FOOD CRISIS: Bitter harvest
A sharp rise in food prices could hit the most vulnerable developing countries hardest – especially those in Africa. Policymakers may well have to prepare for the worst
Bad harvests in various parts of the world have sent food prices rising again, triggering fresh concerns about inflation and the risks of a new food crisis in the most vulnerable countries in Africa and the Middle East. In addition, loose monetary policies around the world have fuelled volatility in financial markets, with soft commodities prices pushed up by the search for yield. But several UN and multilateral agencies have so far rejected the comparison with the devastating food and fuel crisis of 2008, and some officials say that higher agricultural prices might actually bring more opportunities for Africa.
We are not in the same situation as we were in 2008, José Cuesta, senior economist at the poverty reduction and equity unit of the World Bank in Washington, tells Emerging Markets. But, he adds, developing countries should act now to boost their prevention strategies and their plans to mitigate the impact of the crisis.
Exceptionally dry weather and drought in Russia, Kazakhstan and Ukraine as well as the US have hit the grain harvest badly in recent months, triggering a boost to soft commodity prices in the financial markets. In turn, the markets have become vulnerable to further volatility as current supply is tight. According to the World Bank, global food prices had soared by 10% last July compared to July 2011; there was a 25% hike in corn prices and 17% in soy beans to an all-time high.
Prices go up because theres more demand, because emerging economies are eating more proteins, because some of the food is used to manufacture fuel. As prices go up it gives an incentive for countries, for farmers around the world to produce more. Over time [the price hike] should correct itself, Alejandro Jara, deputy director-general at the World Trade Organization, tells Emerging Markets.
The problem in the past was that the prices had been very low, and thus the farmers did not get enough real returns to produce more, particularly in the poor countries, whereas in the wealthier countries that problem was corrected by the use of subsidies.
Subsidies distort the pricing system by supporting farmers who are not efficient in industrialized countries while not generating enough incentives for those in poor countries to produce, and the problem has not been resolved despite reforms to the European Unions common agricultural policy, he says.
Agriculture with the purpose of liberalizing trade and eliminating or reducing trade-distorting subsidies is the key stumbling block in the Doha round of WTO negotiations, which has been going on since 2001.
If there were an agreement, that would go a long way to prevent these distortions in trade, but to do that it requires agriculture reform in the US, Canada, Europe, Switzerland, Japan, and the agriculture lobbies dont like that, no one likes to lose money. Its a political issue, says Jara.
Africa would be one of the main beneficiaries if the issue of subsidies in the developed world is resolved and demand for agricultural products increases. But this requires investment, requires innovation, the skills, the technology that sometimes are non-existent or very expensive. Certainly Africa has the potential to do it. Should distortions be reduced or eliminated, this would be an even greater encouragement and incentive for Africa to take advantage of these opportunities, he adds.
Last April, the IMF noted that global food inventories remain significantly below the average level over the past four decades in terms of stock-to-use ratios, especially for corn and rice. The legacy of the decline in global food inventories during the years before the 200708 global food crisis is therefore still present.
But so far, some ingredients of a full-blown crisis are still missing, and many hope that they will never occur. There are other things that must happen to go back to the level we saw in 2008. We would need to see export bans or panic buying, a worsening of El Niño, or bad news from the harvest in the southern hemisphere and high energy prices for a sustainable time. We would need some kind of combination of these factors, says Cuesta, who nonetheless believes that the current situation requires caution. We saw some large countries buying large shipments of cereals, such as Mexico, but that is not what I would describe as panic buying.
Any further setback in large grain producers, such as Brazil and Argentina, would darken the prospects of the food supply even more. The World Bank adds that prices are expected to remain high and volatile in the long run as a consequence of increasing supply uncertainties, higher demand from a growing population, and the low responsiveness of the food system.
Mexicos president Felipe Calderon says that 40% of grain trading transactions are now made by financial agents as opposed to less than 10% five years ago. Cuesta says it is important to discern exactly the role played by speculation: We know that financial markets and especially speculation have played a role. You have to disentangle how much exactly the contribution of each causes. It is critical to have a well-functioning international market, and it is critically important to have good information going on.
Nevertheless, the FAO and other UN agencies agree that we are better placed today than five years ago, according to a common statement issued last month. While they acknowledge the risks of a crisis, Graziano da Silva, Kanayo Nwanze and Ertharin Cousin, the respective heads of FAO, the International Fund for Agricultural Development (IFAD) and the World Food Programme (WFP), also argue that smallholder farmers, many of whom are also poor and food insecure, can be enabled to benefit from higher food prices and become part of the solution by reducing price spikes and improving overall food security.
Rwanda, a small central African state, says it has been reforming its agriculture and is not worried. Over the past years, Rwanda invested in better utilization of land, increasing the use of fertilizers and improving feeds. This has boosted our agriculture sector, which is growing by 5.5% and has room to advance at an even faster pace, Rwandas finance minister John Rwangombwa tells Emerging Markets. As part of our reforms in agriculture, we have been investing in being self-reliant on food. I dont have worries about that when it comes to our economy.
Some emerging market countries may already have some safety nets in place, but they should make them more sophisticated in terms of linking them more to food security issues, says Cuesta.
The World Bank official cites the case of Mexico and Ethiopia, which have managed to achieve this. They are linking big transfers to weather related indices. Whenever they reach thresholds in terms of rainfall or temperatures, these transfers kick in. So basically they are rather a kind of an insurance [mechanism] more than a compensation after something happens. This is a set of policies [countries] can do in terms of mitigation, he says. On the prevention front, low-income countries could be investing more in agriculture to increase productivity and improve their use of technology. Even basic technology may favour better water management or forestation, according to the World Bank.
For the moment, risks still exists for vulnerable African economies. The southern African state of Malawi may yet suffer future severe droughts observed once in 25 years [which] could increase poverty by 17%, says the World Bank. The population in Sudan and South Sudan, as well as the Malian population living in the northern part of the country that fell under the control of Islamic groups, will be especially exposed if and when the conflict flares up again there.
They are more at risk. Whenever there is a conflict, this is going to affect the production of food, the distribution of food. That creates uncertainty, which will of course affect prices, so I would say yes, there is a very serious risk, says Cuesta.
Oil prices and inflation may add to such vulnerability. Already, a loose monetary policy in several parts of the world has sent investors into the world of commodities, seeking refuge from inflation fears. Ulisses Nehmi, a partner at the Sparta investment funds in São Paulo, says money-printing makes it easier for investors to take risks.
The trend has been strengthened by the latest round of quantitative easing in the US, and the current scenario may well weigh on inflation especially in low-income countries, in which spending on food accounts for a large share of households income. Higher oil prices would also have an impact on food prices, due to the use of fertilizers and the costs of transportation and distribution, which again would put low-income countries most of them oil importers most at risk.