confronting the food price challenge

Confronting the Food Price

Challenge

Joachim von Braun

International Food Policy Research Institute

IATRC Symposium “Confronting Food Price Inflation: Implications for

Agricultural Trade and Policies”

Seattle, June 22, 2009

Joachim von Braun, IFPRI, June 2009

Overview

1. Food price developments

2. Prices, policy dynamics, and feedback

3. Prices and the poor

4. New institutional arrangements


Are we living in unusual times?

Sources: J. von Braun, based on data from NBER Macrohistory database,

BLS CPI database, Godo 2001, OECD 2005, and FAO 2008;

Population data from U.S. Census Bureau Int’l database and UN1999.

1872-2008 prices and population


Globalization of agriculture and food

systems

Global integration—across national borders—of production, processing, marketing, retailing,

and consumption of agriculture and food items

Source: von Braun and Diaz-Bonilla 2008.


Trade globalization?

Agriculture trade in percent of production

Export/Production 1960s 1970s 1980s 1990s 2000-05

Latin America and the Caribbean 22.7 23.0 22.2 25.0 31.2

Sub-Saharan Africa a 23.3 17.0 12.8 12.2 10.9

Asia Developing 5.3 6.1 6.4 6.4 6.1

All Three Regions 11.6 11.3 10.5 10.7 11.2

Import/Production 1960s 1970s 1980s 1990s 2000–05

Latin America and the Caribbean 6.3 8.4 10.9 13.6 14.9

Sub-Saharan Africa a 8.7 6.3 8.1 8.6 11.1

Asia Developing 6.5 6.2 5.6 6.1 5.6

All Three Regions 6.8 6.7 7.0 7.8 7.8

a Does not include South Africa.

Source: Data from FAOSTAT 2009/


High-value products in developing

countries on the rise

Domestic consumption Exports

Source: WDR 2008 with data from FAOSTAT.


Widening gap in trade costs

Trade costs in processed foods in 2000:

- North: 73%

- South: 134%

Geography + history

matter more than

Infrastructure + institutions

(?)

Source: Olper and Raimondi 2009.


Commodity price spike, 2007-08

0

25

50

75

100

125

0

200

400

600

800

US

$/b

arre

lU

S$

/to

n

Corn

Wheat

Rice

Oil (right scale)

Price spike

Source: Data from FAO 2009 and IMF 2009.

Closer linkages between commodity markets and

economic performance


Food prices in developing countries

stay high

78%

43%

17%

0

20

40

60

80

> 12 months earlier > 3 months earlier Highest on record

(%)

Latest food price as of April 2009 (790 domestic price quotations in 58 developing countries)

Source: FAO 2009.


Domestic prices of key staples remain high:

Wheat

Source: FAO 2009.



Maize

Source: FAO 2009.



Rice

Source: FAO 2009.


Transmission from int’l to domestic prices

varies by country and by product

international price

in regression

ln_wheat_int ln_sweet_bread 0 ln_bread 1 ln_bread 1 ln_bread_loaf 0 ln_bread 1

ln_white_bread 0 ln_pasta 2 ln_macaroni 2 ln_spaghetti 1 ln_bread_loaf 1

ln_bread_decaja 1 ln_pastry 1 ln_bread_sweet 1 ln_wheat_flour 1 ln_bread_loaf_sliced 1

