusing on each agricultural crop, given that each implies some unique challenges. As will be discussed in the next section, food crops like maize,
22

It might be possible to distinguish the presently historically high price of petroleum as a short-run factor, even as higher demand for energy might also be considered as a medium to long-term trend.

18

sugarcane, sugar beet, cassava, and wheat could be used as feedstock crops for the production of biofuels. Some of these crops are important components of the food basket in different parts of the world, thus suggesting a possible trade-off between food and fuel use. On the other hand, rice is a highly political crop in some parts of the worldany instability in its supply could cause widespread political unrest, so much so that many countries seem to have over-reacted by restricting exports or building up stockpiles, in order to prevent any blowback from a possible rise in domestic rice prices. This seems to be the case, for example, for big rice producers where rice is also a staple. India and Vietnam, respectively accounting for 14 percent and 15 percent of the global rice supply, for example, have both slapped restrictions on their exports in recent months.23 In the case of Thailand, which is the largest rice exporter in the world (accounting for about 30 percent of the global rice supply), its recently elected populist government has not yet applied, but is nevertheless discussing possible export restrictions.24 On the other hand, Pakistan, which is the fifth largest rice exporter in the world (behind Thailand, Vietnam, India and the United States in that order) has not slapped any restrictions on rice exportsrice is not a staple in the country; instead, wheat is. In addition, the Philippines, a major rice importer (accounting for about 6 percent of total global imports of rice25), has also likely contributed to bidding up international rice prices in recent months as a result of its aggressive strategy to increase its stockpiles by tapping the global market.26 Clearly, when these export and import giants move, smaller and ultimately more vulnerable countries like Haiti could be trampled in the process. Governments in the developing world have thus responded in a variety of ways to meet the challenges related to the recent increases in cereal prices.27 Some of these policies are meant to secure the countrys food stocks and keep domestic prices affordable, including applying taxes on exports, export ceilings or bans. Nevertheless, to the extent that the countries implementing these policies are major suppliers or presently major consumers of certain commodities, then these recent policies by a number of major commodity producers could have also helped to precipitate tightness in global supply. Indeed a casual review of the key policy moves by large rice exporters and trends in rice prices for different varieties suggest, at least in a very preliminary way, that the two are clearly linked, even as the direction of causality is still not clear (Figure 7).

23

India, it seems, has also done this in anticipation of rising wheat prices owing to bad harvest on this other staple food in the country. 24 See Cereal Offenders. The Economist, March 27, 2008. [Available at: http://www.economist.com/finance/displaystory.cfm?story_id=10926502]. 25 Shares of global rice exports calculated using figures for 2007, and taken from FAO (2007b:31). 26 RP unwittingly driving up international rice prices Philippine Daily Inquirer, May 2, 2008 [Available at: http://newsinfo.inquirer.net/inquirerheadlines/nation/view/20080502-134024/Thais-to-snub-RPs-rice-bid]. 27 See annex 2 for a description of policy moves by a selection of developing countries.

19

Figure 7. Rice Price Quotes for Selected Varieties (Simple average of weekly quotes in US$ per metric ton)

Sources: Data for the figure was collated from different sources by US Department of Agriculture (2008a: table 6). Text in the boxes was excerpted from indicated sources. Notes: Data for April 2008 are preliminary. Data on Vietnam long grain 5% brokens is incomplete.

Medium- to Long-Term External Factors Affecting Global Food Security Over the medium- to longer-term, on the demand side, rising and changing patterns of food consumption in the developing world and evolving patterns in biofuels development, as well as supply side factors such as the impact of climate change on agricultural productivity across different food crops and different regions in the world, might also play (or might have already played) a role in the food-related challenges faced by countries like Haiti in recent months, and also in the years to come.

20

Rising and changing patterns of food consumption. The economic rise of developing countriesnotably countries with large populations like China and Indiaare creating a burgeoning demand for raw materials and commodities, as well as undergoing rising and evolving demand for food, thus contributing to the commodity boom (Avendano, Reisen and Santiso, 2008; Gale and Huang, 2008). During the period from 2001-2007, China, India and countries in the Middle East accounted for 56 percent of the growth in oil; and during 20002006, Chinas alone accounted for 90 percent of the increase in global copper consumption. In 2006, China also accounted for one-fifth of the global consumption of wheat, corn, rice and soybeansin terms of the latter, it alone accounts for 40 percent of the total global consumption (Helbling and others, 2008:11-12). China offers an interesting case in terms of rising and changing patterns in food demand. It is the top rice consuming country in the world, and its rice consumption rose from about 50 million metric tons per year in the 1960s, peaked at about 137 million metric tons by 2001, and in 2007 stood at about 127 million metric tons.28 China has traditionally been a net rice exporter, but in recent years, its net exports have declined markedly, from about 3.5 million metric tons in 1997 to about 0.7 million metric tons in 2007. These figures are miniscule compared to Chinas total rice consumption, but they are large relative to recently thinning world rice markets. To give a better sense of this, a decline of about 3 million metric tons amounts to about 11 percent of the total global rice trade in 2007.29 Furthermore, during the last thirty years, Chinas poultry, beef and pork consumption has increased markedly, reflecting its evolving food demand. For instance, between 1990 and 2007, its share of global poultry consumption has nearly doubled (from 9 percent to 17 percent) and its share of global beef consumption has increased six-fold (from 2 percent to 12 percent). In 2007, China accounted for about half of the global consumption of pork. All this helps to explain, in part, Chinas increasing demand for other crops that are used for feedstock. As shown in Table 4, other fast growing countries with large populations like Brazil and India are also beginning to account for larger shares in global meat consumption. The United States is included in Table 4 as a comparator country.

