responding to higher and more volatile food prices
TRANSCRIPT
Joint with Rob Townsend, Sergiy Zorya, Iride Ceccacci, and Saswati Bora (all World Bank/ARD)
Responding to
Higher and More
Volatile Food Prices
Christopher Delgado
World Bank/ARD
IATRC
December 13, 2011
Global Food Price Volatility and its Drivers
•Steadily rising grain demand vs. increasingly uncertain supply
•Combined with stock draw-downs and lack of info on new players
•Greater links between oil and food markets •Slow down in grain crop yield growth in developing • Increased water scarcity and reached land frontier • Increasingly variable climate •Food price spikes contribute to social tension and provoke aggravating short-run policy responses
The context of global grain price volatility
3
Long-term commodity prices 1948-2010
0
50
100
150
200
250
300
350
1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008
Agriculture
Metals
Source: World Bank, DECPG
Korean
War Oil
Crises
Energy
Indices, Deflated 2000 = 100 4
Food demand + production shocks + stocks
= food price volatility
5
10
15
20
25
30
35
40
1,400
1,500
1,600
1,700
1,800
1,900
2,000
Perc
ent
(Sto
ck-t
o-U
se)
Mill
ions
MT
(Cons
umption,
Pro
duc
tion)
Stock-to-Use
Production
Consumption
World Maize, Wheat, Rice
Real maize prices vs. stocks-to-use 1960-2011
Source: Sergiy Zorya and Varun Kshirsagar, World Bank, using USDA data
Stocks-to-use changes (%) 2009-11 for exporters
more pronounced than for world
Source: Compiled from USDA WASDE Nov. 2011
The grain growth trends 1960-2011 (average annual growth rates %)
1960-2011 1960-2003 2003-2011
Rice/Wheat/Maize
Consumption 2.5 2.5 2.5
Production 2.4 2.3 2.8
(of which Yield) 1.9 1.9 1.7
(of which Area) 0.5 0.4 1.1
Maize alone
Consumption 3.0 2.8 3.8
Production 2.9 2.7 3.7
Source: Robert Townsend, World Bank, using USDA data
Many factors affecting commodity prices:
2001/05 compared to 2006/10 9
2001-05 2006-10 Change, %
Crude oil prices (US$/barrel) 33 75 +130
Exchange rate (US$ against a broad index of currencies) 119 104 -13
Interest rate (10-year US Treasury bills) 4.7 4.1 -14
Funds invested in commodities (US$ billion) 30 250 +730
GDP growth, low and middle income countries, annual 5.0 5.8 +16
Industrial production, low and middle income countries, annual 6.3 7.1 +13
Stocks-to-use ratio of maize, wheat, and rice (months of consumption) 3.2 2.5 -20
Biofuels production (million of barrels per day equivalent) 0.4 1.3 +200
Average yields of wheat, maize and rice (tons/hectare) 3.8 4.0 +7
Growth in yields (percentage change per year) 1.4 1.0 -32
Natural disasters (droughts, floods, and extreme temperatures) 374 441 +18
Source: John Baffes, World Bank
A framework for simulating food price
behavior 1960-2011
10
A simulation of world grain supply and demand:
Supply:
Demand:
Market equilibrium: S=D
Market price:
Market price changes:
Actual
Simulated
Drivers of world food prices 11
Average Food Price Levels Food Price Volatility
Dependent on: Dependent on:
Long-term change
in demand
[component of ∆𝛼𝑑 ]
- Population
- Income
- Biofuels
Long-term demand
responsiveness to prices
[component of 𝛽𝑑 ]
- Share of food in consumption
- Biofuels mandates
- Oil/maize price ratio
Short-term change in demand
[component of ∆𝛼𝑑 ]
- Oil prices volatility
- Exchange rate volatility
- Financial speculation
- Precautionary hoarding
- Food reserves
Short-term demand
responsiveness to prices
[component of 𝛽𝑑 ]
- Stock release policies
- Oil/maize price ratio
Long-term change
in supply
[component of ∆𝛼𝑠]
- Area planted
- Yield changes
Long-term supply
responsiveness to prices
[component of 𝛽𝑠]
- Output and input market
integration
- Price risk management
Short-term change in supply
[component of ∆𝛼𝑠]
- Droughts and floods
- Share of production in more
volatile production regions
- Trade policy responses (export
bans and sharp reductions in
import tariffs)
Short-term supply
responsiveness to prices
[component of 𝛽𝑠]
- Trade openness
Preceding Ten Year Growth Rates (% p.a.) in Cereal Yields
in Developing Countries 1960-2008
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Era of Declining
Real Prices &
Benign Neglect
Era of
?
