Food Crisis – Opportunity or Tragedy? Presentation at Heinrich Boll Foundation North Amerca and Carnegie Trade, Equity and Developmoent Program October.

Food Crisis – Opportunity or Tragedy?

Presentation at Heinrich Boll Foundation North Amerca and Carnegie Trade, Equity and Developmoent ProgramOctober 9, 2008

I. Rapidly Changing Food Markets Create New Opportunities

High food prices provide an opportunity for producers

Nominal Grain prices 1998-2008

0

100

200

300

400

500

600

700

Nom

inal

Pric

e $U

S/to

n

Rice (a) Thai 5%brokens FOB BKKFob BKK

Wheat (b) CanadianNo1 Western Red FobThunder Bay

Corn (c) US No. 2Yellow Fob Gulf Ports

Food demand is changing

0

50

100

150

200

250

1981 1984 1987 1990 1993 1996 1999 2002

Kcal consum

ptio

n/capit

a/day (

1981=

100)

Developing Country Consumption

Meat

Horticulture

Cereals

Developing country exports

0

50

100

150

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350

1980 1990 2000 2004

Valu

e o

f export

s (1980=

100)

Cereals

HorticultureMeat

Supply chains are increasingly integrated…

• Supermarkets are rapidly dominating food sales worldwide

• Supermarket supply chains require high levels of coordination between producers, processors and marketing

•Supermarkets are also targeting the poor, selling cheap food and expanding to relatively small cities

•Foreign investors are often critical to knowledge transfer

010203040506070

China Indonesia Philippines Thailand

Share of supermarkets in total food sales

Annual growth rate in supermarket outlets

…but smallholder sourcing adds retail value

Increasing demand for environmental services from agriculture

Agriculture is also critical to climate change in developing countries

New technology is “democratizing” information access

Mobile technology lowers the hurdle for joining the networks

Many developing countries are closing the technology gap

Smaller businesses are able to gain benefits of scale in information access

II. Smallholder Sector and Empowering Value Chains

The Smallholder Sector – Why Care?

3/4 of the world’s poor live in rural areas Over 450 million farms are less than 2 has Almost 1/3 of world’s population depend on

smallholder farming Agricultural growth is at least twice as effective

in reducing poverty as non-agricultural growth For the majority of crops, smallholders are more

efficient producers Smallholder agriculture systems, particularly

the commercial aspects, are increasingly managed by women

Empowering Value Chains

Allow smallholders to seize new opportunities in agriculture by: Increase producer knowledge of market demand

and pricing Increase investments from farmers and the other

private sector Increase access of smallholders to knowledge,

finance, inputs and technology Reduce transactions costs of the producer-

processor/marketing interface Increase the share of value added captured by

primary producers

Empowering Value Chains: Examples

Ghana “grains partnership” between smallholders and private actors (input suppliers, produce buyers) to boost farm-level productivity and secure transactions (maize)

Sao Tome and Principe organic cocoa schemes contributed to more than doubling the income to smallholder farmers

Yulin watermelons (China): Direct marketing to wholesalers, supermarkets and retailers increased selling price from 1.2 to 3.0 yuan per kilogram and its farmed area from less than a ha to several thousand

NorminVeggies (Philippines): Supplies vegetables to fast food, supermarkets and processors. Monthly sales were 80 tons in 2006.

Konzum Supermarket (Croatia): Helped small farmer- preferred suppliers to use contracts as collateral with local banks to investment in greenhouses and irrigation

III. Why aren’t more empowering value chains emerging?

Investment climate limits quantity and quality of agricultural investment

Days to Start a Business

01020304050607080

EAP ECA LAC MENA OECD SA SSA

Days for Export Process

05

10152025303540

EAP ECA LAC MENA OECD SA SSA

•Poor business climate attracts “extractive” investors and limits development of modern marketing systems•Particular problem for countries with small internal markets•Also applies to certification!

Marketing Systems are Inefficient

• Large number of intermediaries increases costs, risks and losses

Property Rights Need to Work for the Poor

Indonesia

Rep of Korea

Vietnam

India

Phillipines

Thailand

Columbia

Venezuela

-0.02

-0.01

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0.01

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0.3 0.4 0.5 0.6 0.7 0.8 0.9 1Share of holdings < 3 ha

Av

g a

nn

ua

l ag

ric

. gro

wth

19

90

-20

02

• smallholder advantages depend, in large part, on tenure security as incentive for farmer to invest

Limited Access to finance

• Credit constrained use less inputs and earn lower incomes• Credit constraint is often associated with risk rationing as well

Under-investment in agriculture and rural infrastructure

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1980 1990 2000 2002

Africa Asia Latin America

• Agriculture and rural infrastructure’s share of public expenditures have declined significantly

Need to improve efficiency of investment in rural development

China India Thailand Vietnam Uganda

Ranking of Returns to Agricultural Production Agriculture R&D 1 1 1 1 1 Irrigation 5 4 5 4 Education 2 3 3 3 3 Roads 3 2 4 2 2 Telecommunications 4 Electricity 6 8 2 Health 7 4 Soil and Water Conservation 6 Anti-Poverty Programs 5