28

Data was taken from the US Department of Agriculture Production, Supply and Distribution Database [http://www.fas.usda.gov/psdonline/psdQuery.aspx]. 29 Authors calculations based on data from the US Department of Agriculture Production, Supply and Distribution Database [http://www.fas.usda.gov/psdonline/psdQuery.aspx].

21

Table 4. Poultry, Beef and Port Consumption for Selected Countries, 1975-2007 (In percent share of global consumption)
a) Poultry Brazil China, Peoples Republic of India Russian Federation United States b) Pork Brazil China, Peoples Republic of India Russian Federation United States c) Beef Brazil China, Peoples Republic of India Russian Federation United States 1975 5 0 0 0 34 1975 2 18 0 0 14 1975 5 1 1 0 29 1980 7 0 0 0 31 1980 2 23 0 0 16 1980 7 1 1 0 26 1990 7 9 1 5 28 1990 2 35 0 5 11 1990 10 2 4 10 22 2000 10 18 2 3 22 2000 2 47 0 2 10 2000 11 10 3 4 23 2007 11 17 3 4 20 2007 2 46 0 3 9 2007 12 12 3 4 21

Source: FAOSTAT Online [http://faostat.fao.org].

Forecasts by the US Department of Agriculture (2008b) from 2008-2017 expect that total rice consumption in China might not increase as markedly as in the past years, once declining per capita rice consumption ( in part from changing food consumption patterns) offsets the impact of population growth. However, India, Indonesia, and Bangladesh, the next top riceconsuming countries in the world after China, will see increasing demand for rice, as will SubSaharan Africa, the Philippines, and Iran, over the next 10 years. Looking to the future, according to the recently released UN inter-agency report on the International Assessment of Agricultural Knowledge, Science and Technology for Development (IAASTD), global demographic changes and changing patterns of income distribution over the next 50 years is expected to lead to an increased general demand for food, as well as different patterns of food consumption (notably greater consumption and demand for meat and dairy products).30 It is predicted that global cereal demand will increase by 75 percent between 2000 and 2050, while global demand for meat doubles during that same period. The increase in demand for the latter also implies a concurrent additional increase in feedstock demand. About 7 kilograms of grain is required to produce one kilogram of beef; and it takes about 4 kilograms
30

With rising incomes, there will be greater demand for meat products and other goods, which in turn could increase the demand for crops to be used for animal feeds.

22

and 2 kilograms of grain to produce pork and chicken respectively.31 Hence, the growing demand for other foodstuff, such as meat and dairy products, creates knock-on effects on the demand for certain crops, like maize. More than three-fourths of this growth in demand for both cereals and meat will be accounted for by developing countries.32 Already, China and India have become large players not just on the supply side, but alsoand increasingly so according to these projectionson the demand side of the global food equation. Trends in biofuel development. Rising global energy demand not just among the industrialized countries but also among the fast growing emerging market economies, combined with efforts to address climate change by trying to minimize carbon emissions, has prompted growing interest and policy emphasis on alternative fuel sources. One of these sources, biofuels, could also affect the supply of food in at least two important ways. First, certain food crops like maize, sugar and cassava could be directly used in biofuel production, and there is a potential trade-off between food versus fuel in terms of the use of the final output. For example, in terms of global maize usage during the 2004-2007 period, biofuel production in the US alone accounted for 50 million tons while other uses (including for food and feedstock) accounted for an additional 33 million tons. Since only 51 million tons of maize was produced during this period, these consumption statistics imply a significant decline (by over 30 million tons) of the global stockpile. Second, to the extent that land area devoted to biofuels as opposed to food production might become an increasingly binding trade-off, this might also exert possible pressure on resources critical to food production. Countries policies, notably biofuel subsidies, will also be a factor to consider here, given that biofuel production receives considerable subsidies. According to one un-official estimate for the case of the United States, its biofuel industry received the equivalent of about $6.3 to $7.7 billion in government support in 2006, and most of this (about 90 percent) was directed at ethanol production. To put this in perspective, this amount was about 30 percent of US foreign aid for that year.33 Based on existing policies, it is expected that biofuel subsidies could range anywhere from $67 to $82 billion during the period 2006-2012 (Koplow, 2007:29). Forecasting into the future, recent estimates by the International Food Policy Research Institute (IFPRI) suggest that if existing biofuel investment and production plans by the major producing countries is carried out, by 2020, world prices for feedstock crops will have increased by: 11 percent for cassava, 26 percent for maize, 18 percent for oilseeds, about 12 percent for sugar and 8 percent for wheat (Table 5). Higher price changes could take placeup to 72 percent for maize for exampleif more aggressive biofuel expansion takes place. An important consideration in anticipating the evolving impact of biofuel development trends is the commercial viability of new technologies coming online. Substantial increases in crop yields due to investments in new technology, or increased efficiency in ethanol production, such as by using alternatives like nonfood crops residues, grasses and forest products when these become commercially viable, might help to mitigate at least part of these expected price increases. Alternative biofuel sources like switchgrass might help to increase the efficiency of biofuel
31 32

