House of Commons - International Development

Select Committee on International Development Written Evidence

Memorandum submitted by Alex Evans[22]

RISING FOOD PRICES: DRIVERS AND IMPLICATIONS FOR DEVELOPMENT

INTRODUCTION AND SUMMARY

1. Food prices are rising fast. In 2006, the FAO food price index rose an average of 9% compared with the previous year. By 2007, that figure had increased to 23%-37% if December 2007 is compared with December 2006.[23] While high price events are not unusual in agricultural markets—even if food prices stabilise at 25% more than they were in 2001, this would still only bring them to early 1990s levels—what is unusual in the current situation is that the price spike applies to almost all major food and feed commodities, rather than just a few of them.[24]

2. The move to current price levels has been sudden, too. As recently as 2005, the Outcome Document from the UN World Summit noted the need to "address the impact of weak and volatile commodity prices and support the efforts of commodity-dependent countries to restructure, diversify and strengthen the competitiveness of their commodity sectors".[25] Less than three years later, corn is around its highest level in 11 years,[26] rice and soya their highest level in 34 years,[27] and wheat—like crude oil and gold—its highest level ever.[28]

3. This short note focuses on what this important change means for international development. It starts by assessing the drivers of rising prices, noting that while in the short term the pressure is on the demand side, a suite of "scarcity issues"—climate change, water scarcity, energy security, pressure on land—will increasingly impact the supply side over the longer term. The paper then discusses the implications of higher prices for developing countries, before setting out a brief survey of implications for development policy, focusing in particular on humanitarian assistance, but also touching on increasing supply; helping low income countries to benefit from rising prices; scarcity issues; trade; and the question of fair shares.

DRIVERS OF INCREASING PRICES

4. At present, the main drivers of increasing prices are on the demand side. Historically, demand growth for food has been about 1.5% each year; now, though, it has risen to 2%, and Goldman Sachs estimate that it will be as high as 2.6% within a decade.[29] The World Bank estimates that food production will need to grow by another 50% by 2030 to meet projected demand, and 85% for meat.[30]

5. A particularly important part of the picture has been rapidly rising income growth, notably in emerging economies like China and India. Joachim von Braun, Director General of the International Food Policy Research Institute (IFPRI), argues that high income growth accounts for perhaps half of the recent increases in food prices.[31] As middle classes grow more affluent, food consumption patterns change too—often towards diets richer in meat and dairy products that are much more intensive in terms of both grain and water use.

6. The role of biofuels as a source of demand for grain has also been a significant element of recent food prices (von Braun estimates 30% per cent of the picture).[32] The US already spends $7 billion a year supporting ethanol,[33] which consumes 20% of America's corn crop[34]—a figure likely to rise to 32% by 2016.[35] Looking ahead, the EU has a target for 10% of its transport fuel to come from biofuels by 2020, while the US has proposed a 36 billion gallon renewable fuel target by 2022.[36]

7. But there are also supply factors at play. In the shorter term, one issue is that food supply is quite inelastic, ie supply responds relatively slowly to increases in demand: IFPRI estimate that aggregate agricultural supply increases by only about 1-2% for each 10% increase in price—and by even less when (as now) prices are very volatile.[37] Another shorter term supply side issue is that some current price volatility is attributable to speculative investors seeking safety in commodity markets from the weak dollar and from falling equity and bond markets—although opinion is divided over how significant a factor this is.[38]17 Thirdly, there is the factor of low inventory stocks, which explains some of the current market volatility.

8. There is some evidence that a short term fall in commodity prices is likely—or indeed happening already—as investors take profits and price in prospects for weakening growth in emerging economies.[39] But in the longer term, four more fundamental supply side factors—which might collectively be termed "scarcity issues"—are already starting to make themselves felt, and are likely to become more significant.

