global food trade: food crisis price shocks and developing ...q trade regime is an integral part of...
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Global Food Trade: Food Crisis Price Shocks and Developing Country Impacts
Philip AbbottDepartment of Agricultural Economics, Purdue University, West Lafayette, IN, USA
Mandela Washington Fellowship InstituteJune, 2017
Ag Trade, Development and Riskn Why International trade? Borders mattern Food crisis and global price risk
q Why border price spikes?q Developing country responses
n Risk management in Agricultureq Public interventions – stocks and tradeq Private risk tools- futures and options, insurance, credit
n Assessing border riskq Supply-utilization balancesq Price Transmission
n Afghanistan as a case study
Why International Trade?n Trade dependence
q Some countries rely on imports for food supply (Morocco)q Some are normally self-sufficient but meet shortfalls with imports (Kenya)q Some export food to balance domestic markets and earn foreign exchange (India,
Vietnam)
n Trade as an engine of growthq Aid initiatives – Exports to foster growthq Hunger is fundamentally a poverty issue, economic growth cures poverty
n Agricultural policyq Trade regime is an integral part of a country’s food and agricultural policy – borders
matter!q Aid initiatives – agricultural development, food aid/safety nets, budget support for
policy measuresq Trade may be used to stabilize domestic agricultural markets
n External shocks – 2007-08 Food Crisisq High international commodity prices brought “food inflation”q Higher prices could result in greater poverty and malnutritionq Countries used policy to isolate local markets from effects of 2007-08 Food Crisis
Borders Matter to Agricultural development policy, outcomes: Mozambique versus South African Differences:
q Irrigationq Roadsq Yields
n Untapped potentialq Land grabs
n Maputu to Moamba to Komatipoort to Kreugerpark
World Food Crisis? Agricultural Commodity (Global) Price Spikes in 2007-08, 2011-12, 2012-13
Source: IMF world commodity price data
Why the high international Prices?n Weather, production shortfalls, and tight stocks
q U.S. drought in 2011, 2012 especiallyq Russian drought in 2011q Normal weather in 2008!!
n Two big and persistent demand shocks:q Biofuelsq Chinese soybean demand
n Market inelasticityq Tightness of land supply and limited reallocation possibilitiesq Biofuels policy constraintsq Higher livestock prices contributing to persistent feed demandsq Grain stocks and futures prices (speculation), and q Trade policies that isolate national markets
n International Macroeconomicsq Exchange ratesq World economic growth, recessions
How developing countries respondedn Trade policy responses to global price spikes
q Reduced tariffsq Export taxes, bans
n Also Domestic subsidies and tax cutsq Fertilizer subsidies prevalent in Africa
n Isolationist policiesq Kept world market price spikes out of domestic marketsq Protecting urban consumers
n Rather than more prevalent rural poverty
q Would diminish supply response?n Countered with price guarantees and input subsidies
q Reflected persisting stabilization preferences
Policy responses by local governments to 2007-08 Food Crisis
Trade based policy measures commonly adopted worldwide (as of 1 December 2008) Africa Asia Latin America Overall
Countries surveyed 33 26 22 81
Market Interventions Trade policy
Reduction of tariffs and customs fees on imports 18 13 12 43
Restricted or banned export 8 13 4 25
Domestic market measures
Suspension/reduction of VAT or other taxes 14 5 4 23
Released stocks at subsidized prices 13 15 7 35
Administered prices 10 6 5 21
Production Support Production Support
12 11 12 35 Production Safety Nets
6 4 5 15 Fertilizer and Seed Programs
4 2 3 9 Market Interventions
4 9 2 15
Consumer Safety Nets
Cash transfers 6 8 9 23
Increase Disposable Income 4 8 4 16 Source:adaptedfromDemeke,PangrazioandMaetz,2008.