World Watch Institute [http://www.worldwatch.org/node/1626]. See FAO, GEF, UNDP, UNEP, UNESCO, World Bank, and WHO (2008: 8). 33 Net disbursed official development assistance (ODA) for the US in 2006 was $23.5 billion (see http://www.state.gov/r/pa/prs/ps/2007/dec/98156.htm).

23

production, as well as ease the pressure on the use of food crops for biofuels; however, land use for biofuel production will nevertheless also impact on food production to the extent that, at least in certain areas, one might be considered the opportunity cost of the other in terms of crop production. In addition, alternative to biofuels altogether, such as solar and wind energy, might also help to ease the food versus fuel trade off.34

Table 5. Changes in World Prices of Feedstock Crops and Sugar by 2020 (In percent compared to baseline levels)
Crop Cassava Maize Oilseeds Sugar Wheat Scenario 1: Biofuel expansiona 11.2 26.3 18.1 11.5 8.3 Scenario 2: Drastic biofuel expansionb 26.7 71.8 44.4 26.6 20.0

Source: IFPRI IMPACT projections in constant prices drawn from Von Braun (2007:9). Note: a Assumptions are based on actual biofuel production plans and projections in relevant countries and regions. b Assumptions are based on doubling actual biofuel production plans and projections in relevant countries and regions.

In 2006, global cereal stocksespecially wheatwere at their lowest levels since the early 1980s. Stocks in China, which constitute about 40 percent of total stocks, declined significantly from 2000 to 2004 and have not recovered in recent years (Von Braun, 2007:2). Similarly, in recent years, global production has not caught up with global demand, so that global ending stocks for the major food crops have been declining since the early 2000s.35 Part of the reason for this is that world cereal production has only been expanding modestly, while growing demand for food and for crops to be used as either feedstocks or biofuels has crept up. Significant drawing down on the stockpiles for major crops like corn, rice and wheat has occurred in the last 7 years so that these crops present ending stocks are close to their levels in the mid- to late-1980s despite significant growth in consumption from those years until today (Figure 8). This also helps to explain the presently thin world market for these commodities.

34

It must also be noted that there are issues related to the effectiveness of using crops like corn to generate biofuels. Recent scientific studies suggest that in the production process (which may be land and fertilizer intensive), there is the possibility that much more carbon emissions could result that be prevented (Searchinger and others, 2008; Fargione and others, 2008). 35 Ending stocks are calculated on an annual basis so that, roughly, it is the sum of total production for the year and the beginning stocks for the year, less consumption for the year. The figures above are based on the authors calculations using data from US Department of Agriculture (2008c).

24

Figure 8. Global Ending Stocks for Wheat, Corn, Rice and Soybean, 1960-2007 (In 1000 metric tons)

Source: USDA Production, Supply and Distribution Database [http://www.fas.usda.gov/psdonline/psdQuery.aspx].

Climate change and agricultural productivity. Compounding these medium- to longterm demand trends are also important factors on the supply side. The staple foods for the vast majority of the global population is comprised of wheat, coarse grains like maize and sorghum, and riceabout half of the calories consumed by the worlds poor is accounted for by rice, maize and wheat (Lobell and others, 2008:608). Each of these crops has its own important demand and supply drivers which determine the path of their total global stocks over time. Some of the major suppliers and some large consumers of agricultural crops in the world markets have suffered lackluster or poor harvests, notably because of recent bad weather and drought. Examples include poor wheat harvests in Ukraine and Morocco, and dry weather affecting wheat output in large exporters like the US, Canada and the Russian Federation. In some cases, the effects of protracted bouts of drought seem to be at play, such as in Australia for its rice crops.36 The combination of weak supply and strong demand (in some cases precipitated by policies to ensure adequate domestic stockpiles) has thinned the world export markets for key agricultural crops, thus contributing to the consequent increases and volatility in prices. Wheat and course grain stocks held by its main exporters, for example, have declined by well over 30 percent in 2007, based on preliminary estimates of the 2007 stocks.37 Various scientific studies have highlighted strong evidence that the impact of climate change on agriculture in the relative short run (as well as in the long run if this challenge is not addressed) will be quite severe in some of the poorest and most food insecure regions in the
36

