House of Commons - Global Food Security - International Development Committee

Global Food Security - International Development Committee Contents

3 Shocks and their drivers

Recent shocks and their impacts

64. Recent years have seen increasing levels of food price volatility. The FAO Food Price Index measures average global food prices, and as the graph below shows, there have been two notable price 'shocks' or 'spikes' in recent years, the first peaking in June 2008 and the second peaking in February 2011.[200] The food price spike of 2008, in particular, took most observers by surprise.[201]Figure 1: FAO Food Price Index

Data source: FAO data.

The Food Price Index is composed of an aggregate of five separate FAO indices—the Meat Price Index; the Dairy Price Index; the Cereals Price Index; the Oils Price Index; and the Sugar Price Index. Graphs showing the changes in each of these indices are included as an Annex to this report. Of the five indices, the Dairy Price Index and the Sugar Price Index have shown the most dramatic increases: they stood at 258.8 and 252.6 respectively in April 2013, meaning price increases of 158.8% and 152.6% respectively 2002-04. The Meat Price Index has shown the least dramatic increase: the Index stood at 178.7 in April 2013, meaning an increase of 75.7% in meat prices since 2002-04.[202]

65. According to research by the FAO, the 2008 price spike led to stagnation in the fight against hunger: while the proportion of the global population suffering from hunger had been declining before the price spike, the rate of progress declined when the spike occurred. The effect was especially marked in sub-Saharan Africa: the hunger rate had been declining before the price spike, but began to rise by 2% per year from 2007.[203]

66. While conventionally one would assume that an increase in food prices benefits net sellers of food, this may not have been the case in this instance, since the cost of agricultural inputs also increased.[204] Oxfam argues that many farmers were forced to sell their produce when prices were low, and thus found themselves having to buy once the price spike struck.[205] In Southern and East Africa, furthermore, most farmers are in fact net buyers of food in any case.[206]

Drivers of shocks

TIGHTENING BALANCE BETWEEN SUPPLY AND DEMAND

67. In the previous chapter we illustrated various ways in which the balance between supply and demand was tightened. The consequence of this was that food prices became vulnerable to destabilising shocks and began to increase.[207] As we will see in this chapter, some of the policy responses to this price increase not only failed to solve the problem, but in fact served to exacerbate it.

LOW STOCKS

68. Small-scale food stocks are commonly maintained for humanitarian purposes: this will be discussed in Chapter 4. What we are concerned with here is the question of larger-scale food stocks, and the extent to which they might be used to reduce food price volatility. At present, levels of food stocks are low.[208] Referring to the UK, Professor Lang told us: "We do not store, actually, it is all on the motorway. We have a just-in-time system of food."[209] The following graph shows how stock-to-use ratios for key crops (stock levels as a percentage of annual consumption) have fluctuated over recent years:
Figure 2: Global stock-to-use ratios (%) for key crops

Data source: FAO data.

69. Stocks are important in helping to avoid price volatility: in his evidence Dr Fan argued that stocks were of 'fundamental' importance in this respect.[210] Professor Dorward agreed, arguing that while stocks can sometimes be inefficient and expensive, they nevertheless serve the purpose of relieving the 'tightness' in markets and thus reducing volatility.[211] Some argue that the availability of stocks in China and India helped to mitigate the impact of the 2008 food price spike for these countries.[212] However, witnesses from DFID, FAO and WFP were unenthusiastic about large-scale stocks.[213] We recognise that maintaining large-scale food stocks can sometimes be problematic and costly. However, given the increasing volatility of food prices over recent years, we believe there may be a case for judicious use of stocks to relieve the tightness of markets. We recommend that the Government conduct further research into this. Specifically, the Government should consider under what circumstances it would be appropriate for a national government to pursue strategic stockholding for national food security purposes. It should consider what the costs, risks and benefits of this strategy would be, and what capacities would be required.