9. First, the costs of agricultural inputs—and especially energy—are rising. Today's global agricultural system is predicated on the availability of cheap, readily available energy, for use in every part of the value chain: both directly (eg cultivation, processing, refrigeration, shipping, distribution) and indirectly (eg manufacture of fertilisers, pesticides—the cost of urea, a fertiliser, has almost tripled since 2003).[40] But as noted earlier, oil prices are already at their highest ever level; many analysts expect oil prices to stay relatively high over the medium to long term. In addition, since food can now be converted into fuel, there is effectively an arbitrage relationship between the two, implying an ongoing linkage between food and fuel prices.[41]

10. Second, water scarcity is likely to become a more pressing issue. Global demand for water has tripled in the last 50 years;[42] 500 million people live in countries chronically short of water, and this will likely grow to four billion by 2050.[43] A particular worry is depletion of limited groundwater resources, on which some parts of the world—including the US, Egypt, Pakistan, India and China—have been enjoying a "free ride" for the past two or three decades.[44]

11. Third, there is the issue of land availability. Some commodities analysts argue that while historical increases in demand could be met through increasing yields, in future an expansion of acreage will also be required.[45] However, this will be expensive, given the infrastructure investment involved; there may also be diminishing returns, since much of the best land is already under cultivation.[46] Above all, though, there is simply increasing competition for what land there is: including food, feed, fibre (eg timber, paper), fuel, forest conservation, carbon sequestration and urbanisation, on top of high rates of soil loss to erosion and desertification. FAO estimates that there is at most 12% more land available that is not already forested or subject to erosion or desertification, and that 16% of arable land is already degraded.[47]

12. Fourth, and perhaps most fundamentally, there is climate change. Overall, the IPCC projects that global food production could rise if local average temperatures increase between one and three degrees Celsius, but decrease above this range. Crucially, though, this is before extreme weather events are taken into account; and the IPCC judges that it is likely to be extreme weather, rather than temperature, that will make the biggest difference to food security.[48] Glacial melting will also impact agriculture: the IPCC estimates that many Himalayan glaciers could disappear by 2035, for example, with catastrophic results for Chinese and Indian agriculture during the dry season.[49] The IPCC assesses that "climate change increases the number of people at risk of hunger", and that climate change will increase the number of undernourished people by 40-170 million people.[50]

13. Many of these factors, on both the supply and the demand side, also apply to fisheries and aquaculture. Demand for fish and seafood is rising sharply, again largely because of increasing affluence. But while FAO estimates that an additional 40 million tonnes of aquatic food a year will be needed by 2030, it also notes that catches of wild fish have remained roughly level since the mid-80s, at around 90 million tonnes a year—a figure that FAO estimates is unlikely to rise substantially.[51] These underlying trends will place increasing emphasis on aquaculture, which last year accounted for 43% of fish consumption (up from just 9% in 1980).[52] However, future expansion of the sector will depend not only on increasing investment capital, but also on availability of land, fresh water and energy—which as noted above, are all already subject to stresses of their own.

14. All in all, the jury is still out on whether recent food price rises will be sustained or not. Many commentators, including the World Bank, estimate it will take "several years" for supplies to increase to rebuild stocks and allow prices to fall.[53] However, over the longer term, structural factors—a population forecast to rise to 9.2 billion by 2050, rising affluence and the four "scarcity trends" referred to above—suggest the possibility of a structural, rather than merely cyclical, shift. Models from both IFPRI and the US Department of Agriculture show that while food prices will not rise much more over the next decade, they are also unlikely to fall significantly.[54]

IMPLICATIONS FOR DEVELOPMENT

15. Rising food prices will hit poor countries and poor people hardest, and will present an obvious impediment to achieving Millennium Development Goal 1 on hunger. The FAO has already announced that 36 countries are in crisis on food security, and will need external assistance; 21 of these countries are in Africa (although not all of them have been affected equally).[55], [56]

16. Poor people typically spend a high proportion of their income on food purchases: Oxfam put this figure at around 50-80%.[57] Of particular concern are landless poor people in rural areas. Most poor people are rural, and most rural poor people are net food buyers, who are unlikely to be compensated fully by additional employment as agriculture grows, or by higher wages.[58] However, the extent and rapidity of current rises also means that urban populations are also being hit, as World Food Programme head Josette Sheeran recently noted: "There is food on shelves but people are priced out of the market. There is vulnerability in urban areas we have not seen before."[59]