Drawn from various editions of the FAOs Crop Prospects and Food Situation [Available at: http://www.fao.org/giews/english/cpfs/index.htm]. 37 Authors calculations based on data reported in FAO (2008b:39).

25

world. For instance, detailed crop- and region-specific forecasts of the possible effects of climate change by the Woods Institute for the Environment at Stanford University suggest that certain food crops in particularly food insecure regions will have a high probability of being hit hard by climate change (see also annex 3): wheat in Central and South America; rice, maize and millet in parts of West and South Asia; maize, wheat and sorghum in different parts of Africa; and maize and rice in Southeast Asia. Furthermore, projections by the Intergovernmental Panel on Climate Change (IPCC) until 2080 suggest that the additional population that will be at risk of hunger because of climate change is greatest in Africa (157 million people), followed by Asia (78 million), and South America (27 million) (Yohe and others, 2007:825).38 In addition, an influential study by Cline (2008: 25) suggests global warming could diminish world agricultural productivityin terms of output per hectare, declining by anywhere from 3-16 percent depending on the intensity of carbon fertilization. An examination of the distribution of these predicted effects also reveals that most losses will be concentrated in developing countries: industrial countries lose about 6 percent in terms of output per hectare, while developing countries lose up to 26 percent (ibid: 24). Of the latter, countries in Africa, where many net food importing low income countries are located, could be affected the most. Clines study predicts that the African region could see declines in agricultural output potential in order of magnitude of about 28 percent (going down to 17 percent with carbon fertilization) (ibid: 24). Finally, climate change could also affect different crops in different ways. There is already some evidence, for example, that the El Nio-Southern Oscillation (ENSO; commonly referred to as El Nio) phenomenon, which has been scientifically linked to climate change, could also lead to lower agricultural productivity, notably for crops like rice that are highly reliant on precipitation.39 In addition, it has also been predicted that climate change will cause land suitable for wheat production to almost disappear (Von Braun, 2007:3; Yohe and others, 2007).

3. National and International Food Market Structure An additional important point pertaining to the national and international food market structure requires a brief elaboration here. The effects of a food crisis could also be exacerbated by bottlenecks and malfunctions along the domestic food supply chain. In Haitis case, and indeed possibly true for many other developing countries, the rice import market is dominated by a few major players. Consequently, the practice of high mark-up on imported goods, as well as possible hoarding at various points of the supply chain have also possibly exacerbated the rise in food prices, further marginalizing those with least ability to pay and with no immediate access to food. In other countries, the mere threat of possible food scarcity leads not only to opportunistic hoarding by some retailers, but also to hoarding by panicked consumers. In many cases, this
38

More recent empirical estimates by Tubellio and Fischer (2007:1041) suggest that the number of people at risk of hunger in Africa because of climate change could be even much larger increasing from 188 million in 2000 to over 400 million by 2080. 39 In the case of rice production, the adverse impact of environmental factors such as El Nino and atmospheric brown clouds has been found in some empirical studies (e.g. Auffhammer, Ramanathan and Vincent, 2006; Datt and Hoogeveen, 2000; Tan Chua, 2007).

26

leads to the very crisis that people fear, and further harms the poor as they have the least capability to either engage in or adjust to these activities. Clearly, markets develop and function only with adequate investments in market underpinning public goods, including critical regulatory (e.g. consumer protection) and physical infrastructures. Yet, in many parts of the developing world market institutions remain underdeveloped. In a much broader sense, these malfunctioning markets are also a fundamental reason why the poor are often trapped in low return economic activities (often of a subsistence nature), as they have little access to functioning credit and insurance markets, and remain marginalized in the broader market economy (e.g. Armendariz de Aghion and Morduch, 2005; Barrett, forthcoming; Fafchamps, 2004; Hoff and Stiglitz, 1993).40 In addition to this, the structure of the international food supply chain could also play an important role in precipitating or amplifying the transmission of shocks related to food. Only a fraction of total global food production is actually tradedin the case of rice, global exports have been increasing since the late 1990s but remains at only about 5-7 percent of total global rice production in recent years (Figure 9).