ln_cookies 0 ln_crackers 2 ln_crackers 2 ln_spaghettis 2

ln_other_cookies 0 ln_bread_semitas 1 ln_wheat_flour 1

ln_wheat_flour 0 ln_cookies 2

ln_pastry 0 ln_crackers 1

ln_candy_polvoron 1

ln_corn_int ln_corn 0 ln_corn 1 ln_corn 2 ln_corn 0 ln_corn 0

ln_tortillas 0 ln_tortillas 0 ln_tortillas 2 ln_tortillas 0 ln_tortillas 0

ln_corn_flour 0 ln_corn_flour 1 ln_corn_flour 0 ln_corn_flour 1

ln_corn_milling 0 ln_cornflakes 0 ln_cornflakes 1

ln_rice_int ln_rice 1 ln_rice 2 ln_rice 2 ln_rice 0 ln_rice 2

We report “.” when the null is rejected for maximum rank equal to 1,2,…,N-1

international price

in VECM

ln_wheat_int ln_bread 1 ln_bread 0 ln_bread1 1 dln_bread 1 ln_bread_cereals 2

ln_bread_square 0 ln_flour 1 ln_bread2 1 dln_bread_baguette 2

ln_bread_sweet 2 ln_pasta 2 ln_spaghetti 1 dln_flour 2

ln_cookies 0 ln_crackers 1 ln_pasta 1 dln_cookies 0

ln_crackers 2 ln_cereals 0 dln_pasta 0

ln_wheat_flour 2 dln_spaghetti 0

ln_corn_int ln_tortillas 0 ln_cereals 0 dln_corn 2 ln_bread_cereals 1

ln_corn_flour 0

ln_rice_int ln_rice 1 ln_rice 0 ln_rice 0 dln_rice 1 ln_bread_cereals 1

ln_rice_selected 0

ln_rice_premium 0

Mexico Guatemala Honduras Nicaragua

Peru

El Salvador

Costa Rica Panama Dominican Republic Ecuador

Items with positive statistical significant coefficients with respect to the international prices in t (month) and t-4

Source: Robles and Torero 2009 (forthcoming in Economica).


No lag One-month

lag

Three-

month lag

Maize 0.672 0.524 0.312

Rice 0.875 0.734 0.500

Food Commodity

Index

0.779 0.755 0.707

Source: Benson, Mugarura, and Wanda 2008.

Correlation of global and Ugandan price and food index

series, Jan 2000–July 2008

Price transmission, Uganda


Reasons for the change in price trends

1. Income and population growth

2. Energy and biofuels

3. Slow agricultural growth

4. Speculation and financial crisis


1. Income and population growth

• Annual income growth high in 2005-07- 10% in developing Asia, 6% in Africa

- 3% in industrialized countries

…but slowed down in 2008-09- 6% in developing Asia, 4% in Africa

- -1% in industrialized countries

• Population grew by 78 million per year in

2005-09, reaching 6.8 billion in 2009

- Expected to reach 9.1 billion by 2050

Sources: IMF 2009 and UN 2009.


2. Energy and biofuels

• Energy prices now affect not just agric. input

prices, but also output prices strongly via

biofuel-land competition

• IMPACT Model: Increased biofuel demand in

2000-07 contributed to 30% of weighted

average increase of grain prices


3. Slow agricultural growth

%

East Asia 2.7

South Asia 1.0

East Africa 0.4

West Africa 1.6

Southern Africa 1.3

Latin America 2.7

North Africa & West Asia 1.4

All regions 2.1

Annual total factor productivity growth, 1992-2003

Source: von Braun et al. 2008.

Joachim von Braun, IFPRI, June 2009 Source: Chicago Board of Trade 2008.

4. SpeculationN

um

be

r o

f c

on

tra

cts

Grain and oilseed futures and options - Ave. daily volume

And closure of commodity exchanges (India, China, etc.)


Speculation and prices:

Evidence of causality

Source: von Braun, Robles, Torero 2008.

Indicator of speculation activity Wheat Corn Soybeans Rice

1. Monthly volume (futures contracts CBOT)

2. Monthly open interest (futures contracts CBOT)+ +

(Apr/05 -

Oct/07)

(Dec/04 -

Jun/07)

+

(Sep/05-

Mar/08 )

+ +

(Jan/05-

Jul/07)

(Aug/05-

Feb/08)

+

(Jan/06 –

May/08)

- “+”: evidence of causality

- Starting period of evidence of causality in parenthesis

- * It combines futures and options positions, data available since January 2006.

