Cross countries analysis

Cross-countries analysis of risingfood prices: policy responses andimplications on emerging markets

Abiodun Elijah ObayeluDepartment of Agricultural Economics, University of Ibadan, Ibadan, Nigeria

Abstract

Purpose – The purpose of this study is to create an opportunity to see what is wrong withagriculture and provide an opportunity for much needed change. It identified who benefits or bears thepains of food prices increase, examines the causes and effects of the increase and discusses policyresponses by various countries and the implications of such interventions.

Design/methodology/approach – Secondary data were employed and analyzed through simpledescriptive statistics.

Findings – The results of the findings showed that increase in food prices affects the nutrition of notonly the poor but also the working and middle classes. It limits the food consumption of the poor andworsens the dietary quality. It revealed that foods are available in many countries but millions ofpeople have no purchasing power. Some of the driving forces of price increase include expansion ofbiofuels, high demand for food, and high cost of food production, climate change, unfavorablegovernment policy and underinvestment in agricultural innovation. Contrary to the opinion thatincreased food prices benefit farmers, this study observed that the marketers benefit most. High costsof inputs and inflation make it difficult or impossible to produce by smallholder farmers.

Originality/value – The recent increase in food prices around the world has raised serious concernsabout food and nutrition security of people. As part of intervention, several countries have bannedgrain exports and tariff reductions on imported foods in others. The export restrictions and importsubsidies have harmful effects on import-dependent trading partners and give wrong incentives tofarmers by reducing their potential market size. The price controls employed by some countries reducefarmers’ incentives to produce more food.

Keywords Food crisis, Food policy, Food consumption, Cross-country analysis, Emerging markets,Food industry

Paper type Research paper

1. IntroductionFood crisis is a traumatic or stressful or abrupt change in the prices of food commoditiesleading to a global crisis and causing political and economical instability and socialunrest in both poor and developed nations. Price spikes are not unusual in agriculturalmarkets, what is unique is the rapid pace and consistency with which prices have risen.Almost all major food and feed commodities are now much more expensive since thelevels of food production in the last few years are unable to keep up with the sustainedhigh demand. Although the food prices have always been volatile, the increases of2006-2008 were of a magnitude and were last seen in the 1970s. The sharp increase infood prices over the past couple of years has raised serious concerns about food andnutrition for many poor people in developing countries. The determinants, effects andpolicy implication of the dramatic rises in the world food prices deserves to be studied asa results of political, economic instability and social unrest in both poor and developednations is causing. The food prices went up at the same time fuel prices went up

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International Journal of EmergingMarketsVol. 6 No. 3, 2011pp. 254-275q Emerald Group Publishing Limited1746-8809DOI 10.1108/17468801111144076

(see Figure 1). In 2008, the real international prices of food commodities reached levelsthat had not been seen since the end of the 1970s. For the first time since 1981 the FAOreal food price index surpassed the 150 mark, the result of a sharp increase in 2006-07was followed by steeper increment in the first part of 2008 (OECD-FAO, 2008). At thepeak of food price increase in the second quarter of 2008, world prices of wheat and maizewere three times higher than at the beginning of 2003, whereas the price of rice wasfive times higher. Dairy products, meat, palm oil, and cassava also experienced sharpprice hikes. The prices of butter and milk, for example, tripled between 2003 and 2008,and the prices of beef and poultry doubled.

The scale of food crisis is also unparalleled, affecting in 2007, about countries 47 ofwhich 27 are in Africa, ten in Asia and the remaining ten in other parts of the world. Thekey affected areas are Asia, sub-Saharan Africa and Central America (IFPRI/CGIAR,2008). The price rises affected parts of Africa particularly severely with Burkina Faso(Mathieu, 2008), Cameroon, Senegal, Mauritania, Cote d’Ivoire (BBC News, 2008d)Egypt (BBC News, 2008c) and Morocco with protests and riots in late 2007 and early2008 over the unavailability of basic food staples. Other countries which have seen foodriots or are facing related unrest are: Mexico, Bolivia, Yemen, Uzbekistan, Bangladesh(The Philadelphia Trumpet, April 11, 2008), Pakistan (The Independent, 2008), SriLanka (World Socialist Web Site, 2008) and South Africa (The Times, 2008).

This study builds on the work of Sachs and Santarius (2007) and relatedbackground papers. The paper is relevant to policymakers, investors, speculators,farmers, and millions of poor people with the aims of identifying specifically the shortand long-term causes of rising food prices, examines who benefits or bears the pains

Figure 1.Food and oil price indices,

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Notes: Commodity Food Price Index, 2005 = 100, includes cereal, vegetable oils, meat, seafood, sugar,bananas, and oranges; price indices crude oil (petroleum); price index, 2005 = 100, simple average ofthree spot prices; Dated Brent, West Texas Intermediate, and the Dubai FatehSource: IMF Commodity Price Data, available at from www.imf.org/external/np/res/commod/index.asp

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of food prices increase, policy responses of various governments and the implication oftheir interventions.

2. Literature reviewThis section presents the major distinction between the current global food priceincreases and the other recorded food price increases as well as showing the trends ofin food prices across the globe.

2.1 Distinction between the current global food prices increases and other soaring foodpriceBefore the 2006-2008 price hikes, the real price of food had been falling since the 1950s.The “green revolution” that began in the mid-1960s saw developing world farmersplanting improved varieties of cereals, prompting extraordinary increases in yields,falling food prices and reductions in poverty. But since the early 2000s to date, foodprices have risen. The international prices of basic food commodities have increasedrapidly in 2006-2008. The current situation is distinctive because the affected foods arenot just selected few but nearly all major food and feed commodities that are seeing areconcurrence rise up in the world prices’ (FAO, 2008g). Real prices are higher than theyhave been since the 1974 price spike. Food price index rose by 9 percent in 2006 and by23 percent to 37 percent by the end of December 2007 (IFAD, 2008a; FAO, 2008e). ButHanrahan (2008) opine that in 2007 food price index rose by 36 percent over its 2006level. In March 2008, food price index was 80 points higher than in March 2007, a rise of57 percent (Crop Prospects and Food Situation, 2008). According to International FoodPolicy Research Institute (IFPRI) reports, since 2000, a year of low food prices, the priceof wheat in international markets has more than tripled, corn prices have doubled, andthe price of rice rose to unprecedented levels in March 2008 (IFPRI, 2008b). A tonne ofwheat for instance moved from $105 in January 2000 to $167 in January 2006 and to$481in March 2008 (about 30 percent higher than 2007) (IMF, 2008). As of March 2008maize price was also 130 percent higher than 2007 period. Rice prices after recordingrelatively moderate increases of 9 percent in 2006 and 17 percent in 2007, gained 10percent in February 2008 and another 10 percent in March (FAO, 2008d).