Figure 9. Global Exports of Soybean, Wheat, Corn and Rice, 1960-2007 (Expressed as a share of total global production in percent)

Source: USDA Production, Supply and Distribution Database [http://www.fas.usda.gov/psdonline/psdQuery.aspx].

Exports as a share of world production of corn has hovered at around 9-10 percent in recent years, while that of wheat and soybeans at about 12-13 percent and 20-21 percent
40

Other private sector actors in the food supply chain could also end-up charging much higher costs due to factors such as poor infrastructure, lack of access to credit (owing to an underdeveloped financial sector more broadly), as well as lack of competition (e.g. Dawe and others, forthcoming; Fafchamps, 2004).

27

respectively. Of this already thin global food trade market, export supply is also highly concentrated. About 90 percent of corn and soybean exports are accounted for by only three countries: Argentina, Brazil and the United States. Five countries (India, Pakistan, Thailand, United States, and Vietnam) account for over 80 percent of global rice exports. And as mentioned earlier, because the rice export market is thin, even China, which accounts for only about 3.6 percent of global rice exports, could have a significant impact on the global rice supply. As for wheat exports, over half of the global total is accounted for by five countries (Argentina, Canada, the EU, Russian Federation and the United States). Any changes in export policies or in the harvest fortunes of major producing countries could have a large impact on the international food markets.41

4. Towards a Coherent Policy Response The preceding offers a preliminary diagnosis of what might have been some of the underlying factors behind the worlds present food challenges. What emerges is a complex story whereby many factors could be at play, including: Domestic and country-specific factors, such as the state of Haitis agricultural sector, and external factors such as recent trends in and affecting global commodities markets; and, Short-term factors such as the recent and probably temporary policy moves of key consumers and producers of certain crops, as well as medium- to longer-term factors such as the rise of large developing countries as global consumers, biofuel development and climate change. Designing the appropriate immediate, as well as medium- to longer-term policy responses will need to consider the nature of these different factors, as well as the extent of the evidence and our understanding of the over-all trends as this unfolds. Figure 10 helps to illustrate a possible framework for thinking about matching the nature of the response (unilateral or collective action) with the extent of the challenge (short-term or medium- to long-term).

41

Authors calculations based on data from USDA Production, Supply and Distribution Database [http://www.fas.usda.gov/psdonline/psdQuery.aspx].

28

Figure 10. Policy Matrix to Respond to the Global Food Crisis

Source: Authors own elaboration.

Drawing on this policy matrix as well as the preceding discussion, there is probably enough information to outline a few points to take forward. Prices will begin to calm, but will probably settle on slightly higher levels compared to the past. In some parts of the developing world, immediate humanitarian aid is required, and collective action by the international community is necessary in order to prevent further harm and suffering (quadrant C in figure 4). More broadly, countries will need to think about the development of social safety nets so that these may be able to help mitigate the effects of food-related shocks such as the presently unfolding one (quadrant B in figure 4). These safety nets could involve direct transfers ensuring that the poorest and most vulnerable groups in society, notably children, get adequate food and nutrition. More evolved mechanisms might also be possible, such as market-based hedging instruments that would cover the excess fiscal costs of food subsidies in case the price increased or an adverse climate event affects domestic production.42 Nevertheless, in response to the high prices, a strong supply-side response is already expected to boost global cereal production in the coming year (e.g. FAO, 2008b:4). As immediate concerns about food stockpiles subside somewhat, and with eventual calm in the financial markets, this will likely contribute to a tempering effect on food prices. However, medium- and long-term factors taking stronger effect could mean that food
42

We are grateful to Diego Arias for bringing this type of innovation to our attention.

29

prices will probably not settle on previously low levels of the 1980s and 1990s. As food demand from developing countries surges, and biofuel development and climate change begins to impose a tightening effect on the food supply side, food prices could remain somewhat higher than in the past. This precludes, of course, a variety of actions that could help mitigate these forces, including a significant productivity boost based on existing land used, or a major expansion in crop acreage, or a combination of these two. These responses, even when implemented immediately, will probably take some time before it contributes to the recovery in global food stocks, and relaxes global food supplies and prices once again. Achieving food security requires addressing important distributional issues across and within countries. Low income countries, notably those emerging from or presently in conflict, are particularly vulnerable to food price shocks including those transmitted through trade or arising from other sources (e.g. weather). And within most developing countries, both net food importing and net food exporting alike, much of the base of the economic pyramid (BOP) still maintains a significant portion of their expenditures on food, which suggests that large groups of the population will be adversely affected. A finer disaggregation might also reveal that vast numbers of the urban poor as well as the rural net-food-buying poor are also vulnerable. These distributional dimensions suggest that targeted strategies are required in order to reach the most vulnerable, both across and within countries. Investments in agricultural productivity could be timely and effective in boosting food supplies and reducing poverty and inequality. For some countries, the increased food prices could provide an opportunity for a positive supply response to be developed in the medium- to longer-term. Some countries are in a position to do this on their own (quadrant B in figure 4); however, others may require official development assistance from the international community (quadrant D in figure 4). The latter group is likely to be comprised mostly of least developed countries, including net food importing ones like Haiti. For these countries, important investments to boost agricultural productivity, combined with the terms of trade improvement for agricultural products, could incentivize and help poor farmers to produce and supply more. If the supply responses come from smallholder farmers, and accompanying public and private investments are able to boost the broader rural economy, it could generate important gains not just in boosting food security, but also in reducing poverty and improving the income distribution in many developing countries.43 Countries need to take important steps, but unilateral action is likely to be insufficient. Policies designed to build adequate social safety nets in response to the present crisis as well as in response to possible future food supply shocks are urgently required in order to mitigate their effects on the most vulnerable segments in society. These types of urgent responses probably fall under quadrant A in figure 4. Yet, some of these immediate