Ranking of Returns in Poverty Reduction Agriculture R&D 2 2 2 3 1 Irrigation 6 7 5 4 Education 1 3 4 1 3 Roads 3 1 3 2 2 Telecommunications 5 Electricity 4 8 1 Health 6 4 Soil and Water Conservation 5 Anti-Poverty Programs 7 4

Concentration in Agribusiness Sector

Concentration widens the spread between world and domestic prices – from 1974 to 1994 this more than doubled for wheat, rice and sugar

Developing countries’ claim on value added declined from around 60% in 1970-72 to 28% in 1998-2000

Market share of four largest input suppliers

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Agrochemicals Seeds Biotech

1997 2004

IV. The way forward

Actions to Build Empowering Value Chains

Strong facilitation & strengthened legal framework to secure, build trust & reduce costs of transactions

General business climate – business licensing, trade facilitation

Strengthen land access and tenure security Develop rural financial and risk services Efficient input markets Rural infrastructure Quality, and Sanitary and Phytosanitary Standards Market information Producer organizations in order to help farmers engage

on less skewed terms

Bridging the Gap: New Role of the State

Global flow of capital, technology and market access

Private sector dominatesInput and output markets

Improve coordinationfor service delivery and

avoid duplicatingregulations and red tape

From financing investments to…

From supplying inputsand buying outputs to…

From centralized investment

planning and service delivery to…

From agencies working in silos to…

Transparent, predictable investmentclimate

Regulate input and output qualityIncluding SPS

Political and fiscal decentralization and supportive engagement with farmer

organizations and other CSOs

Mechanisms for inter-institutional coordination

Empower rural communities so investments and services

respond to needs and farmers can engage private

sector

Drivers Dynamic Roles

Bridging the Gap: New Role of the Private Sector

Global sourcing brings political risks

Demand for socially responsible production

Phytosanitary and quality are the new trade barriers

From vertical integration to…

From focus on cutting supply costs to…

From uniform product characteristics to…

From dependence on intermediaries to…

Diversified sources of product

Marketing smallholders

Encouraging traditional varieties and product diversity

Providing farmers with quality inputs and production technology

Increasing importance of “new cultural markets”

Drivers Dynamic Roles

Farmer associations are critical

Morogoro is Tanzania’s main sugar-producing region where the mills owned some large farms but could not adequately supply all their needs.

The mills provided farmers with seed cane on credit and the services of tractors for land preparation. Workers from the mill would harvest the cane and take it for processing. These services were deducted from the amount paid to the farmers.

The Millers Association, as a monopsony, had considerable power. Not surprisingly, for many years, the relationship between the growers and the sugar millers had been characterized by mistrust. The millers frequently violated their contracts and often delayed payment to the farmers for as long as six months.

The Tanzanian Sugar Cane Growers Association (TASGA) emerged to represent smallholders averaging 1.4 ha each - initially had public sector help to organize farmers

The ability of TASGA to negotiate effectively eliminated strikes and social unrest. However its importance was not just its role representing farmers. It also conducts various functions: (1) sourcing funds to provide loans to farmers; (2) offering training on improved cropping practices; and (3) promoting better environmental practices.

TASGA has grown to include many thousands of farmers and now accounts for about 17,000 ha. of cropland.

When the government discussed providing the sugar millers some 30,000 ha of land to grow sugarcane, it was recognized instead that it ought to go to the Association

Important Caveat: Many smallholders will not be able to integrate or will do so slowly

Areas constrained agronomically (low rainfall)

Areas constrained by market access (time to market)

Need investments in rural roads, irrigation and other food security measures

Need investments in education and health and active labor market policies

Safety net programs such as public works

Common interests and challenges

Poverty Reduction – helping all of the poor to escape poverty

Food quality – how to ensure that appropriate incentives exist for higher quality and more sustainable production?

Environmental sustainability – how to ensure that environmental costs of unsustainable production are “internalized” in incentives?

Public support – how to do it “right” in terms of reaching right people and being responsible in terms of government expenditures?

Trading system which supports sustainable and equitable opportunity in agriculture as well as ensuring a safe, reliable and affordable food supply?

Parting Message…

How we respond to this crisis in terms of fixing what is broken in agriculture and social protection will determine whether future generations will record this as the triumph of an opportunity grabbed or the tragedy of an opportunity squandered

Some publications of interest:

Rising Food and Fuel Prices – Addressing the Risks to Future Generations

The Impact of Food Inflation on Urban Poverty and its Monetary Cost

Double Jeopardy: Responding to High Food and Fuel Prices

World Development Report ’08: Agriculture Implications of Higher Global Food Prices for

Poverty in Low Income Countries

www. Worldbank.org(food crisis)

On behalf of the World Bank

Thank you

www.worldbank.org