2.2 A review of the trends in the world food pricesFood commodity prices were found to be relatively stable after reaching lows in 2000and 2001 (Donald, 2008). Between 1961 and 2002 the real international prices of meat,dairy and horticulture products were also found as roughly constant. On the otherhand real prices of cereals, oil crops, tropical beverages, agricultural raw materials andsugar were roughly between 50 percent (raw materials) and 100 percent (oil crops)higher in the 1960s up to 2002 (FAO, 2008f). This means that price declines wereconcentrated heavily in basic staple foods, tropical beverages, agricultural rawmaterials and sugar. The significant erosion in these prices implies a major shift inrelative prices relative to meat, dairy and horticulture which unlike some staples arehigher-valued commodities. Only countries experiencing rapid technical changeremain competitive in cereals, oilseeds, tropical beverages and sugar. Another majorfeature of the period was high volatility in prices, with staggered sharp peaks of allprices (other than dairy and horticulture). In China, where grain prices are 30 percentabove those of a year ago, the National Bureau of Statistics reports that retail food

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prices in March were 7.9 percent higher than in March 2003. The price of vegetable oilis up by 26 percent, meat by 15 percent, and eggs by 19 percent.

However, beginning from 2006 to early 2008, the prices of some of the most basicinternational food commodities increased dramatically on international market foralmost every country. In a World Bank policy research working paper published onJuly 2008, an increase in food commodities prices was led by grains with sharp priceincreases in 2005 despite record crops worldwide.

Between the start of 2006 and 2008 the average world price for rice rose by217 percent, wheat by 136 percent, maize by 125 percent and soybeans by 107 percent.In late April 2008, rice prices hit 24 cents a pound (BBC News, 2008b). In some nations,milk and meat prices were more than doubled between 2006 and 2008, while soybeanshit a 34-year high price in December 2007 (Adams, 2007). The increase in grain priceswas followed by increases in fats and oil prices in mid-2006. A pound of ground chuckclimbed from $2.10 in 2007 to $2.48 (about 18 percent increases), Pork chops were up10 percent. Bread and potatoes were up 4 and 3 percent, respectively, price of milk hasincreased by 2 percent, eggs by 29 percent and vegetable oil has rose by 23 percent in2007 compared to 2008 (www.earth-policy.org/Updates/Update39_data.htm).

In December 2008, the global economic slowdown and speculation of decreaseddemand for commodities worldwide brought about sharp decreases in the price of staplecrops from their earlier highs. Corn prices on the Chicago Board of Trade dropped fromUS $7.99 per bushel in June to US $3.74 per bushel in mid-December; wheat and riceprices experienced similar decreases (Bloomberg, 2008). The UN’s Food and AgricultureOrganization, however, warned against “a false sense of security”, noting that the creditcrisis could cause farmers to reduce plantings (Financial Time, 2008).

With income growth in emerging economies, globalization and urbanization,the demand for agricultural products will continue to grow and shift toward high-valuecommodities. Partly driven by the expansion of biofuels and demand for feed, strongglobal cereal consumption is likely to continue. On the supply side, global productionresponse has been slow. The overall productivity growth in agriculture is simply toolow to cope with the increase in demand. Between 2000 and 2006, cereal supply grewby a mere 8 percent and stocks declined to low levels. The production response to highprices is mainly impaired by land and water constraints, as well as underinvestment inagricultural innovation. Increased production – driven by higher yields, not by areaexpansion – and improved productivity require substantial investments in researchand development (R&D), services and input supply systems. Climate change and rapidpopulation growth further increase the need for more agricultural science andtechnology investment.

3. Method of data collection and analysisIn effort to achieve the above stated objectives, the study gathered data food pricesfrom different countries. Information was also collected on policy interventionprograms on against hike in food prices. The sources mainly secondary in natureincluded government policy and development plan documents, government documentson macro economic performance, Food and Agriculture Organization statisticaldata base, International Monetary Fund (IMF) data based, World Bank (WB),International Fund for Agricultural Development (IFAD), African Union (AU), UnitedNations Children’s Fund (UNICEF), European Union (EU) and published research

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materials from IFPRI, Institute of Development Studies (University of Sussex).Other sources include academic journals. The data were subsequently analyzed usinggraphs, tables and narrative methods.

4. Results and discussion of research findingsThis section presents the major findings on rising global food prices, policy responsesand the implications on the emerging market.

4.1 The impacts of rising food prices: who bears the burdens or gains?The immediate fiscal impacts of rising food prices also vary across countries. High foodprices affect households differently, depending on their production and consumptionpatterns and what commodities are produced and consumed, the share of householdincome dedicated to food, and the degree to which world prices are transmitted to localmarkets. High food prices can also affect different groups within householdsdifferently (IFPRI, 2008a). Research has shown that the rising food price has morecrisis effects on female consumers and producers than their male counterparts.Food-price increases are having serious consequences for the purchasing power of thepoor (KFSSG/WFP, 2008). In Asia for instance, food expenditures comprise a largeshare of the poor’s total expenditures (60 percent). Their expenditures on food andenergy comprise over 75 percent of total consumption expenditures. Millions of peoplein this continent as many as 1.2 billion are vulnerable to soaring food grain prices(Asian Development Bank, 2008). Affected groups include the rural landless,pastoralists, small-scale farmers and the urban poor (ALNAP, 2008). In Africa, poorpeople in developing countries spend between 50 and 80 percent of their income onfood and poor rural households tend to be net consumers of food. Studies have shownthat despite the various causes of food crises, the hardships that individuals andcommunities face have striking similarities across disparate groups and settings.These according to ALNAP (2008) include: inability to afford food, and related lack ofadequate caloric intake; distress sales of productive assets; migration of householdmembers in search of work and reduction in household spending on healthcare,education and other necessities.