70. In 2011, the G20 formed the Agricultural Market Information System (AMIS):[214] participant countries include all members of the G20 plus Spain, together with seven major agricultural exporters and importers (Philippines, Thailand, Nigeria, Egypt, Kazakhstan, Vietnam and Ukraine). AMIS has received funding from a variety of sources including FAO, the Bill & Melinda Gates Foundation, the World Bank, the OECD, IFAD, and the Governments of Japan and France. Under AMIS, participating countries are required to provide monthly data on consumption, production, exports, imports, prices and stocks of 'AMIS crops' (maize, rice, wheat, soybeans). This data is then analysed and used to prepare short-term market forecasts for AMIS crops. AMIS also includes a Rapid Response Forum (RRF) consisting of senior officials from participating countries: the RRF meets annually, or more frequently if necessary, to discuss policy co-ordination.[215] In the long term, the success of AMIS will be dependent on the quality of information provided by participating countries.[216] In countries such as China and India, governments may lack accurate information as to the levels of stocks which exist on their countries' farms:[217] Professor Stefan Dercon, Chief Economist at DFID, argued that misinformation about the level of stocks in China in fact contributed to the 2008 price spike.[218]

71. The launch of the Agricultural Market Information System (AMIS) is a major step forward in the fight against food price volatility. We commend all participant countries for supporting this initiative, but we recognise that its long-term success will depend upon the quality of information provided by participant countries.

EXPORT CONTROLS

72. Food price increases have been was exacerbated by the introduction of export bans by certain countries: in Russia, for example, cereal exports were outlawed in 2010.[219] The introduction of export bans led to a tightening of the market for other exporters, and encouraged importers to begin 'panic buying', thus driving prices up further.[220] Moreover, Dr Fan argues that export bans 'tend to inhibit a domestic production response.'[221] In its written evidence, the OECD argues that:

222

More recently, there has been some progress in respect of reversing these damaging policies. At the G20 summit in 2011, it was agreed to remove any export bans or special taxes for food purchased by the WFP.[223] The introduction of export controls by certain countries was regrettable, and served to make an already bad situation worse. The decision by the G20 to remove any export bans for food purchased by the World Food Programme is a welcome step in the right direction, but more needs to be done. The UK should encourage its international partners to remove any remaining export bans and to dissuade them from introducing any new ones. It should also commit to raising this issue at the forthcoming G8 summit.

SPECULATION

73. Some argue that financial speculation on food commodities may have contributed to food price increases, and that such speculation should thus be regulated. Christopher Gilbert, Professor of Econometrics at the University of Trento, has argued that speculation caused the prices of wheat, corn and soybeans to increase by up to 16.9%, 15.8% and 14.8% respectively between January 2006 and December 2008.[224] Excessive speculation is likely to distort the price discovery function of derivative markets,[225] which will result in misinformed planting decisions. Lawrence Haddad, Director of the Institute of Development Studies, has suggested a tax on food price speculation, albeit one linked to the speed of flows rather than their levels.[226] The World Development Movement, meanwhile, suggests that the UK and EU authorities should require all deals involving food derivatives to be cleared by a transparent, central clearing house.[227] In his evidence to this Committee, Patrick Mulvany, co-Chair of the UK Food Group, argued that the UK should impose 'position limits' - legal limits on the quantities which can be held by speculators.[228]

74. However, there are different views. Whilst speculation does appear to have led to price increases in the short term,[229] its long-term effects are far less clear. In a separate paper, Professor Gilbert finds no evidence to support the contention that index investments led to speculative bubbles on the US future markets for food crops.[230] A 2012 paper by Aulerich, Irwin and Garcia drew a similar conclusion.[231] Moreover, some argue that the imposition of excessively low position limits runs the risk of undermining hedgers' liquidity,[232] thus reducing the potential of hedging as a risk-management strategy. The Parliamentary Under-Secretary of State for International Development argued that speculation was not a major factor in food price increases,[233] and told us that the Government did not intend to introduce position limits.[234] Evidence as to the impact of speculation on food prices is inconclusive. While there has been a proliferation of recent research on this topic, there is still no consensus. We recommend that the Government study the latest research in detail, and that it use this research to inform its future policy on this issue.

Implications

75. As we have seen, the tightening of the balance between demand for and supply of food has led to increasing levels of food price volatility, while additional factors, in particular the imposition of export controls, have served to exacerbate the situation. It will be important for the UK to use its influence on the international stage to discourage the adoption of similar policies in future. The Government should also conduct further research on some of the more contentious issues we have raised in this chapter, namely food stocks and speculation.

200 "FAO Food Price Index", Food and Agriculture Organization of the United Nations, www.fao.org Back

201 Qq 43-44 Back

202 "FAO Food Price Index", Food and Agriculture Organization of the United Nations, www.fao.org Back

203 UN FAO, The State of Food Insecurity in the World, 2012, p 11 Back

204 Ev 64 Back

205 Ev 64 Back

206 Ev 99 Back

207 Qq 2, 43 Back

208 "FAO Cereal Supply and Demand", UN FAO, 9 May 2013, www.fao.org Back

209 Q 45 Back

210 Qq 88, 123 Back

211 Q 58 Back