Impacts on Developing Countries:Macroeconomics or Poverty and Hunger?
n Price increases drove food inflation, q Where high world prices cross borders, food inflation, poverty and
hunger may resultq so also general inflation
n Mitigating measures (tariff and tax cuts, subsidies) costly Government revenue falls – “fiscal space reduced”q Some governments willing to pay those costs for stability, others borrowed from
World Bank
n Balance of paymentsq Food imports costly, also crude oil importsq Commodity boom, oil imports è mix of consequences depending on trade statusq Exchange rates depreciate when BOP worsens, all imports more costly
Impact Estimates on Poverty, Hunger and Malnutrition
n World Bank initially estimated 2007-08 crisis moved an additional 110 million people into extreme povertyq Normally, about 1 billion people earned less that $1/day – the WB extreme poverty thresholdq High prices in 2010-11 added 44 million people to poverty headcount
n FAO and USDA initially estimated an additional 75-110 million people experienced hunger due to the 2008 food crisisq Before crisis, about 800 million suffered from malnutrition
n IMF – High Food prices impacted poverty, whereas high energy prices affected macroeconomic performance
n Initial modeling predictions were recognized as overestimates. Key to these impacts were the extent to which the High world food prices crossed borders
n Better estimates of poverty and hunger impacts need households surveys, actual price changes faced, and net seller status of rural householdsq Poverty, hunger estimates from models, “evidence on the ground” harder to find
Grain Import Bills in 2007-08 Food Crisis:Doubled (up $56 billion) in 2008
TotalGrainImportValueandQuantity:TrendsandDeviationsafter2006GrainImports
Valuein$billions
2006TrendForecast 2007 2008World 57.18 24.74 56.37China 2.51 -0.76 -0.45India 0.61 0.22 -0.88Brazil 1.21 0.80 1.48
Sub-SaharanAfrica 6.06 1.74 1.45NorthAfrica&MiddleEast 11.37 7.23 16.86SouthAsia 2.54 0.86 4.17East&SoutheastAsia2 11.59 3.92 10.16LatinAmerica3 8.88 3.29 8.61
NetFoodImportingDeveloping1 10.90 4.29 11.07LowIncomeFoodDeficit 17.63 5.47 9.93LeastDeveloped 4.75 0.64 2.95
AdditionalGrainImports:Value(abovelineartrend)in$billions
Import Volume in 2007-08 Food Crisis:Insensitive to higher prices?
2006TrendForecast 2007 2008 2009 2010World 249.2 16.4 16.9 14.5 2.2China -3.8 -0.6 2.5 4.6 2.7India -4.7 -3.6 -1.5 -1.0 -2.6Brazil 1.3 -1.9 0.3 -4.4 -2.5
DevelopingCountries2 136.2 -0.8 20.8 18.7 9.0Sub-SaharanAfrica 21.9 -5.5 -2.1 -1.9 -5.5NorthAfrica&MiddleEast 57.1 8.8 26.6 20.6 14.6SouthAsia -2.4 -2.5 2.8 -0.7 -0.3East&SoutheastAsia2 25.6 -1.9 -2.5 2.2 3.5LatinAmerica3 34.1 0.3 -4.0 -1.5 -3.3
AdditionalGrainImports:Quantity(abovelineartrend)inmmt
NetImportQuantityinmmt
0
1
2
3
4
5
6
7
8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
CrudeOil
Wheat
Rice
Corn
Urea
IMFFood
Crude oil, hencefertilizer prices also spiked, and more so thanfood prices
Fertilizer prices remained high afterthe food crisis
Fertilizer trade
Fertilizer Import Costs also Spiked, Followed High Oil PricesFertilizerImportValue:TrendsandDeviationsafter2006
FertilizerImportValuein$billions
2006TrendForecast 2007 2008World 34.31 19.90 44.78China 2.89 0.01 0.47India 2.03 2.10 9.57Argentina 0.50 0.55 0.86Brazil 2.65 13.39 6.12
Sub-SaharanAfrica 1.69 0.14 1.21NorthAfrica&MiddleEast 1.46 0.02 0.71SouthAsia 3.21 1.75 9.45East&SoutheastAsia2 4.27 0.69 6.36LatinAmerica3 3.79 0.89 3.87
NetFoodImportingDeveloping1 2.80 -0.20 1.40LowIncomeFoodDeficit 8.65 2.04 13.05LeastDeveloped 1.04 -0.09 0.02
AdditionalFertilizerImports:Value(abovelineartrend)in$billions
“Best practices” Risk management advice -- before versus after food crisisn Domestic production variability was the more important source of risk
than international price variability
n Long run agricultural development: greater self-sufficiency, drought tolerant crops
n Safety nets: cash transfers, food aid n Private market solutions to risk (crop insurance, futures markets)n Liberal Trade regimes
n Developing country food price responses and some post crisis criticism reject these best practices, particularly liberal trade
n Risk management institutional development has been slow, difficult – World Bank projectq Changing recommendations: First futures markets, then crop insuranceq Little successful adoption over 15 yearsq Local Futures market only in large countries (China, India, South Africa)