Hike in food prices resulting to malnutrition and stunting in preschool childrendirectly affects the ability of the children to learn in school and thus their long-termability to earn income as adults (IFPRI/CGIAR, 2008). A 1 percent increase in the priceof food in low-income countries typically leads to a 0.75 percent decrease in foodspending (von Braun, 2008c). At the household level, the poor spend about 50 to 60percent of their overall expenditures on food. About 160 million people continue to livein extreme poverty, on less than 50 cents a day. In times of hardship, the poorest suffersilently, but the middle class typically has the ability to organize, protest and lobby.

At the microeconomic level, whether a household will benefit or lose from high foodprices depends on whether the household is a net seller or buyer of food. While somehouseholds benefit from higher prices, others are hurt by them, depending on whetherthey are net producers or consumers of the food staple and the extent to which wagesadjust to higher food price inflation. Surging and volatile food prices most dramaticallyaffect those who can afford it the least (the poor and food insecure). The few poorhouseholds that are net sellers of food could benefit from higher prices, but those thatare net buyers (the large majority of the world’s poor) are at risk. Contrary to the belief

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that increased food prices is benefitting farmers, smallholder farmers are sufferingfrom high costs and inflation making it impossible to produce. The farmers get thelowest price for their produce in the season at harvest and thereafter, the producepasses into the hands of traders and corporate houses that manipulate high prices forcommodities in the futures markets. Traders are seeking to maximize profit byhoarding stocks because they know the low production will yield higher prices.

In general, poor people, especially in urban areas, suffer due to rising food prices.At the household level, surging and volatile food prices hit the poor. As prices continueto rise, the poor keeps on experiencing a worsening dietary quality and micronutrientintake. High food prices erode households’ purchasing power of not only foods butother goods and services essential for the health and welfare of household members,including heating, lighting, water, sanitation, education, and health care. Most farmers,especially the small and poor, do not benefit from the higher prices. Their fertilizer andinput costs increased significantly.

The results of FAO’s empirical study of the effects of food price increases on someselected countries have shown that, female-headed households suffer more from risingfood prices in terms of declining food consumption than male-headed households.Among rural households, female-headed households face considerably higher welfarelosses in all countries according to FAO 2008 report (FAO, 2008a). The explanationfor the overall differential impact of price rises on female- and male-headed householdsis that at comparable income levels, female-headed households tend to spend a largerproportion of income on food than male-headed households, and thus they arehit harder by the impact of high food prices on consumption (FAO, 2008a).The female-headed households tend to benefit less from potential gains from staplefood crop production because they face a variety of gender-specific obstacles that limittheir ability to produce food. Women often end up being the shock absorbers ofhousehold food security, reducing their own consumption to leave more food for otherhousehold members. In another study in Bangladesh, almost 60 percent of women outof the total sampled households’ studies were found to skip meals more often than menfor the survival of members of their households (Asian Development Bank, 2001). Withthe increase in food prices they are therefore much affected. Female-headed householdsare often faced with the problem of having access to inputs and services, land andcredit in particular (Quisumbing and Pandolfelli, 2008).

4.2 Causes of food prices increaseThere are a number of complex factors that have contributed to the rise in food prices.While some of the factors are cyclical, some are structural, other are unique(IFPRI/CGIAR, 2008). The factors are based on fundamental changes in the globalmarketplace that economists’ heralds as “The end of cheap food,” in recognition of aconsensus that prices will not return to 2005 levels. In the horn of Africa for instance, thefood price hike of 1980s and 1990s were characterized by government hostility tothe afflicted population, or by bad relationships between the national government andthe international community (Devereux, 2000). Recent studies have now linked foodprice crisis to both short and long-term problems (De La Torre Ugarte and Sophia, 2008).The systemic causes for the worldwide increases in food prices continue to be the subjectof debate. Initial causes of the late 2006 price spikes has been attributed to unseasonabledroughts in grain producing nations and rising oil prices. The gradual change in diet

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among newly prosperous populations is the most important factor underpinning the risein global food prices (von Braun, 2008c). Agricultural production has not kept up withthe rising demand of cereals for food consumption, cattle feeding and biofuel production(Wahlberg, 2008). Increase in energy prices and the related increases in prices of fertilizerand chemicals which are either produced from energy or are heavy users of energy intheir production process leads to increase the cost of food production and higher foodprices. Other factors found as responsible for high food prices include income growth;climate change, high energy prices, globalization and urbanization (von Braun, 2007d, e),under-investment in agricultural science, market speculation, export bans, drought andclimate variability (Catholic Relief Service Report, 2008). Temperature increases of morethan 38C may cause prices to increase by up to 40 percent (Easterling et al., 2007).According to IFAD (2008b), world cereal production fell by 3.6 percent in 2005 and6.9 percent in 2006 due to bad weather in major producing countries. Another majorforce altering the food equation is shifting rural-urban populations and the resultingimpact on spending and consumer preferences.

Further causes observed in this study were the increasing use of biofuels indeveloped countries (Kazinform, 2008). In addition, since all global commodity marketsare denominated in dollars, the declining dollars makes all commodities cheaper to therest of the world, driving up demand and prices (Hanke and Ransom, 2008). At thecountry level, these global food price changes have been transmitted to differentdegrees owing to factors such as transportation costs, domestic policies and marketstructure (von Braun, 2008a).

4.2.1 High food prices and climate change. An increase in food prices are tied to ahost of resource scarcity issues (Center on International Cooperation, 2007) notablyclimate change and water depletion. According to Intergovernmental Panel on ClimateChange (IPCC) fourth assessment report, climate change alone is estimated to increasethe number of undernourished people to between 40 and 170 million. Climate change informs of droughts, floods, and freezing weather in some countries have led to reductionin agricultural output. In 2005, extreme weather incidents in major food-producingcountries, possibly related to more general climatic shifts, caused world cerealproduction to fall by 2.1 percent in 2006 with increase in food emergencies cases(FAO, 2008b). For example, in Lesotho and Swaziland, multiple years of droughtscaused “exceptional shortfall in aggregate food production/supplies” (FAO, 2008c).Droughts in Australia and Eastern Europe and poor weather in Canada, WesternEurope and Ukraine in 2007 led a reduction in available food supplies (Hanrahan,2008). Also in Nigeria and Ghana, the decline of coarse grain production led to tightfood supply that affected rising food prices in the two countries as well as theneighboring countries like Benin, Burkina Faso, Niger and Togo. In China’s harshestice rains, snow, and freezing weather since 1951 is leading to loss of millions ofhectares of vegetable and oil crops in that countries. In Mongolia, the harsh winter ishaving a negative impact on livestock production (Young and Mittal, 2008).