Era of High Prices and
Green Revolution
Land has become an increasingly limited
resource
Global land area for 13 major crops increased by 27 million ha in the last 5 years: China, Argentina, India, Brazil, Ukraine, Russia, and SS Africa accounted for 24 million ha
Uncultivated land, not much left
13 Source: Fisher and Shah (2010) Source: USDA
Tightening links between grain and
historically volatile oil prices 14
Source: GTAP Source: World Bank
Ag is more energy intensive The link between oil and fertilizer prices
has strengthened since 2005
Grain exports from new main exporters are more
variable than from traditional exporters
0
50
100
150
200
250
300
350
400
450
500
1990/1991 1995/1996 2000/2001 2005/2006 2010/2011
Ex
po
rt V
olu
me
Ind
ex
(199
0/9
1=
100
)
Example of Wheat
Black Sea region Latin America OECD exporters
Source: USDA
Exploit Opportunities
Productivity growth
Link farmers to markets
Manage risks
Improve information and ensure early discussion by policymakers
Invest in agricultural resilience
Improve safety nets
World food prices are
expected to remain
higher and more
volatile than their pre-
2007 levels
Short term price
volatility is
increasingly becoming
a long term
phenomenon
Outlook Preferred Response
16
Actual Responses to Price Volatility
Up to half of the 250% rice price increase in
2008 was due to policy
0
200
400
600
800
1000
1200
1-Ja
n-04
1-A
pr-0
4
1-Ju
l-04
1-O
ct-0
4
1-Ja
n-05
1-A
pr-0
5
1-Ju
l-05
1-O
ct-0
5
1-Ja
n-06
1-A
pr-0
6
1-Ju
l-06
1-O
ct-0
6
1-Ja
n-07
1-A
pr-0
7
1-Ju
l-07
1-O
ct-0
7
1-Ja
n-08
1-A
pr-0
8
1-Ju
l-08
Rice Price 2004-2008 US$/mt
India imposes export restrictions
Philippines buying > $700/ton
Philippines buying > $1,000/ton
Japan sells 200,000 ton WTO stocks to Philippines;record harvests forecast
Vietnam introduces export restrictions
Source: Aldaz-Caroll 2008
Rice price transmission from global market to
consumers in 2008 different across asia
World price pass-thru (%) between Q207 and Q208
81 78
5444
4-3
-10
10
30
50
70
90
Cambodia
(June)
Thailand
(April)
Vietnam
(May)
Philippines
(June)
China
(June)
Indonesia
(April)
Transmission of price peaks limited and uneven
Source: Aldaz-Caroll 2008
Reality Check: Countries Facing Food Price Protests And
Riots, January 2007- May 2008
Source: USAID Office of Food for Peace
Actual country responses to the 2008 food
price spike (N=77) 21
0 10 20 30 40 50 60 70 80 90 100
None
Price Controls/Consumer Subsidies
Export Restrictions
Increase supply using foodgrain stocks
Reduce Taxes on Foodgrains
East Asia
MENA
SAR
Africa
LAC
ECA
Source: FAO - State of Agricultural Commodity Markets, 2009
More detail on actual country policy responses
2007-2008 (N=81) 22
Source: OECD (2010)
Short-term policy responses observed in 2008
affecting long-run outcomes
(given in increasing order of possible negative impact on long-run policy options)
1. Reduce (permanently)Food Grain Taxes/Tariffs
2. School Feeding Programs
3. Cond’nal Cash Transfers to the Poor
4. Targeted Food Subsidies
5. Food for Work
6. Food Aid
Good
Still good,
but more
difficult to
avoid
operational
problems or
negative
impact on
incentives
Worse short-run responses observed in 2008
(given in increasing order of likely negative impact on long-run
policy objectives)
7. Build-up of Gov’t Buffer Stocks for Distribution (governance and cost
are issues, but has the fall-back situation in the exporting countries
changed?)