Stocks or Trade as part of the strategy?n Theory: Trade for well integrated countries
Stocks for isolated, poorly integrated domestic marketsq But Holding stocks for long periods is costlyq Trade requires adequate foreign exchange (IMF, EU trade
lending facilities seldom used)q Variable levies, Price Bands are WTO illegal, if cost effectiveq But most countries use both trade policy and stocks
n Inter-seasonal, short term stocksq Imperfect information on upcoming harvestq Import delivery lagsq Seasonal price dynamics and storage
n Depends on maturity of marketing institutionsn Avoiding price spikes before harvest
Stabilizing Policy Mechanismsn Variable levies – Tariff (T) adjusts to stabilize
domestic pricen Price bands – Intervene only at extreme external
pricesn Marketing boards – Variable quota adjusts to
stabilize domestic consumption, hence pricen Public Stocks
q Open, small country case – Pd determined by Pw, stocks only change M (trade volume)
q Stabilized or imperfectly integrated markets – stocks changes affect domestic pricesn Trade can limit the extent to which food security stockpiles can
function
Private Market Risk & Solutionsn Conventional wisdom advocated by World
Bank and Donors prior to crisis was to emphasize private market solutions over public interventionq Futures, options and forward contractingq Crop insuranceq Safety nets – food aid or cash transfers?q PPPs still emphasized
Anton’s Risk Management Frameworkn 3 Layers -- Holistic policy approach
q Farmer’s own actions: crop choice, diversification,…q Private institutions: Insurance, Futures and optionsq Market Failure è Government intervention
n Developing countries: Deeper market failure layerq Stabilization policy to address market failure
n Useful when private institutions are inadequaten Intervention when market extremes faced
q Depends crucially on institutional development (market information, storage, credit, insurance,…)
Risks faces by farmersn Production shortfalls – drought, pests, floods, etc.
affecting area planted and yieldn Price – Domestic price and world price (to the extent it
influences domestic price)q Surpluses and price collapseq Seasonality and credit
n Revenue – Price times productionq Inadequate supply and low farm income are both risks – policy
must worry about both low and high prices, contingent on production
q “Market Risk” and “Production Risk” in World Bank guiden Policy (enabling) environment – rules governing price
determination or risk strategies can change
Variability and Covariance of Maize Production in Africa, 1995-2004
Coefficients of Variation in Grain Prices
Disaggregation of Variance Components in Producer Prices for Maize, Selected African Countries (%)
Risk Layering – Mitigation, (Technology) Transfer (Insurance) and Coping (credit)
Private Solutions – Risk management
n Technology- crop diversification, breeding/selection for drought or pest tolerance, GMOsq Safety first strategies
n Futures, options and forward contractingq World bank risk management project
n Crop insurancen Finance – credit, warehouse receipts
World Bank 2005 assessment
Short list of solutions that followed;n Technology
q Highly drought- (pest-) tolerant seedsq Good agricultural practices to address drought,
pests and diseasesn Policy
q Balanced maize trade policyq Risk management strategies for key export crops
with high price volatility (in principle, coffee and cotton)
n Insurance (not on list?)
Financial marketsn Futures markets, Options
q Better designed for intermediaries, q Large scale contracts problematic for farmersq Basis riskq World Bank Risk project, Nigeria exchange
n Forward contracts q Backed by futures market transactionsq Although forwards are potentially more flexible and useful than futures
contracts for small-scale farmers and traders, futures contracts are low-cost, highly liquid, and easily transferable financial instruments that do not incur default risk. In many developing countries the inability to enforce forward contracts, especially for staple food crops, means that default risks are too high to support viable forward markets without some form of guarantee on performance.
Where are futures and options markets?