4.2.2 Increase in the production of biofuel versus food crisis. Cars, not people, usedmost of the increase in world grain consumption in 2006 (Brown, 2008). The grainrequired to fill a 25-gallon gas tank with ethanol will feed one person for a year.Brazil has been producing ethanol from sugar cane for more than 30 years and thecountry now makes up to more than 40 percent of its auto fuel supply with ethanol.As a result of this alternative of biofuels in place of petroleum that is very costly,

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USA has mandated an increase from 5 to 10 percent of its auto fuel supply coming fromethanol produced mainly from corn (maize) by 2011. Europe has embarked on aprogram of promoting biodiesel as a renewable substitute for diesel using temperateoilseeds such as rape, canola and soybeans (Commonwealth of Australia, 2008).

The 2008 World Development Report “Agriculture for Development” provides acompelling example of the food-for-fuel debate: over 240 kilograms (or 528 pounds) ofcorn which is enough to feed one person for a whole year is required to produce the26 gallons, or 100 liters of ethanol needed to fill the gas tank of a modern sports utilityvehicle. With this, a World Bank policy research working paper therefore concludedthat biofuels have raised food prices between 70 to 75 percent (Donald, 2008). But the“month-by-month” five year analysis disputed that increases in global grainconsumption and droughts were responsible for significant price increases with onlybiofuels having only a marginal impact. Demand for fuel in rich countries is nowcompeting against demand for food in poor countries.

There are serious issues of how much net energy savings there really are from usingcorn produced with high fossil fuel inputs (petrol, fertilizers, pesticides and otherpetroleum-based inputs), processed into ethanol with a process that uses high amountsof energy and at high cost. Further there are significant differences in energy yields fromdifferent feed stocks. For example, one hectare of sugar cane yields 6,000 litres of ethanolcompared to 4,500 litres of biodiesel from palm oil, 3,000 litres of ethanol from maize, and1,000 litres of ethanol from barley (Worldwatch Institute, 2006). Equally problematic isthe agriculture-led push toward biofuels where corn and sugarcane are being used tocreate ethanol, and oil crops are being used to create biodiesel. The World Bank lists theeffect of biofuels as an important contributor to higher food prices. Biofuels have raisedfood prices between 70 to 75 percent (The World Bank, 2008). Higher oil prices and aweak dollar explain 25-30 percent of total price rise (Donald, 2008).

Rising demand for biofuels has increased pressure on the prices of the commoditiesused to make them. In addition, high prices for corn and canola (rapeseed) because ofthe demand for biofuels, has encouraged producers in the USA and EU to grow thesecrops at the expense wheat and soybeans. This has reduced the supply and driven upthe price of a wide variety of commodities not directly used for biofuels. However, otherstudies, such as the World Bank contends that oil prices and a weak dollar explain25-30 percent of total price rise in January 2002 until June 2008 (Donald, 2008). The risein food prices is due to poor agricultural policies and changing eating habits indeveloping nations and not biofuels as some critics claim (Gernot, 2008).

4.2.3 Increase in cost of food production versus food crisis. Oil is a significant directcost to farmers who use it to run farm machinery like tractors and harvesters. Highenergy prices have made agricultural production more expensive by raising the cost ofcultivation, inputs especially fertilizers and irrigation and transportation of inputs andoutputs (von Braun, 2008b). This increase in the costs of production has impacted oncommodity prices. The rapid rise in petroleum prices exerted an upwards pressure onfood prices as fertilizer prices nearly tripled and transport costs doubled since 2006.Increased demand from the biofuels sector also tended to push prices upwards.In addition, the heightened public interest in disease, food safety and animal welfareissues are also leading to increased production costs. Disease outbreaks such as footand mouth disease, BSE (mad cow disease), swine fever and avian influenza haveresulted in expensive, large-scale culls.

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4.2.4 Effects of access to key productive assets. Access to key productive assets,especially land, is another factor that affects the extent to which households arepositively or negatively affected by higher food prices. Study has shown that, across allincome groups, landless households are on average worse affected by high food prices.In an overall surplus rice producer such as Vietnam, where access to land is fairlyegalitarian and where there have been impressive gains in smallholder productivity, thepoorer rural households’ tend to gain from rising prices. By contrast, in Bangladesh,where land distribution is not as equitable and rural households have more limitedaccess to land, the impact of rising food prices is negative for most households. Higherincomes in emerging markets like China and India was also observed to have resulted instrong demand for food commodities, meat and processed foods thereby leading tohigher food prices in world markets (FAO, 2008a).

4.3 Empirical evidence of the effects of food prices increaseRising food prices are having impacts across the world especially among poor peoplein the low-income developing countries. There is a clear evidence of the availability offood in different markets both local markets in different countries and internationalmarket, but millions are without purchasing power. As food prices continue to risearound the world, poor households which were already struggling to afford basic foodsare being pushed deeper into poverty, while many newly vulnerable groups areemerging particularly in urban areas (World Vision Food Crisis Global Report, 2008).Lack of access to food influences food intake, consequently impacting the health andnutritional status of households. Of the world’s undernourished children, 80 percentlive in 20 countries; nine of these are in sub-Saharan Africa. Malnutrition and death arenot new consequences of high food prices in the free market. High food prices leavemany without the means to satisfy other essential needs (health, housing, schools).Estimates suggest that up to 105 million people could fall below the $1/day poverty linedue to rising food prices alone. Almost seven years of progress in poverty reductionappear to have been lost in many countries. It could very well be that the attainment ofall Millennium Development Goals is compromised by the food crisis.

The food price problem has become a security issue in many countries threateningrecent gains in overcoming poverty and malnutrition and is likely to persist over themedium term (Zoellick, 2008). The poor are suffering daily from the impact of high foodprices especially in urban areas and in low income countries (Zoellick, 2008). Theimpact of a price increase is country and crop specific. For every 1 percent increase inthe price of food, food consumption expenditure in developing countries decreases by0.75 percent (Regmi et al., 2001).

The most alarming, immediate consequence is the incidence of social and politicalfood-related unrest in a number of countries (High-Level Task Force on the GlobalFood Crisis, 2008). Studies have shown different cases of mass protests in 2007 to 2008against rising prices in more than 30 countries (including Burkina Faso, Cameroon,Egypt, Guinea, Haiti, Mauritania, Mexico, Morocco, Nepal, Senegal, Uzbekistan andYemen) (von Braun, 2008b).