8. Food Rationing (not sustainable over time)
9. Price Controls (bad other than in very
short term special circumstances)
10. Ad Hoc and Temporary Reductions in Tariffs
(the equivalent for net importers of export
taxes for net exporters)
10. Export Restrictions/Taxes Not Good
11. Inflexible Export Bans
Preferred Responses to Price Volatility
Preferred measures to address food price
levels & volatility longer-term 26
Measure to Reduce Average Food Price Escalation Measures to Reduce Food Price Volatility
Long-term change in
supply [component of ∆𝛼𝑠]
- Raise crop yields
- Facilitate land markets
Long-term supply responsiveness
to prices [component of 𝛽𝑠]
- Better use of price risk
management tools
- Strengthen market integration
Short-term change in
supply [component of ∆𝛼𝑠]
- Develop more weather
tolerant varieties
Short-term supply responsiveness
to prices [component of 𝛽𝑠]
- Trade openness
Long-term change in
demand [component of
∆𝛼𝑑 ]
- Shift to market based
biofuels policies
Long-term demand
responsiveness to prices
[component of 𝛽𝑑 ]
Short-term change in
demand [component of
∆𝛼𝑑 ]
- Increase transparency
of agricultural markets
Short-term demand responsiveness
to prices [component of 𝛽𝑑 ]
- Efficient stock management
Reducing levels requires productivity increases
in developing countries 27
Raising crop yields and their resilience is the single most important action needed
for an enduring solution to global food security
Narrow the gap between average farm and experimental yields
Generate yield-enhancing and resiliency technologies
Improve water management, including irrigation
Country Test mean
yields (bu/ac)
Test mean yield
stdev (bu/ac)
No. of
tests
Country average
yields (bu/ac)
Yield gap
(bu/ac)
Yield gap
(%)
United States 199 36 723 157 42 21%
France 221 31 133 144 78 25%
Italy 231 29 76 147 85 27%
Argentina 188 52 88 114 74 29%
China 153 30 140 85 68 45%
Thailand 121 22 184 66 56 46%
Philippines 105 29 277 41 65 61%
Indonesia 107 32 51 38 69 64%
Pakistan 148 21 50 46 103 69%
Mexico 181 54 113 52 128 71%
India 142 35 114 36 106 75%
Yield gaps are large in developing countries
Test plot data for maize yields, 2008 to 2010, Monsanto Corp.
Source: Abbott at el. (2011)
Other measures to address high food
price levels 28
Secure land rights for poor farmers
Shift to market-based biofuels policies:
Improve farmer access to price risk management via financial instruments
Improve trade openess, market infrastructure, market information systems, access of producer organizations
Improve analysis and outreach on implications of different policy alternatives
Improve safety net infrastructure for faster better mitigation of shocks, avoiding more negative alternatives
Build capacity for all of above
Trust is the scarcest currency in global grain
markets
Avoid short-term policy responses to short-term food insecurity that have adverse longer-term implications for both food security and market development
Decrease the asymmetries of information that create transactions costs in international grain markets
Recognize the absolute imperative governments face to provide food security in the face of crisis, including through solidarity from better off neighbors
Improve the consistency of market signals