Crop insurance in the USn Federal crop insurance began in 1938n Little used by farmers until farm bill in 1994
q Greater subsidies and requirement to participate in farm programs
q Greater role for private insurers – government subsidizes farm premiums and reinsurance risk of private insurers, covering any large losses as well as administrative costs
n Revenue insurance introduced in 1994, now dominates
n Enabled by county extension offices, long history of data collection
Crop insurance in Africa, Developing countriesn Expanding, but still quite limited in scopen Basis risk, weak institutions, poor historical data
have led to index based weather insurancen 104 countries offered some form of crop
insurance in 2008, half were low incomeq Often under public-private partnerships (PPP)q Over 90% of premiums in highly developed countriesq “Penetration” extremely small , even in middle income
countries – few farmers buy products
Credit
Limitations to implementing “best practices”n World price volatility now more important?n Institutional development immature –
marketingq Domestic stockholding, market information,
infrastructure, insurance and creditn Safety nets
q Conditional cash transfers need a commitment to real not nominal income levels – Ethiopia case
n Governance key to successful interventionsq Credible, transparent, predictable interventions
A few Key conceptsn Basis risk
q Price and insurance payoutq Index based weather insurance
n Actuarially fair premiumsq Administrative and operational costsq Risk aversionq Risk Poolingq Premium subsidies
n Reinsurance, systemic riskn Catastrophic coverage, shallow loss
Supply-Utilization balances show trade dependence, adjustment mechanismsn Production + Imports + Carry-in stocks
= Feed use + Food Use + Exports + Carry-out stocks
n Q + M + St-1 = Cfeed +Cfood + E + St
q Ending stocks (carry-out) last year = Beginning stocks (carry-in) this year
n Adjustments to a production shortfall:q Cut use, import, release stocks
Self-sufficient, occasionally trade dependent countries: Kenya, Mozambique
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2012/2013
Kenya- Coarsegrains
BeginningStocks
Production
Imports
Exports
DomesticConsumption
EndingStocks
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MozambiqueCoarsegrains
BeginningStocks
Production
Imports
Exports
DomesticConsumption
EndingStocks
Isolating or Stabilizing Countries:China, Morocco
0
20,000
40,000
60,000
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120,000
140,000
160,000
2000/2001
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China- Rice
BeginningStocks
MilledProduction
MYImports
MYExports
ConsumptionandResidual
EndingStocks
0
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2,000
3,000
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Morocco- Wheat
BeginningStocks
Production
MYImports
TotalConsumption
EndingStocks
Net Exporters: Vietnam, India
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2012/2013
India- Rice
BeginningStocks
MilledProduction
MYImports
MYExports
ConsumptionandResidual
EndingStocks
0
5000
10000
15000
20000
25000
30000
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2008/2009
2009/2010
2010/2011
2011/2012
2012/2013
Vietnam- Rice
BeginningStocks
MilledProduction
MYImports
MYExports
ConsumptionandResidual
EndingStocks
Price Transmission – Are domestic and world food markets linked?n Exchange rate changes and border price transmission determine
domestic prices q Urban-rural price transmission determines farmgate prices
n Two causes of imperfect price transmissionq (Isolationist) Stabilization policy responsesq Weak market integration (high transactions costs, imperfect markets)
n With world markets and between urban and rural (remote)areasn Implicitly stabilizes
n Food inflation follows home goods prices, less impacted than traded grain prices
n Highly variable domestic price impacts observedq Import dependence (rice), home good status (millet) determine
n which countries most severely impacted, n which commodities within countries see biggest price changes
Imperfect Market Integrationn Law of one price è domestic prices should follow world
pricesn Poorly integrated markets – domestic and world prices
are independentq ΔPd = ε Δ( e Pw ) ε < 1 è imperfect integrationq Intermediate cases typical ε = 0 independent marketsq Can look at border or urban-rural linkage
n Judging market integration versus trade policyq Are tariff changes large enough to account for differences in
changes in domestic versus world market prices, or were effective quotas in place?