The sharp rise in food prices, especially since mid-2007, has been a majorcontributor to the higher rates of headline inflation now being experienced acrossworld: it is estimated that rising food prices contributed some 44 percent to globalinflation over the 12 months through end 2007, and as much as 67.5 percent in Asia.

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While the extent of global price transmission varies, in year 2007 there have beensignificant surges in domestic food price inflation in countries such as Sri Lanka(34 percent), Costa Rica (21 percent), Kenya (31.5 percent) and Egypt (13.5 percent).In many countries and regions, food price inflation is higher than aggregate inflationand contributing to underlying inflationary pressures. In Europe and Central Asia forinstance, the overall inflation in 2007 averaged 10 percent, food inflation 15 percent andbread and cereals inflation 23 percent. This compares to 6 percent overall inflation and6.4 percent food inflation in 2006 (PREM, ARD and DEC, 2008).

Using a sample of household data for eight low income countries, a recent paper(Ivanic, 2008) analyzes the impacts of higher prices of key staple foods on poverty,taking into account direct impacts from changes in commodity prices, and impactsthrough changes in wage rates for unskilled labor. The results show that, in six of theeight countries considered, price increases for staple foods were associated with asignificant rise in poverty. Averaging across these eight countries, the increase in foodprices between 2005 and 2007 is estimated to have increased poverty by 3 percentagepoints. A recent assessment in Indonesia shows that over three-fourths of the poor arenet rice buyers, and an increase in the relative rice price by 10 percent will result in anadditional two million poor people (or 1 percent of the population). Analysis using analternative price index weighted according to the consumption patterns of the poor inLatin America suggests that in most countries of the region, the effective inflation ratefaced by the poor is higher than the official rate by 3 percentage points (The WorldBank, 2008).

Another study by the World Food Program (WFP) shows that the most vulnerablepopulations are running out of coping strategies. People living on less than US$2 a day havecut out health and education and sold or eaten their livestock. Those living on less than US$1a day have cut out protein and vegetables from their diet. Those living on less than US$0.50a day have cut out whole meals, and sometimes go days without meals (Josette, 2008).

A recent study by Aksoy and Isik-Dikmelik (2008) illustrates the extent in which higherfood prices affect urban and rural poor consumers by classifying them into net buyers andsellers of food. The study concludes that even though there are more poor net buyers offood than net sellers, half of these net buyers are only marginal buyers of food;consequently the increase in food prices has in the short-term only a small impact on theirwelfare. The same study also found that in eight of the nine countries examined, theincome of net buyers was higher than net sellers of food. This means higher food priceshad a positive redistributive effect, lowering poverty. In any case, if the income of the netsellers and net buyers are interdependent, higher food prices should also create amedium-term benefit in generating higher farm and non-farm demand for labor.

In another study, Polaski (2008) reports that rural labor markets played a key role intransferring the effects of high agricultural prices. For the case of India, the studydocuments that higher world prices for rice and wheat have a positive impact in therural economy of India. Similarly, in the case of China, the reduction in rural povertywas attributed to the increase in agricultural prices.

4.4 Government intervention and the implications of such interventionsSpecific policies are needed to deal with the changing causes and consequences of highfood prices, to help the most vulnerable people in the short-term, while working tostabilize food prices by increasing agricultural production in the long-term.

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Two interrelated categories of response have been considered in this study. These are:market-level policy responses through trade and market management; and directsupport to consumers and vulnerable groups at the micro-level. High-Level Task Forceon the Global Food Crisis (2008) has therefore developed a detailed set of policyprescriptions in the Comprehensive Framework for Action (CFA). The CFA highlightstwo major objectives which are meeting immediate needs, and building longer-termresilience with related outcomes and actions (High-Level Task Force on the GlobalFood Crisis, 2008).

During the global food crises of the early 1970s, the United Nations rose to theoccasion by promptly establishing the World Food Council of 1974 to ensure thatassistance reached the needy nations (Nkire, 2008). The world had witnessed poor cropyield due to adverse weather conditions in the then Soviet Union, South East Asia,China and parts of Africa. Today, national governments, the international communityis now identifying how best to address all aspects of the global food crisis and isaiming to prioritize action over process and operate in a strategic and consistent way.It is intended to make the best use of existing opportunities to highlight the urgency ofthis issue, agree on a common vision and galvanize a coherent, system-wide response.The aim is that through global coordinated action we can alleviate the emergingchallenges and address the more structural and endemic issues that have put us in thisposition in the first place. In general, using ffood price subsidies might be wasteful,as wealthier consumers would also benefit.

At regional level, high prices have prompted a number of policy responses to ensurefood supplies at more affordable domestic prices (FAO, 2008f, g). Analysis of responsesto the soaring food prices from a sample of 77 countries surveyed in early 2008 byregion shows that, in Asia and in the Middle East and North Africa, both trade andmarket management policies were widely used. In Asia, one still finds that openmarket operations using publicly held food stocks are used. Examples are open marketoperations by the Food Corporation of India, BULOG’s operations in Indonesia and theRice Marketing Board operations in Vietnam. In Africa and in Latin America and theCaribbean, fewer interventionist policies were used, with a significant proportion ofsampled countries not having intervened at all. Given the high costs associated withopen market operations and their unintended effects, the preferred policy has been torely on trade for price stabilization (FAO, 2008g and Appendix for detail).

Further findings on government policy on the rising food price at countries levelrevealed that, as at April 2008, more than 15 countries including eight major producershad imposed export restrictions on agricultural commodities. Countries such asArgentina, Bolivia, Cambodia, China, Egypt, Ethiopia, India, Indonesia, Kazakhstan,Mexico, Pakistan, Russia, Senegal, Tanzania, Thailand, Ukraine, Venezuela andVietnam are among those that have imposed restrictions on exports or banned ofcertain agricultural commodities. For instance, In April 2008, the Brazilian governmentannounced a temporary ban on the export of rice. The ban is intended to protectdomestic consumers (Olle, 2008; The Real News, 2008). In East Africa, Zambia, despiteavailable export surpluses of corn, has continued an export ban in place for much of theprevious marketing years. China has also banned rice and maize exports, while Indiahas banned exports of non-basmati rice and pulses, and raised the minimum exportprice of basmati rice (Navhind Times, 2008). Mexico has announced a number offood production support measures and announced that it will reduce fertilizer prices