43

Many have emphasized the important links across agricultural productivity growth, food security, political stability, poverty alleviation and economic growth. See for instance Birdsall, Ross and Sabot (1995) and Timmer (2000).

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responses to the crisis which have sought to secure national food stocks such as through export taxes or bans may have also contributed to even tighter international suppliesa possibly new form of protectionism of a hunger thy neighbor nature. These types of policies undermine the very incentives necessary to implement a strong supply response in order to boost food supply. They also only address the short-term symptoms of the present food challenge, but do not respond to the underlying long-term factors behind it. The previous review of different crisis factors in this paper clearly underscores that the latter are well beyond the capacity of any one country to address. Collective and coordinated actionnotably among the major producers and consumersis probably necessary in order to avoid exacerbating already tight food supplies, as well as address growing food challenges in a sustained way. These types of actions will likely fall under quadrant D in figure 4. Examples of possible collective action initiatives to enhance food security include joint investments in agricultural R&D, as well as the possible creation of regional grain reserves or insurance mechanisms.44 Volatility in the international food markets combined with the limits of unilateral attempts at food self-sufficiency will make these cooperation initiatives increasingly important options. Policy coherence is essential in order to address complex and evolving food and energy issues. Oil used to be linked to the input side of global food production (including through inputs of oil-based fertilizers, or transportation of foodstuff); however, oil today and going into the future could become more tightly linked on the output side as well, as biofuels begin to offer a more cost-efficient and widely used substitute for traditional fossil-fuel based energy sources. However, in the absence of significant technological advancements, biofuel uses for food crops (or the de facto competition on land use) could result in a more binding trade-off between food and fuel. In moving forward in this area, it is important to consider how policies designed to develop viable energy alternatives do not end-up creating adverse effects on human development on other fronts. Collective action is key, but so too is coherent action. Hence, in the design of countries individual responses, policy coherence will need to be ensured (quadrant B in figure 4).

Responding effectively to the challenge of ensuring adequate global food supplies requires a careful context-specific understanding of some unique challenges on the ground, as the case of Haiti underscores. The present food crisis is not just an issue of high prices, though this latter point seems to grab much of the headlines and media coverage. More importantly perhaps, the present crisis manifests part of the long standing challenges faced by many developing countries whose agricultural sectors have contracted or have remained stagnant, and concurrently of people mired in poverty and whose incomes have remained low. There are also important international aspects to this issue. As some parts of the developing world become richer, growing and evolving food demand could create a greater gap between the food haves and the food have nots. Biofuel usage for crops might also be seen
44

For a discussion of some of these regional initiatives, see for instance see Hanpongpandh (1982) and Konandreas, Huddleston and Ramankura (1978) and more recently, Mendoza (2008).

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as a manifestation of evolving global demand not just on food but on scarce resources more generallyspanning food and inputs to produce food, as well as energy sources. Ensuring adequate access to food is still obviously a high priority in many of the poorest parts of the world, while in the industrialized and fast-growing economies, the demand for energy is much more pronounced. Addressing broader challenges of meeting the food and energy demands of the world in a sustainable way will likely require not just coherent policies, but also decisive collective action.