q Price transmission methods used sometimes to assess policy impacts, sometimes to measure market integration
Lags in Price transmissionn Policy and imperfect market integration may
mean in the short run world price changes do not impact domestic prices
n But over longer run world price changes are expensive to resist, both for traders and governmentsq Tariff revenue lost, subsidies may be needed to
maintain differentialsq Lost “fiscal space” and making up lost tariff
revenue top requests by governments to World Bank’s GFRP program
Rice and wheat prices in stabilizing regimes – China and Morocco
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
RicePw$
PwLC
Pd
0.00
0.50
1.00
1.50
2.00
2.50
1995 1997 1999 2001 2003 2005 2007
WheatPw$
PwLC
Pd
Moroccan Wheat --Є Pw>Pd = 0.02
Chinese Rice --Є Pw>Pd = 0.15
Tradable versus non-tradable grain prices in Burkina Faso
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RicePw$
PwLC
Pd
FoodInflation
0.0
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1.0
1.5
2.0
2.5
3.0
MaizePw$
SorghumPw$
PwLC
SorghumPd
FoodInflation
Rice -- Є Pw>Pd = 0.45
Sorghum --Є Pw>Pd = 0.30
Nigeria case studyn Rice is purchased/imported globally
q Big margins relative to world pricesn Large transaction's costs (shipping, port handling?)n Or Market power of oligopolistic traders
n Maize, millet, sorghum appear to be home goodsq Trade is with neighbors, not global marketq Internal commercial centers well integratedq Rural markets can be isolated
n Long lags in transmission; local conditions matter
56
Large Rice Price spreads at Nigerian ports
57
Empirical Results: Imported Rice
Empirical Results: Maize
58
Price Transmission Lessonsn Many developing countries are poorly integrated with world
marketsq Even if domestic prices eventually follow world prices, lags in
adjustment to world price shocks can be quite long – 6 months or moreq Evidenced of market power in several cases resulting in large margins
at bordersn Relevant world market is often a neighbor, not the global market
q For Afghanistan wheat: Pakistan or Kazakhstan not the U.S.q For Tanzanain maize: Kenya not the U.S. or even South Africa
n Commercial centers are often well integrated, with short lags in price adjustment,
n but isolated rural market prices may be poorly integrated with those commercial centersq Local conditions (eg production shortfalls) matter
Beggar-thy-neighbor policyn Stabilizing a domestic market, and disconnecting from
world price signals, destabilizes world marketq Rice world price spike in 2008 due to export bansq Policy responses transmitted instability abroad, countries did not
help absorb world market shocksn Variable levies and price bands were made WTO illegal
in 1995 Uruguay Round Agreement on Agriculture –against EU policy
n Hope is that free trade would lead to more stable world market, so stabilizing option for countriesq 2007-08 crisis challenges this logicq WTO implemented commitments failed to resolve problems of
1970s
Conclusionsn Stability remains a policy concern in many
developing countriesq Institutions resurrected during food crisis
n Policies in 2007-08 and afterwards sought to isolate countries from world marketsq Import demand inelastic, high foreign exchange
requirements for importsq Mitigating measures generally costlyq Protected urban consumers (poverty mostly rural)
n Best practices risk management advice being rethought in many countriesq Both trade and stocks used to ensure food security
How one country was impacted? Afghanistann Declining self-sufficiency in wheat
q Rapid population growth, influx of refugees, and rapid income growth have meant rising demand for food
q Wheat Production (the staple) has been growing slowly, also more volatile
q Imports surged, and provided a substantial share of food by 2007n In 2007-08, during world food crisis
q 55% wheat production shortfall in Afghanistanq World wheat prices more than doubled
n Domestic prices rose even more!
q Pakistan, its major supplier, banned exportsn In 2009 a bumper crop meant apparent self sufficiency
q High prices and good weather were production incentivesq Imports persisted
Wheat prices
Wheat supply, use and trade in Afghanistan
Trade in Afghanistann Prior to 2008, Afghanistan benefited from (free rode on) stabilization
policy in Pakistanq In 2008 Pakistan banned exportsq Pakisitan also subsidized flour milling
n Since 2008 Afghanistan has imported wheat from Kazakhstanq Transactions costs much higherq Kazakhstan prices follow world pricesq Kazakhstan initially sold wheat not flour
n Lack of flour mills has led to Kazakh flour imports
n Pakistan once again cheaper import sourceq Export ban eventually lifted, but Pakistan still viewed as unreliable, so
kazak imports persistq Quality better from Kazakhstan
Trade/Ag Policy in Afghanistan
n Can/should Afghanistan become more self-sufficient in wheat?
n Does it need some trade policy to cope with unreliability of Pakistani supplies?
n Should it hold stocks in anticipation of production shortfalls?
n What is the relative importance of uncertainty in world markets versus domestic production in setting agricultural policy? How can it cope with both aspects of uncertainty?