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by a third. El Salvador, Guatemala, Nicaragua, and Honduras have jointly agreed tocancel the import duty on wheat flour for all of 2008. Argentina has raised export taxeson soybeans, maize, wheat and beefs in order to increase domestic supplies and,to partially offset the negative effect of these taxes on farmers’ incomes, is consideringa 20 percent reduction in the price of fertilizers. Ethiopia and Tanzania have bannedexports of major cereals. Other nations, including net food-importing developingcountries have reduced import barriers. Brazil has removed import tariffs on 1 millionMTs of non-Mercosur wheat until June 30, 2008. Peru has revoked its tariff on grainimports and has announced a program to distribute food to the poorest members of itspopulation. Morocco has cut tariffs on wheat imports from 130 to 2.5 percent; Nigeriahas slashed duties on rice imports from 100 to 2.7 percent; Peru has removed importtaxes on wheat and maize. Senegal has waived duties on cereal imports. Ecuador hasincreased the subsidy on wheat flour. Bolivia has authorized tariff-free imports of rice,wheat, and wheat products, corn soybean oil and meat until the end of May, 2008(High-Level Task Force on the Global Food Crisis, 2008).

Some of the policy responses (such as export bans) may reduce risks of foodshortages in the short-term, but they are likely to backfire by making the internationalmarket smaller and more volatile. Price controls reduce farmers’ incentives to producemore food and divert resources towards helping people who do not really need it.Export restrictions and import subsidies have harmful effects on import-dependenttrading partners and also give wrong incentives to farmers by reducing their potentialmarket size. Any long-term strategy to stabilize food prices will need to includeincreased agricultural production.

Many other countries are also taking ad hoc steps, such as export restrictions, foodstamps or vouchers, restricted cash transfers, school feeding programmes, restrictionson stockholding by private traders, restrictions on inter-district movement of foods andopen market operations, such as selling public stocks of foods to reduce market pricesand price controls to minimize the effects of higher prices on their populations. Variouskinds of cash transfer programs are currently used in Brazil, China, Ethiopia, Egypt,Indonesia, Mexico, Mozambique, South Africa, Sri Lanka, and Tunisia. The use of cashtransfers intervention is appropriate where local food markets function well andimproving access to food is the objective. Vouchers become a parallel currency in foodand other goods’ markets. As such, they can have some of the positive effects ofunrestricted cash transfers in fostering local market development, but, due to theirrestrictive use, tend not to be used for investment. The schemes also tend to havehigher transaction costs than cash based measures.

Other countries, including Burkina Faso, Brazil, China, Kenya, Honduras, Mexicoand Mozambique, make effective use of school feeding programs to improve the foodintake of school-age children and their families. But on the other side, school-basedprograms do not typically address child malnutrition at its most critical point whenchildren are in their infancy. South Africa is expanding allocations to its schoolnutrition program to keep pace with the rate of food inflation. The use of school feedingprogrammes sometime miss the target populations, such as poor households withoutchildren, or whose children do not a attend school (FAO, 2008f).

To boost agricultural productivity and rescue the scourge of rising food prices,China, Pakistan, Malawi, Zambia, Mexico and Argentina have introduced agriculturalproduction support programs, including input subsidies. Bangladesh, Thailand,

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Malaysia, Senegal, South Africa, Zimbabwe, Ethiopia, Peru and Ecuador haveprovided subsidized commodities or developed safety net programs for vulnerablegroups, including raising local wages for public sector workers, while countries likePhilippines, Liberia, Cote d’Ivoire, Tanzania, El Salvador, Guatemala, Nicaragua,Honduras, Brazil, Peru and Bolivia have all reduced or eliminated price importrestrictions on certain agricultural goods. For instance, South Africa, which has anextensive social safety net program, has announced an increase in disability and oldage payments, and increased social grants (cash grants) to poor families. Ethiopia,which also has a social safety net program, has announced wheat subsidies of $38million, and fuel subsidies of $366 million. Ethiopia is increasing the wheat ration itdistributes to 800,000 low-income urban residents. Ethiopia also has increased the cashwage rate of a large cash-for-work program by 33 percent. Ethiopia’s government hasalso announced it will increase imports of sugar, wheat, and cooking oil. Tanzania hasauthorized duty-free imports of 300,000 metric tons of corn, and banned exports ofagricultural commodities (Hanrahan, 2008).

Government policies to encourage the use of biofuels include production/consumption subsidies and mandatory blending requirements. The policies, togetherwith an increase in demand for alternative fuels as oil prices have risen therebycausing biofuel production to rise rapidly. The EU and the US provide the greatestsupport for biofuel production. However, Brazil and China are also major ethanolproducers, with strong government policy support, albeit with less governmentfunding. Malaysia and Indonesia, the dominant palm oil producers, are also rapidlyincreasing production of palm oil for biodiesel.

In Cameroon (the world’s fourth largest cocoa producer), part of the governmentresponse to the protests on food price hike was a reduction in import taxes on foodsincluding rice, flour, and fish. The government reached an agreement with retailers bywhich prices would be lowered in exchange for the reduced import taxes. As of lateApril 2008, however, reports suggested that prices had not eased and in some caseshad even increased (IRIN, 2008). China has banned rice and maize exports and Indiahas banned exports of rice and pulses. Argentina has raised export taxes on soybeans,maize, wheat, and beef, and Ethiopia and Tanzania have banned exports of majorcereals. Other countries such as Kazakhstan, Pakistan, Russia, Vietnam, Zambia,Argentina, Cambodia, China, Egypt, Ethiopia, India, Nigeria in the recent past havealso banned exportation of some selected products were imposed for example by: thesesteps can add up to policy failures. Policy responses such as export bans or high exporttariffs may reduce risks of food shortages in the short-term for the relevant country,but they are likely to backfire by making the international market smaller and morevolatile. Export restrictions have harmful effects on import-dependent tradingpartners. For example, export restrictions on rice in India affect Bangladeshiconsumers adversely and also dampen the incentives for rice farmers in India to investin agriculture, which is a long-term driver of growth. In addition, export bans stimulatethe formation of cartels, undermine trust in trade, and encourage protectionism. At thecountry level, price controls can also backfire by reducing farmers’ incentives toproduce more food and diverting resources away from those who need them most.