Humanitarian assistance

17. High food prices are already posing extensive challenges to provision of humanitarian aid. The World Food Programme currently feeds 73 million people in 78 countries (less than a tenth of world's undernourished). While its agreed budget for 2008 had been $2.9 billion, rising costs—for logistics as well as for food—mean that this level will now not even cover current deliveries, according to WFP, who say that at least $500 million more is now needed.[60] WFP head Josette Sheeran raised the possibility in a recent interview that the agency would have to look at "cutting the food rations or even the number of people reached" if the additional funding were not forthcoming.[61]

18. Improvements in aid quality are needed too: humanitarian aid still needs to shift to a proactive insurance model from its current reactive configuration. While the Central Emergency Response Fund—in which funds are allocated before emergencies—is likely to meet its 2008 target of $500 million, this remains a small proportion of the overall requirement. 2007 humanitarian requirements were $4 billion, for example, and the older, more reactive Consolidated Appeals Process remains the main window for funding.[62]

Domestic policy measures

19. Numerous countries have already reacted to rising food prices with concern and a broad range of policy interventions designed to address the situation. The approach taken by most countries so far is to reduce or eliminate import tariffs (Azerbaijan, Bangladesh, Bosnia, China, Egypt, EU, Ghana, India, Indonesia, Mexico, Morocco, Nigeria, Peru, Philippines, Russia, Taiwan, Turkey).[63] However, at least some of these reductions in import tariffs have been offset by other countries—some of them major importers—imposing additional export tariffs or quotas in order to reduce domestic prices (Argentina—where to move has led to major unrest among farmers; and China, India, Kazakhstan and Russia).[64] Among other approaches currently being tested are making purchases to establish or replenish stockpiles and strategic reserves (Iraq, Malaysia, Turkey, UAE); increasing subsidy levels (Egypt, India, Oman); capping prices (China, Russia, Thailand); and examining the possibility of introducing rationing (Malaysia, Pakistan).[65]

20. Various countries have witnessed protests, riots or other forms of civil unrest that are at least partly attributable to rising food prices. At the time of writing, some of the most serious unrest so far has been in Egypt and Lebanon; other countries to have experience unrest include Burkina Faso, Cameroon, China, Cote d'Ivoire, Guinea, Haiti, Mauritania, Mexico, Morocco, Mozambique, Niger, Senegal, Uzbekistan, Vietnam and Yemen.[66]

21. As these lists show, rising food prices are of concern in every part of the world, and there is so far little consensus among governments on what to do about the issue. Most donors appear currently to be in information gathering mode themselves, although World Bank President Bob Zoellick has called for countries to investigate cash transfers targeted at poor consumers rather than the less efficient option of regulating food prices across the entire economy.[67] There is significant scope for donors to help developing countries to share information on which approaches have worked where.

Import costs and trade balances

22. The World Bank has argued that more expensive food imports will disrupt the trade balances of relatively few countries, because the majority will see largely offsetting gains in other commodity exports; from the Bank's perspective, the countries most adversely affected include Jordan, Egypt, the Gambia, Lesotho, Djibouti, and Haiti.[68] However, the impact of rising food prices needs to be looked at in tandem with concurrently rising energy prices, which are also imposing strain on many importing countries. An International Energy Agency study in December 2007 found that the rising cost of oil had already wiped out the benefits of increased aid and debt relief to 13 non-oil producing African countries including South Africa, Ghana, Tanzania, Ethiopia and Senegal. According to the IEA, the increased cost of oil bought by these countries since 2004 was 3% of their combined GDP: more than the sum of debt relief and aid received over the past three years by the countries.[69]