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Timmer, C. Peter (2000). The macro dimensions of food security: Economic growth, equitable distribution and food price stability. Food Policy 25(3):283-295. Tulpule, Vivek (2008). Insight: No Bubbles, just fundamentals, Financial Times. April 28. UNDP (2007). Human Development Report 2007/2008: Fighting Climate Change. New York: Palgrave MacMillan. United Nations (2005). A Practical Plan to Achieve the Millennium Development Goals. London: Earthschan. [Available at: http://www.unmillenniumproject.org/reports/fullreport.htm]. US Department of Agriculture (2008a). Rice Outlook Monthly Tables. Washington, D.C. [Available at: www.ers.usda.gov/Briefing/Rice/data.htm]. US Department of Agriculture (2008b). USDA Rice Projections, 2008-2017. April 21, 2008. [Available at: http://www.ers.usda.gov/Briefing/Rice/2008baseline.htm]. US Department of Agriculture (2008c). USDA Production, Supply and Distribution Online. [Available at: http://www.fas.usda.gov/psdonline/psdHome.aspx]. Veneroso, Frank (2008). Commodity Comment, Global Strategic Outlook. April 1. Von Braun, Joachim (2007). The World Food Situation: Driving Forces and Required Actions. Food Policy Report 18. Washington, D.C.:IFRPI. [Available at: http://www.ifpri.org/pubs/fpr/pr18.pdf]. Wilson, Jeff (2008). Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin. Bloomberg.com. April 28. World Bank (2007). World Development Report 2008: Agriculture for Development. Washington, D.C.: World Bank. World Bank (2008a). Food price crisis imperils 100 million in poor countries, Zoellick says. April 14,2008. Washington, D.C. [Available at: http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21729143~pageP K:64257043~piPK:437376~theSitePK:4607,00.html]. World Bank (2008b). World Development Indicators 2008. Washington, D.C. World Bank (2008c). World Development Report 2008: Agriculture for Development. Washington, D.C. Yohe, G.W., R.D. Lasco, Q.K. Ahmad, N.W. Arnell, S.J. Cohen, C. Hope, A.C. Janetos and R.T. Perez, 2007: Perspectives on climate change and sustainability. Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, M.L. Parry, O.F. Canziani, J.P. Palutikof, P.J. van der Linden and C.E. Hanson, Eds., Cambridge University Press, Cambridge, UK, 811-841. [Available at: http://www.ipcc.ch/pdf/assessmentreport/ar4/wg2/ar4-wg2-chapter20.pdf].

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Annex 1. Food and Agricultural Trade

A majority of the countries in the world are net food importers. Of 196 countries for which data for 2005 was available, 131 countries (or about 67 percent) were net importers of raw food, where raw food includes meats and dairy products, grains and cereals, and vegetables and fruits. Nevertheless, countries may still be able to adjust their food production to the extent that their broader agriculture sector is not only producing raw food, but might also include output such as cash crops and agricultural raw materials. If one examines the broader agricultural trade balance, spanning raw food, cash crops and agricultural raw materials, about 50 percent of the countries in the world are net exporters and the other half are net importers. Focusing just on low income countries, about 78 percent (42 of 58 countries) are net raw food importers, while 40 percent (24 of 58) are net agricultural importers. Twenty low income countries have a raw food trade balance exceeding 5 percent of their total imports (of which 3 are oil exporters and 4 are countries in conflict). Only 6 low income countries have a raw food trade balance exceeding 10 percent of their imports; these include: Yemen (and oil exporter), Eritrea and Haiti (countries in or recovering from conflict), and Benin, Guinea-Bissau and Senegal. Food and Agriculture Trade Balances, 2005
Country Group Industrial Countries Middle-income, all Oil Exporters Civil Conflict States Small Islanders Other Middle-income Low-income, all Oil Exporters Civil Conflict States Other Low-income World, Total Country Group No. of Countries in Raw Food Trade Net Exporter Net Importer Total 13 20 33 36 69 105 3 17 20 1 3 4 5 25 30 27 24 51 16 42 58 2 5 7 1 7 8 13 30 43 65 131 196 No. of Countries in All Agricultural Trade Net Exporter Net Importer Total 16 17 33 41 64 105 5 15 20 0 4 4 8 22 30 28 23 51 34 24 58 4 3 7 2 6 8 28 15 43 91 105 196

Industrial Countries Middle-income, all Oil Exporters Civil Conflict States Small Islanders Other Middle-income Low-income, all Oil Exporters Civil Conflict States Other Low-income World, Total Source: Ng and Aksoy (2008:6,9). Note: Raw food is defined under SITC Revision 2, and it includes meats and dairy products, grains and cereals, and vegetables and fruits (and excludes cash crops, processed food and seafood). Agricultural trade includes raw food, cash crops and agricultural raw materials in SITC Revision 2.