In addition, various kinds of cash transfer programs are currently used in Brazil,China, Ethiopia, Egypt, Indonesia, Mexico, Mozambique, South Africa, Sri Lanka, andTunisia. Several of these countries are adjusting current programs in response to the

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rise in food prices. For example, in Ethiopia, where food price inflation in February2008 was 23 percent (year on year), the Government has raised the cash wage rate ofthe largest cash-for-work program by 33 percent (Robinson, 2008).

Other countries have contributed to the expansion of global food demand. Some netfood-importing developing countries, for example, have reduced import barriers inprinciple a welcome move toward more open trade but in practice a factor in theupward pressure on prices. The increases in food prices now have a dominant role inincreasing inflation in many countries. It would be inappropriate to address thesespecific inflation causes with general macroeconomic instruments such as monetaryand interest rate policies, which have the potential to trigger a general slowdown andmake the economic situation even worse. But the restrictive agricultural trade policiesadopted by several developing countries also undermine the benefits of globalintegration, adding to the distortions already created by rich countries’ longstandingtrade policies (IFPRI, 2008a).

France, Germany, the UK and the USA governments have supported biofuels withtax breaks, mandated use and subsidies. These policies have the unintendedconsequence of diverting resources from food production and leading to surging foodprices and the potential destruction of natural habitats (Andrew, 2007).

A number of countries including Argentina, China, Benin, Malaysia, Senegal,Egypt, Mexico, Morocco, and Russia, have responded by adopting price controls onfood to limit the prices farmers receive for their goods. But this will make the situationworse, especially for importing countries. Price controls could remove incentives forfarm-ers to produce more. But if the price controls are explicitly introduced as atemporary measure and are widely felt to be justifiable in terms of a higher social goal.In such cases, the risks of entrenchment will be minimized, as observed in recentinterventions to limit price increases for staples during Ramadan in Morocco.

Other measure that has been used at meeting hunger needs of vulnerable peoplethroughout the world is the United Nation WFP. The WFP is one of the largestpurchasers of food in the developing world to assist the poor having neither access norpurchasing power to food. WFP is the world’s largest food aid provider. In 2007, theWFP provided $2.7 billion of food aid to an estimated 70 million people in 80 countries.The USA contributed 44 percent of this amount or $1.2 billion in 2007. This percentagehas been the USA’ average annual contribution to the WFP since 1999. Other majordonors to the WFP in 2007 included the European Union (the EU Commission andindividual EU member countries), $586 million; Canada, $161 million; and Japan,$118 million. For example, during the recent floods in Mozambique, there was plenty offood on local markets, but the food could not reach the victims and they could notafford to buy it. WFP thus purchased 80 percent of the food for the victims fromMozambican farmers, creating a win-win solution (WFP, 2008).

A number of countries and international organization in order to ease the hardshipcreated by the global food prices increase have also granted financial assistance tosupport poor farmers to produce more food to meet up with demand at lower price. Forinstance, IFAD in 2008 made up to US$200 million available to support poor farmersboost food production in face of the global food crisis (IFAD, 2008b). On May 2, 2008US President announced an extra $770 million funding for international food aid (BBCNews, 2008a). The Government of Yemen in 2008 started to supply wheat in selectedmarkets at subsidized rates following a sharp rise in food prices. Also in the early 2008

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the Government of Pakistan announced that it was reviving a ration card system todistribute subsidized wheat. However, the implication of subsidizing food is thatgovernment can become entrenched thereby incurring high fiscal costs, and ifconsumer subsidies are met to keep producer prices low, subsidizing can createdisincentives for domestic food producers, and end up being counterproductive.

As a measure to lower food prices increase, countries such as Japan released up theirrice reserves onto the market in 2008 which brought rice price down significantly by14 percent in a single week in that country (Leo, 2008). On April 30, 2008 Thailandannounced the creation of the Organization of Rice Exporting Countries (OREC) withthe potential to develop a price-fixing cartel for rice (BBC News, 2008e). This is seen bysome as an action to capitalize on the crisis.

In June 2008 the FAO hosted a High-Level Conference on World Food Security, inwhich $1.2 billion in food aid was committed for the 75 million people in 60 countrieshardest hit by rising food prices (BBC News, 2008e).

As a measure to encourage food production and reduction in food prices, the USgovernment pays farmers to “idle their cropland” under a conservation program. Thispolicy reached a peak of 36,800,000 acres (149,000 km2) idled in 2007, that is 8 percentof cropland in USA, representing a total area bigger than the state of New York(New York Times, 2008).

5. Conclusion and recommendationsThe effects of higher food prices radically differ across countries and population groups.The most recent food crisis that started from 2006 through mid-2008 had seriousimplications for food and nutrition security, macroeconomic stability, and politicalsecurity in virtually all countries. The Food price increase is playing a dominant role inincreasing inflation, undermining livelihoods and food security in many countries. It hasstoked inflation and squeezed the fiscal space in many countries. It has also increased therisks of higher interest rates and a slowdown in economic growth across Africa, Asiaand Pacific regions. It is also threatening to undermine the global fight against poverty.The observed increase in food prices is not a temporary phenomenon, but likely topersist in the medium term. Food price hikes in different countries have been linked tohigher energy and fertilizer prices, a weak dollar and export bans, high oil prices, energysecurity and climate change leading to increase bio-fuel production and use. Manygovernments are already taking action by expanding targeted safety nets, such as cashtransfer programs to vulnerable groups, food-for-work programs, or emergency food aiddistribution, lowering of tariffs and other taxes on key staples in order to provide somerelief to consumers. In contrast, other countries have put in place food-rationing systems,price controls and export bans. Of all the interventions, exports ban is seen as leasthelpful, as pulling commodities off the market only exacerbates price increaseselsewhere. Import subsidies and export taxes or bans may reduce risks of shortages fornational consumers in the short-term, the policy may backfire by making theinternational market smaller and more volatile, distortion of incentives globally and invarious country and eventually lower food production.

Most of the interventions put in place by different countries are also consideredshort-term, they may therefore not be maintained if food crisis continued into themedium term (i.e. more than six-12 months). Without serious government intervention,this study observed that the benefits from price increases will continue to go to the

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large-scale commercial operations and agribusinesses rather than to small-scaleproducers in remote markets.

In determining the appropriate policy responses to rising food prices, the rootcauses of the price shock must be well-understood. The choice and design ofintervention policy against food price increases by any country must recognize that thetransaction costs associated with the different interventions varies significantlydepending upon the specific context in which they are to be implemented. Schemesappropriate for densely populated cities with well developed financial services may beinappropriate in sparsely populated rural areas.