23. The economist Stephany Griffith-Jones has argued that higher import costs may create a need for a new IMF lending facility, noting that "When oil prices went up in the 1970s, the International Monetary Fund created low conditionality oil lending facilities... Should not a similar facility be created now in the IMF to ease the burden... . [or] existing IMF facilities, like the different windows of the Poverty Reduction Growth Facility, be modified to provide rapid, significant, cheap, low conditionality loans to poor countries facing the external shock of a large deterioration of their terms of trade?"[70] Discussions about compensatory financing remain so far relatively undeveloped, but may emerge as an increasing focus of discussion if balance of payments issues emerge as a major factor for many developing economies.[71]

POLICY IMPLICATIONS

24. So what does all this mean for policymakers—and especially for donors?

Humanitarian assistance

25. Start with what rising food prices mean for the humanitarian system, where short term pressures are likely to be most acute. First, consider the issue of aid volume in the context of humanitarian assistance. As noted earlier, WFP have called urgently for an additional $500 million. Given the scale of recent food price increases, it does appear likely that additional funds will be needed just to maintain current levels of food assistance. It would be of particular concern if the US were to follow up on suggestions that it might reduce the amount of food aid that it provides to WFP as a result of rising prices and costs, given that the US is by some distance the largest donor to WFP.[72] (Washington is reported to have told the World Food Programme that it is facing a 40% increase in food commodity prices compared with last year, and will hence "radically cut" the amount it gives away.)[73]

26. But at the same time, more specificity is needed on how this headline figure breaks down. It would be useful, for example, to know how the $500 million would be distributed between different types of aid (such as food aid, vouchers or cash transfers), and between which recipient countries. It is also essential that WFP's call for additional funds be set in the context of the needs of the UN humanitarian system as a whole, given that WFP accounts for only around half of total global food aid.[74] While there is no doubting WFP's effectiveness in setting out its case, donors also need to hear from other multilateral agencies (notably UNICEF, UNDP, FAO and WHO), and ensure that OCHA is in the lead on co-ordinating funding calls as well as other emergency action from across the sector.

27. This raises the question of wider humanitarian system coherence. While progress was made in 2005 on strengthening OCHA's co-ordination role at global level, on the role of Humanitarian Co-ordinators in country and in the use of pooled funding arrangements, much remains to be done. WFP has much to contribute here. It is fair to say that at the time of the UN High Level Panel on System-Wide Coherence in 2006, WFP was not among the principal enthusiasts for a more coherent approach. But as the humanitarian system moves into a demanding context with potential for higher tempo operations, better inter-agency coherence becomes more important than ever.

28. On a related note, it would be interesting to explore the possibility of a "one UN" initiative on food security, which could bring a harmonized approach to bear both at the global level and in specific countries (UNDP's office in Yemen has already been approached by the government with a view to piloting such an approach). Such an initiative might bring together WFP, FAO, IFAD, UNICEF, UNDP and WHO, and focus on developing and mobilizing resources for a package of policies and programs, potentially for presentation at the Secretary-General's summit meeting on the MDGs in New York in September.

29. Another important current issue is the question of changing ways of giving humanitarian assistance. As noted earlier, many donors (including WFP) are focusing increasing attention on social protection programmes, given that poor countries tend to lack social welfare systems—a deficit that places many poor people with precarious livelihoods at acute risk from shocks and stresses. For such vulnerable people, access to food is as important as the availability of food, and social protection programs can play an important role in addressing the gap.[75] But it is important to stress that current enthusiasm for social protection approaches is relatively novel, and that the evidence base on the effects and challenges of such projects is not yet as extensive as it could be.

30. In particular, humanitarian donors need to be acutely aware of the political impact of a large scale shift towards provision of safety nets. If donors provide cash or food directly—as opposed to through national governments—then there is a potential risk of diluting states' own accountability to their citizens. Better answers are also needed to questions about the potential inflationary impact of some social protection measures, the best combination of cash and in-kind transfers, what kind of targeting and conditionality works best and so on.[76] It is too soon to see social protection systems as any kind of panacea to the issue of high food prices. Donors should also assess carefully what the value added would be of WFP moving into wider social protection, given the humanitarian sector's relatively limited experience of social safety nets, and the extent of the organisational change and shift away from traditional core business that this would imply for WFP.