5. Ratio non-commercial positions to total reportable positions (short)

6. Index traders net positions (long – short positions)* N/A

Commodity

3. Ratio volume to open interest (1)/(2) (futures contracts)

4. Ratio non-commercial positions to total reportable positions (long)


4. And financial crisis

Food crisis Financial crisis

Source: von Braun 2008.

But Who drives Whom?

Food- and financial crises linkages


Any lessons from history?Financial and Food Price Crises 1900 - 2008

Ba

nk

ing

, c

urr

en

cy,

so

ve

reig

n d

efa

ult

, a

nd

in

fla

tio

n c

ris

es

ind

ex

(w

eig

hte

d b

y s

ha

re o

f in

co

me

)

Wh

ea

t p

ric

e

(20

00

US

$/m

etr

ic t

on

, 3

-ye

ar

ave

rag

es

)

Panic of 1907

Sources: The wheat price are compiled and interpolated from data from BLS 2008, Godo 2001, NBER 2008, OECD 2005,

U.S. Census Bureau 2008, and United Nations 1999.

The BCDI Index is a composite index of banking, currency, sovereign default, and, inflation crises. It was developed by

C. Reinhart and K. Rogoff, and presented at Brookings Institution in April, 2009.

Pre World War:

CORR (1900 – 1950) = - 0.16


Commodity prices, inflation,

and monetary policy in the USA

Oil p

rice p

er b

arre

l, PP

I –co

mm

od

ities

Co

re in

flati

on

, eff

ecti

ve f

ed

era

l fu

nd

s r

ate

Source: Data from US Bureau of Labor Statistics.

End-2004: oil price spill to other commodities, effect on core inflation

2004-07: Tight monetary policy triggered recession (from housing

market defaults to decreased consumption and incomes)


Overview






Decreased market distortions ?

India Indonesia

-40

-30

-20

-10

0

10

20

30

1985 1987 1989 1991 1993 1995 1997 1999 2001

Perc

en

t

%PSEc %PSE

-80

-60

-40

-20

0

20

40

60

80

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Perc

en

t

%PSEc %PSE

China Vietnam

-40

-30

-20

-10

0

10

20

30

1995 1996 1997 1998 1999 2000 2001

Per

cent

%PSEc %PSE

-80

-60

-40

-20

0

20

40

60

80

1985 1987 1989 1991 1993 1995 1997 1999 2001

Perc

en

t

%PSEc %PSE

Source: Orden et. al 2007.

Producer support estimates

Global Trade Restriction Index: 1985-89=23%, 2000-04=12%(Lloyd, Croser and Anderson 2007)

OECD producer support: 1986-88=37%, 2005-07=26% (OECD 2009)


But now a new wave of

trade protectionism with high prices?

Export restrictions in 2008 were serious!

• Tariff increases do not explain trade decline

• Trade financing an issue in the recession

Potential costs of rising protectionism are high!

• Failed Doha round: up to -11.5% in world

trade (volume) if tariffs increase to their

current WTO limits (bound level)

Source: Laborde, Torero 2009, IFPRI.


…And reversal in grain stock policy

149

25.8

44.4

206.9

39.4

54.5

0

50

100

150

200

China India EU

Mil

lio

n t

on

nes

2006

2009

Source: Based on data from FAO 2009.

Cereal stocks


Creation of cartels?

• 2008, Vietnam, Thailand, and Burma

attempted to form a rice cartel

• June 2009, Russia, Ukraine, Kazakhstan to

form a 'grain pool’ to:

- manage stocks and prices

- improve infrastructure incl. rail and port

capacity


Result: Accumulation of market

inefficiencies

From “hypothesis”

to “fact”

to “myth”?

(Justin Fox, 2009)

Market efficiency:


Rise in food protests

0

5

10

15

20

25

0

100

200

300

400

500

600

700

800Jul-

07

Aug

-07

Sep

-07

Oct-

07

Nov-0

7

Dec-0

7

Jan

-08

Feb

-08

Mar-

08

Ap

r-08

May-0

8

Jun

-08

Jul-

08

Aug

-08

Sep

-08

Oct-

08

# o

f riotsU

S$/t

on

Maize

Wheat

Rice

Riots (right)

Source: J. von Braun based on data from FAO 2009 and news reports.