In view of the ongoing food price increases and assessment of policy interventionsfrom various countries and there implications, there is the need for comprehensiveresponses by national governments with the support of the international community.Policy responses must go beyond food aid in the short-term to promote strongeragricultural growth. It would be a misguided policy to address the inflation withgeneral macroeconomic instruments. Rather, specific market and productivity-relatedpolicies are important to deal with the causes and consequences of high food prices.

To counteract dramatic increases in costs and demand, and bring food prices backto levels that the poor can afford, it is important to increase agricultural productivity.Boosting agriculture will potentially increase the supply of food to local markets,reduction in poor farmers’ need to purchase food and increase in farmer’s income fromthe sale of food at higher prices.

Any shorter-term agricultural interventions such as food aid must be linked tolonger-term national policy and practices in the areas of environment, production andmarkets. For instance, provision of chemical fertilizer and pesticides may generate arapid and significant impact but may be unsustainable in the long-term, as these inputsare costly to purchase and can damage the environment and soil quality. Carefullysubsidized programmes for seeds, fertilizers, irrigation, technologies and water shouldinvolve the private sector from the beginning.

Short term approaches, such as the distribution of food aid, are most appropriatewhere insufficient food supply is the main reason for reduced consumption. Longerterm measures will serve better through facilitating access to inputs, and/or improvingtechnologies and infrastructure to increase the production of food.

As a result of the role of biofuel in food price increases, it becomes imperative fordeveloped countries to facilitate flexible responses to price increases by eliminatingtrade barriers. Biofuel subsidies and excessive blending quotas may be revoked and afull-scale moratorium on biofuels from grains and oil seeds can be considered for somemonths. Local and domestic use must be the priority for biofuels development.Programmes that set aside agricultural resources, except in well-defined conservationareas can also be terminated.

Policy intervention is also required to ensure household food security by providingsafety nets such as cash vouchers and subsidized food, to help poor households affordadequate nutrition. Ensuring access to food for all also depends on a reliable grainreserve, both to protect against dramatic price increases when a harvest falls short, andto protect long-term investment in agriculture.

Where input markets are working well and inputs are available, but producers arecash-constrained, voucher systems may be best, as free distribution of inputs couldundermine input markets. But where input markets are not functioning well, starter

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packs could be distributed. In countries where local output markets are not wellintegrated with larger markets, interventions for increased production could result in asignificant fall in local food prices to the detriment of producers and wage laborers.

Governments must also pay much greater attention to the needs of women who aremuch affected by the soaring food price and overwhelmingly responsible for foodproduction worldwide (upwards of 70 percent) but own nearly none of the land, receivenearly none of the extension services and who are systematically discriminated againstby many official agricultural policies. There is also the need to enforce land reformmeasures that protect smallholders’ access to their land and that redistributes landwhere inequality is extreme.

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Asian Development Bank (2008), Soaring Food Prices Response to the Crisis, ADB, Manila.

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BBC News (2008e), “UN increases food aid by $1.2bn”, BBC News, June 4.

Brown, L. (2008), Starving for Fuel: How Ethanol Production Contributes to Global Hunger,Global Briefing.

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De La Torre Ugarte, D.G. and Sophia, M. (2008), “The global food crisis: creating an opportunityfor fairer and more sustainable food and agriculture systems worldwide”, EcoFair TradeDialogue Discussion Paper No. 11, October, available at: www.ecofairtrade.org/pics/de/EcoFair_Trade_Paper_No11_Ugarte__Murphy_1

Devereux, S. (2000), “Famine in Africa, issues in food security”, in Devereux, S. andMaxwell, S. (Eds), op cit, p. 143.

Donald, M. (2008), “A note on rising food crisis”, Policy Research Working Paper No. 4682, July,The World Bank, Washington, DC.

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FAO (2008a), “Assessment of the world food security and nutrition situation”, Report presentedby the Committee on World Food Security at the Thirty-fourth Session, Rome,October 14-17.

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FAO (2008c), “Declaration of the high-level conference on world food security: the challenges ofclimate change and bioenergy”, June 5, Rome.

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FAO (2008f), “National policy responses to high food prices”, FAO’s Economic and SocialDevelopment Department (ES), Policy Brief 1.

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Further reading

BBC News (2007), “Wheat breaks through $10 a bushel”, BBC News, December 17.

De La Torre Ugarte, D.G. (2007), “The contributions and challenges of supply management in anew institutional agricultural trade framework”, EcoFair Trade Dialogue, Heinrich Boll

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Foundation, Misereor, and Wuppertal Institute for Climate, Environment and Energy,Discussion Paper No. 6.

De La Torre Ugarte, D.G. and Dellachiesa, A. (2007), “Advancing the agricultural trade agenda:beyond subsidies”, The Georgetown International Environmental Law Review, Vol. 19,pp. 775-96.

Ezekwesili, O.K. (2008), “Rising food prices spell hunger for millions across Africa”, The WorldBank Report, available at: http://go.worldbank.org/BJL6ZL4X70

Overseas Development Institute (2007), “Rising food prices: a global crisis”, April 22, 2008.

Pretty, J. (2005), The Earthscan Reader in Sustainable Agriculture, Earthscan, London.

Appendix. Country policy responses to increase in food prices

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About the authorAbiodun Elijah Obayelu started his educational career in University of Ilorin, Kwara state,Nigeria where he obtained Bachelor degree in Agriculture (B. Agric) in 1995. In 2002, he obtainedMaster’s in Business Administration (MBA) and Master’s in Agricultural Economics fromUniversity of Ilorin and Ibadan, Nigeria, respectively. His fields of interest include: economictheory, agricultural policy, agricultural innovation and environmental issues. He was Universityof Ibadan Postgraduate School Teaching and Research Assistant between 2005-2007. He is at thefinal stage of his PhD degree program in Agricultural Economics of University of Ibadan. He haspublished extensively in both international and local journals and has to his credit over 12publications besides conference proceedings and chapters in at least three different books. He is amember of both international and local associations including the African AssociationAgricultural Economists (AAAE), African Financial and Economics Association (AFEA),Chinese Economics Society (CES), and African Economics Research Consortium networkmember. Abiodun Elijah Obayelu can be contacted at: [email protected]

To purchase reprints of this article please e-mail: [email protected] visit our web site for further details: www.emeraldinsight.com/reprints

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