31. In the background, there is the question of what it will mean for humanitarian assistance if (as considered earlier in this paper), the recent shift to higher food prices is structural rather than just a blip: if, in other words, this is the "new normality". At present, around 850 million people are classified as "food insecure". At peak tempo, humanitarian agencies have been able to feed about 100 million people at the very most. If a longer term effect of changes in world food markets were to increase the number of people in need of humanitarian assistance significantly beyond that level, then it is not clear that the humanitarian system would have the capacity and knowledge to respond, even if sufficient financial resources were available. It is therefore essential that in addition to coping with the current short term turbulence in food markets, donors make a sustained effort to ask "what if?" questions and plan for further contingencies.

Wider issues

32. As this note has set out, the implications of higher food prices extend far beyond humanitarian assistance. The suddenness with which the issue has emerged has raised not only the political stakes, but also the risk of knee-jerk policy responses. Meanwhile, the complexity of the drivers of rising food prices makes a comprehensive approach essential—while also increasing the likelihood of unintended consequences from policy responses. Policymakers hence face an awkward and hazardous balancing act between the urgency of responding on one hand, and taking enough time to understand the consequences of what they are doing on the other.

33. The remainder of this short note identifies some of the larger policy questions that arise for aid donors. In most cases, it does not attempt to answer them; at this stage, our aim should be to build the evidence base and to catalyse more intensive and thorough conversations, involving a wider range of actors, with the objective of building shared awareness around the issue. With that caveat stated, consider the following issues:

34. Increasing supply. Perhaps the hardest question is how the world is going to increase food supply to meet projected demand—which, as noted earlier, is projected by the World Bank to rise by 50% over the next 22 years, and 85% for meat. Much work needs to be done, quickly, to figure out where this increase is going to come from (both geographically, and in terms of new agricultural techniques and technologies), and what needs to be done to make it happen. An urgent first step towards increasing the available food supply should be to ensure that production of biofuels does not undermine food security—an issue now acknowledged by President Bush, who has commented that, "If you look at what is happening in corn, you're beginning to see the food issue and the energy issue collide".[77] While an outright ban would probably be unwieldy and undesirable, discussion of basic standards for biofuels production—with food security at their heart—should be an early priority for policymakers.

35. Helping low income countries to benefit. While supply increases in the shorter term are likely to come from existing "breadbasket" countries like the US, Canada, Russia, Ukraine, Brazil and Argentina, there is longer term potential for lower income countries to play a significant part as well—especially in Africa, largely bypassed by the first Green Revolution, where productivity remains far lower than in other regions. But while poor countries should in theory be able to benefit from rising prices for agricultural commodities, the reality is that they are held back by poor infrastructure, by the need for better access to technology and finance, by restrictive supply chain standards and other barriers as well. Aid donors therefore need to be clear about how crucial their role will be in this. Until recently, agriculture was seen as a rather unfashionable relic of the past in many donor agencies (and perhaps especially in their country offices). That needs to change quickly: donors need to invest heavily in programme aid—and in many cases, rebuilding their own capacity—in rural development.

36. Managing scarcity. Donors will also need to build be able to help countries to devise integrated strategies for managing scarcity in land, water, energy, food, and the effects of climate change. The first step towards this is mainstreaming throughout donor agencies a much better sense of how these scarcity trends link to each other—as they all do, frequently in subtle and complex ways. On top of that, donors need to integrate scarcity issues more thoroughly into their governance and economic analyses (as the role of land disputes in catalyzing the recent post-election violence in Kenya underlines). Within the specific context of food, a good starting point would be to build a much more comprehensive picture of the overall resource footprint of different foods (and in the process, move the debate on from its current unsophisticated focus on the minutiae of specific variables, such as "food miles").