Looking for land: Overseas land investments to secure food supplies, 2006–09

Source: von Braun and Meinzen-Dick 2009,

with data compiled from media reports.


Overview






Rising number of hungry people in the

developing world

Data source: FAO 2006, 2008, 2009.

(in

mil

lio

n)

>1 bil.

WFS target


1.4 billion people remain poor in the

developing world

0

20

40

60

80

1981 1987 1993 1999 2005

% o

f p

op

ula

tio

n

East Asia and Pacific

South Asia

Sub-Saharan Africa

Poverty at $1/day, 2005 PPP

Source: Chen and Ravallion 2008.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1981 1987 1993 1999 2005

Bil

lio

ns

East Asia and Pacific

South Asia

Sub-Saharan Africa


High food prices reach the poor

• Poor countries fully participate in food

price shocks

• Poor households are reached by high

prices (Dorosh, Dradri, Haggblade 2009)

- Coping strategies vary, and include

switching to non-traded food items


Maize and sweet potato prices

Zambezia, Mozambique 2006-2008

0

2

4

6

8

10

12

mzpkg

wspkg

Source: R. Labardo, A. de Brauw HarvestPlus, 2008.


People in low-income countries are very

sensitive to changes in food prices

High

estimate

Low

estimate

North

Small farm -0.92 -0.52

Rural nonfarm -1.04 -0.59

Middle and urban rich -0.61 -0.45

Urban poor -0.53 -0.39

South

Small farm -0.60 -0.33

Rural nonfarm -0.58 -0.33

Middle and urban rich -0.16 -0.12

Urban poor -0.24 -0.18

National aggregate -0.64 -0.43

Price elasticities of maize in Zambia

Source: Dorosh, Dradri and Haggblade 2009.


Human costs of volatile prices are high

Price stocks and malnutrition in Kordofan children, Jan 1981-Dec 1986

Teklu, von Braun, Zaki 1991.

And must be included in sound econ. analysis of price volatility


Overview






Strategic agenda

1. Promote pro-poor agriculture growth with

technology and institutional innovations

2. Facilitate open trade and reduce market

volatility

3. Expand social protection and child

nutrition action


For long-term agric. growth:Double public agric. R&D to impact poverty

CGIAR investment to rise from US$0.5 to US$1.0 billion

as part of this expansion

Source: von Braun, Shenggen Fan, et al. 2008.

R&D allocation

(mil. 2005 $)

in # of

poor (mil.)

2008-2020

+ Agr. output

growth (% pts.)

2008-20202008* 2013

SSA 608 2,913 -143.8 2.8

S Asia 908 3,111 -124.6 2.4

Devel.ing

World 4,975 9,951 -282.1 1.1


What to do about volatility?

1. Keep trade open at times of global and

regional food shortage is a must

2. Regulation of food commodity markets? (only

as part of financial markets)

3. Establish grain reserves policy at global level

(emergency reserve, shared physical

reserves, and a virtual reserve > a new

institution at global level needed)


Institutional design behind virtual reserves

Country

commitment to

supplying funds

Intelligence unit• Model

fundamentals

• Model dynamic

price band

• Trigger alarm

High level technical

commission

• Approve intervention

Appoint

Futures market


Support pro-poor food and nutrition

interventions

Protective actions e.g.:

• Cash transfers

• Employment-based food security programs

Preventive actions e.g.:

• School feeding

• Early childhood nutrition programs

Focus on children, women, and poorest


www.ifpri.org

confronting the food price challenge

Documents

tortillas0 ln

bread1 ln

bread0 ln

cookies0 ln

int ln

pasta2 ln

rice2 ln

salvadorhondurasnicaragua