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Annex 2. Policy Responses to Food-Related Challenges in the Developing World

Governments all over the world have responded to the recent increase in the international prices of cereals by implementing various policy measuressome in combination. The following provide illustrative examples: EXPORT CEILINGS OR BANS Cambodia announced on 26 March a two -month ban on rice exports and the release of rice stocks to curb rising domestic prices. China introduced a series of quotas/bans on grain exports, has recently announced additional agricultural production support measures, including increases in the minimum purchase prices of wheat and rice, and agricultural inputs subsidies. India banned non-basmati rice exports in late March, set the minimum export price for basmati rice at USD 1 200 per tonne, and authorized duty-free imports of rice. Pakistan, which had raised duties on wheat exports, has also recently raised wheat support prices by 23 percent in an attempt to build up strategic reserves. Ukraine imposed an export quota on its wheat and barley in June 2007. Viet Nam has extended a ban of rice exports until June, and announced in late March that total rice exports, eventually permitted in 2008, would be cut to 3.5 million tonnes from 4.5 million tonnes last year. Zambia reinstated the export ban which had been in place most of the previous marketing season. It has also implemented large input subsidy schemes to foster cereal production this year. IMPORT TARIFF REDUCTION Brazil removed the 10 percent import tariff on 1 million tonnes of non-Mercosur wheat until June 30. Cte dIvoire temporarily suspended import duties on essential foodstuffs following recent social unrest in response to sharp increases in oil and milk prices. El Salvador, Guatemala, Nicaragua and Honduras jointly agreed to cancel the import levy on wheat flour until the end of the year. Liberia recently suspended the USD 2 tax levied on a standard bag of rice. Senegal subsidized wheat flour by 40 percent, waived tariffs and imposed price controls. CONSUMER SUBSIDIES Bangladesh is selling rice at subsidized prices in urban areas. Ecuador has raised the subsidy on wheat flour introduced last October from USD 10 to USD 14.3 per 50 kg. Malaysia continues to regulate the price of rice which is subsidized and has not suffered variations in recent months, despite price hikes in international prices. The Government is planning to increase its stocks. Thailand will release 650 000 tonnes of rice from state stocks to be sold at subsidized prices. Zimbabwe controls maize imports, wheat and sorghum which are sold at subsidized prices. PRODUCTION SUBSIDIES Malawi continued with the large scheme to subsidize fertilizers and quality seed in the current agricultural season. 38

COMBINATION OF POLICIES Argentina delayed the reopening of its wheat export registry until 21 April from the previous scheduled date of 17 March. It has introduced a new scheme of variable levies for oilseeds and grains to boost state revenue while commodity prices are soaring. As an attempt to partially offset the negative impact of this scheme on farmers profits, the Government is considering a 20 percent subsidy on the price of fertilizers. It has also imposed a 44 percent tariff on soybean exports. Bolivia authorized the tariff-free imports of rice, wheat and wheat products, maize, soybean oil and meat until the end of May, while a ban on exports of grains and meat products has been introduced. Egypt increased wheat flour subsidies, and announced at the end of March a ban on rice exports from April to October 2008. Earlier in the month, it had ordered the army to bake bread for the population. Ethiopia has recently cancelled the value-added and turnover taxes on food grains and flour, as well as all taxes on cooking oil, and surtax on soap. Earlier, the Government took actions to stabilize cereal prices and to increase the purchasing power of the poor, including expenditures of USD 38 million to subsidize wheat, and USD 366 million to subsidize fuel. Monthly distribution of 25 kg of wheat to 800 000 low-income urban dwellers introduced in March 2007 will be maintained. Mexico removed quotas and tariffs for food imports, and it has made agreements with traders to increase maize imports and reduce retail food prices. It has also recently announced food production support measures and its intention to reduce fertilizers prices by a third. Peru announced in late March the launching of a programme to distribute food to the poorest strata of the population. It had earlier removed the tariff on cereal imports. Philippines, is analyzing the reduction of rice and maize import tariffs, that stand at 50 percent and 40 percent respectively, and has encouraged the private sector to participate in importing 163 000 tonnes of rice together with the National Food Authority (NFA). The NFA is also selling its rice stocks at subsidized prices. Russian Federation has announced high purchase prices for grain from domestic producers and is currently selling stocks to millers, after prices of wheat reached record highs in late March, in spite of the introduction of a 40 percent export tariff at the end of January. Tanzania authorized duty-free imports of some 300 000 tonnes of maize, and banned exports of agricultural commodities.
Source: Excerpted from FAO (2008b) and Precious grains: How export curbs are exacerbating the food crisis. Financial Times, April 14, 2008.

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Annex 3. Projected Impact of Climate Change on Five Major Food Crops by 2030 for Selected Regions.
Lobell and others (2008) examined 94 crop-region combinations and assessed the impact of climate, notably through the temperature and rainfall effect on crop yield by 2030. They generated a probability distribution of the crop production changes in 2030 using a Monte Carlo procedure. In order to facilitate comparisons, they expressed production changes for all crops based on the average values for 1998-2002. For each crop, the dark vertical line indicates the middle value out of 100 separate model projections, boxes extend from 25th to 75th percentiles, and horizontal lines extend from 5th to 95th percentiles. The number in parentheses is the overall rank of the crop in terms of importance to food security, calculated by multiplying the number of malnourished in the region by the percent of calories derived from that crop.

Source: Lobell and others (2008). Reproduced with permission from the authors. +amdg

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