37. Trade. Donors also need a clearer picture of the trade dimensions of the current food prices issue. As noted earlier, the current picture of food-focused trade measures is growing more complex by the day, as importers lower import tariffs even as exporters raise export tariffs. Meanwhile, some countries—including China—are apparently exploring the potential for bilateral food supply arrangements, of the kind already becoming more common in energy supply. Donors and development advocates need to find their way towards a renewed strategic stance on agricultural trade. Even before food prices began their sharp increase, there was lively debate in the donor community about the extent to which agricultural trade liberalization would in practice benefit low income countries. That debate is now further complicated by the fact that even if liberalisation is desirable in principle, careful attention will need to be paid to the need to sequence reforms, in order to avoid (for example) the risk that rapid elimination of CAP export subsidies could increase food prices in developing countries.

The question of fair shares

38. Finally, there is the elephant in the room: the long term question of fair shares, pithily summarized in a recent cartoon in the US in which a portly man in a suit takes a maize cob out of an African child's food bowl, with the speech bubble, "Excuse me. I'm going to need this to run my car."[78]

39. Inequality between countries is falling for the first time in a generation. From 2003 to 2007, per capita income grew faster in every region of the South than in developed countries: hardly news in East and South Asia, but a major shift in Latin America and Africa. Whereas in 1980 developed country GDP was 23 times higher than in developing countries, it was 18 times higher in 2007.[79] Yet even as inequality falls between countries, it is rocketing within them—particularly within developing countries, and above all in emerging economies like China, where the difference between the top 20% and the bottom 20% grew by 40% over the last three years.[80]

40. In his book Development as Freedom, Amartya Sen observes that "the focus has to be on the economic power and substantive freedom of individuals and families to buy enough food, and not just on the quantum of food in the country in question." Later, he observes that "[some] who buy food may be ruined because the real purchasing power of their money incomes may have shrunk sharply. Such a famine may occur without any decline in food output, resulting as it does from a rise in competing demand rather than a fall in total supply."

41. Now, Sen's questions may be starting to apply at the global level. As noted a moment ago, while the line between developed and developing countries grows more blurred with each passing year, the gulf between the haves and the have-nots has never looked sharper—or wider. In a context of increasing tightness of food supply—which is likely to grow further as population, affluence and scarcity trends all continue to rise—we may well reach a situation in which relative inequality can have absolute implications for the world's poor, and in which a burgeoning global middle class inadvertently takes food beyond the purchasing power of the world's poorest people. Indeed, we may already be there.

CONCLUSION

42. As this paper has set out, this is a time of massive change for global food policy, in developed as well as developing countries. In addition to the concerns discussed here about what higher food prices mean for poor people, there are questions about environmental standards; obesity and health; animal welfare; competitiveness, between countries and companies; the security of globalised "just-in-time" supply chains; and numerous other issues besides.

43. At the heart of these debates is the deceptively simple question: should global food policy be trying to achieve? We need to be clear at the outset about the nature of the choices that we face. There are real trade-offs between different potential objectives in food policy—such as competitiveness for consumers, security of supply, environmental conservation, local sourcing and others besides. That raises the question: who is the "we" that decides the shape of 21st century food policy? Who has the power to make choices?

44. It is vital that advocates for development get involved in these debates now, and start making the argument that the primary objective of the world food system in the 21st century must be to feed all of us, as healthily as possible. From there, work can be started to evaluate what such a food system might look like. But if the hard questions about overall objectives are swept under the carpet, or answered without being properly considered, then one outcome seems certain: the world's poor will be under-represented in the debate, and marginalized by its outcome.

45. But as they start to set out their case for a food system designed to meet the needs of all the world's people, advocates for development should take great care with the narratives they set out. Food has always been an emotive subject, and never more than when questions start to be asked about whether there is enough to go around. People rarely make better decisions for being in a fearful frame of mind. "Malthusian" narratives carry with them a risk of self-fulfilling prophecy if they lead to bad decisions, and are in their way just as deterministic as "Cornucopian" narratives with their message of inexhaustible plenty.

46. Instead, development advocates may find that the emergence of food as a top rank political issue provides them with an opportunity to form new alliances, new coalitions and new drivers for change. Stressing the reality that we have the power to make choices about the kind of food system we want is a good starting point. In that light, we may find that "food democracy" is a more useful frame than "food security"—both in the kind of thinking that it engenders, and in the policy options and approaches that it implies.

April 2008