Food crisis to get worse, Bank warns

  • By Simon Pirani, Phil Thornton
  • 09 Oct 2008
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The surge in global food and fuel prices will leave 44 million more people suffering from malnutrition this year, World Bank president Robert Zoellick warned yesterday. This will take the total afflicted to 967 million people.

“For the children among them that means lost potential that will never be regained,” he said. “We cannot let a financial crisis become a human crisis. Children suffer long-term consequences from short-term economic shocks. Many never fully recover.”

The World Bank had identified 28 countries that were already fiscally vulnerable from the double shock of higher food and fuel prices, Zoellick said. “But what was a double jeopardy is now a triple hit – food, fuel, and finance – threatening not just to knock the poorest people down, but to hold them down.”

Senior executives of the Bank will meet with those from other international financial institutions on Monday in Washington to coordinate efforts on food supply.

Officials at the IFC, the Bank’s private sector lending arm, warned that the liquidity squeeze could aggravate the food crisis by choking off farmers’ working capital and disrupting trade. They say that agricultural producers in Ukraine, and some Latin American countries, are reporting difficulties in refinancing working capital.

“Working capital is essential. But there is simply not enough liquidity,” Alzbeta Klein, manager with IFC’s agribusiness department, said.

It is understood that some local banks are charging agricultural producers prohibitive interest rates of Libor + 10% and more.

Food processors are benefiting from falling commodity prices, Klein added – but they, too, face refinancing issues. And large traders in soft commodities “will need to manage increased volatility, and some will struggle to meet margin calls”.

Richard Henry, lead economist in the IFC’s agribusiness department, said that agricultural trade will be “seriously slowed down” by the financial crisis. “Perceived risks increase. Counterparty risk has become very difficult to assess, and this will slow down trade.”

There are some short-term positive effects of the financial crisis, Henry added. Lower oil prices, and lower demand for non-agricultural capacity, have impacted freight rates, which fell by about 25% in the last week.

Another key factor is higher agricultural commodity prices, Henry said. Prices have come off since the spring, but most prices remain well above their long-term trend: even after the falls, grains and oilseed prices are roughly twice as high as in recent years.

“This helps the private sector to pick up. In Ukraine, for example, it has produced one of the largest ever harvests, of more than 50 million tonnes.”

To counter the effects of the crisis, the IFC will provide short-term liquidity support for its clients. It also has a broader programme of support for agricultural producers in middle income countries and to invest in supply chains.

Joachim von Braun, director general of the International Food Policy Research Institute, said the failure to achieve a new world trade deal, and the increase in biofuels production, had driven food prices up. “One has to be less optimistic [than in May].”

“While China and India and large African countries got their act together, many other countries did not.”

  • By Simon Pirani, Phil Thornton
  • 09 Oct 2008

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