The global food prices debate

Soft commodities are hardening. Corn, wheat, cocoa and coffee prices have all risen strongly in recent months, suggesting consumers will face an extended period of more expensive food prices.

Can poorer farmers hope to benefit from the rising demand for food? How will the rise in global food prices affect consumers? And can the world continue to feed its expanding population?

Jeffrey Currie, global head of commodities research at Goldman Sachs, Marc Cohen, research fellow at International Food Policy Research Institute and Steven Were Omamo, chief of the World Food Programme’s social protection and livelihoods service, answer your questions below.

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What is your advice for local governments in emerging market countries (like Turkey) to decrease the inflationary effect? Do we need new policies (both internally and globally) to protect consumers?
Murat Basboga, Istanbul

Marc Cohen: it may be that the higher prices revive interest in some sort of system of buffer stocks that would moderate price swings. A global stock, or globally coordinated system of national stocks poses many political problems, however. It would be expensive to maintain, and there would be a sharp debate on how to share the costs. Also, stocks may invite corruption, as in the selling off of Malawi’s a few years ago. There are pressures from the International Monetary Fund against national buffer stocks, precisely because of the high fiscal impact.

Other public policies can help consumers, most notably safety-net type programs for the poorest consumers. Also, high prices may well stimulate production in middle- and higher-income countries, such as Turkey, so that should help over the longer-term. It is also possible that consumers through their organisations could bargain down prices with retailers.

With regard to humanitarian assistance, the answer lies in creating an insurance-oriented system, so that humanitarian agencies no longer have to beg donors to respond to emergencies with adequate resources.

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What effects do you expect to see on food production and prices arising from the inevitable changes in climate identified by the IPCC (e.g. ambient air temperature, changes in precipitation and soil/moisture deficits) over the next 20 years? What are the implications for the agricultural commodities markets?
John Firth, UK

Steven Were Omamo: Data from the Forth Assessment Report of the United Nations Intergovernmental Panel on Climate Change suggests that the most devastating effects of climate change will be felt by those with the least resources to adapt and poor countries would be the worst hit.

Rain-dependent agriculture could be cut in half by 2020, affecting food security and exacerbating malnutrition in Africa. FAO estimates that 95 per cent of agriculture in Sub-Saharan Africa is rain-dependent. This implies that markets for key commodities could be considerably tighter and more volatile.

WFP and the broader UN system, together with governments, will need to work to help vulnerable farmers to adapt to climate change, and to manage and reduce risks from hazards that, with climate change, are likely to increase in intensity and frequency.

Jeffrey Currie: The risk in yields has been skewed toward worst conditions as opposed to best conditions over the past several years due to weather shocks. Going forward, if the current trend in weather is sustained, then the skew towards poor conditions will likely become larger and more persistent.

Marc Cohen: It is clear from the most recent IPCC report that climate change will have significant effects on agriculture, especially in Sub-Saharan Africa. There will be more frequent and more intense severe weather events, and tropical harvests are likely to be reduced. Even in more temperate zones, the warmer weather will mean a longer lifecycle for disease agents, such as malarial mosquitoes, with adverse impacts on agriculture. All of this may be offset by better growing conditions in some historically colder regions, assuming that they are not flooded by the melting of polar ice caps and glaciers.

Also, new technologies may offset some of the problems even in the tropics, for example the development of more drought-tolerant crop varieties (using conventional breeding as well as transgenics). The net effects on markets are hard to judge, although climate change is one factor suggesting that the long-term trend of falling real cereal prices may reverse.

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Do you agree with the proposition that the indirect financial support of farmers in the US and Europe (eg the governmental subsidies) may affect the capacity to produce the cotton, corn, wheat, cocoa and coffee by farmers in other less favourable places in the world? What is the influence of the hidden trade war policies on the process of trade liberalisation towards the free trade agreements under the WTO?
Viktor O. Ledenyov, Ukraine

Marc Cohen: It is clear that subsidies and protectionism in the North has had detrimental impacts on farmers in the South. For example, US cotton subsidies, which in recent years have exceeded the GDP of some of the cotton producing countries in West Africa, have depressed global prices, lowering farm income, export receipts, and government revenues in those West African countries.

Research at my institute indicates that poverty went up as a direct result in Benin in the early part of this decade. Likewise, liberalisation of the rice market in Haiti meant that subsidized US rice was cheaper than the domestic product, hurting many Haitian rice farmers and contributing to economic decline in that country. European subsidies and trade barriers lower the world price of sugar, keep developing country exports out of the EU, and undercut non-subsidising developing country exporters in other markets.

The policies of the North are one reason why the Group of 20 developing country agricultural exporters has become an important force in the WTO negotiations. This is in contrast to the Uruguay Round, when the US and Europe were the main players in the agricultural talks.

Jeffrey Currie: As discussed above, these countries were squeezed out of the global production system by low agriculture prices that were the result of now dwindling excess capacity capacity in the US and Europe. Big subsidies over the past several decades created this excess capacity, which made a significant number of family and small farms in Africa and Latin America uneconomical. As stated above, if agriculture prices can be sustained at higher levels, we may see a reversal of this, with or without free trade.

The irony is that now with mandated biofuel programs in the US and Europe, the lack of free trade is creating inefficient uses of globally available crop lands for biofuel production, pushing biofuel and agriculture prices in the US and Europe higher than what they would otherwise be. By removing these trade barriers, land use would be more efficiently allocated, resulting in lower agriculture prices than today, but at higher levels than the past several decades when marginal farmers were squeezed out.

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Is the current phenomena of increased prices in food commodities an actual decrease in ”supply” due to increased demand or the result of the inefficiency of the market mechanisms in place in its response? (An example of this would be accepting in kind commodity donations from wealthier markets rather than accepting cash from those countries and encouraging growth and purchasing within the poor country). Are rising prices a cogent argument against continued US subsidies of grain commodities? Shouldn’t rising prices encourage growth, competition and value in developing market commodities?
Scott Pappert, US

Marc Cohen: Scott attributes too much to market mechanisms, in my view. Accepting in-kind commodity donations from wealthier countries’ governments (not their markets!) is in fact an appropriate response when there is price inflation in the recipient country, when markets are thin and poorly integrated, or when lack of infrastructure creates high costs to moving local produce. In other circumstances, and particularly when there are substantial surpluses within the recipient country or in neighbouring countries, cash donations would make more sense to address food emergencies.

But some donors, such as the US, do not provide such ”cash for food” (in contrast to many European donors and Canada). None of this is a result of ”market inefficiency” - it is the result of politics and policy in the donor countries. In principle, rising prices should encourage agricultural development in the developing countries (and are likely to do so).

I wholeheartedly agree that rising prices are a good logical and economic argument against US and other developed country subsidies, and there are many other arguments (for example, the subsidies are price depressing; they harm poor farmers in the developing world by depressing prices and undercutting local markets; they make a mockery of alleged rich-country commitments to agricultural trade liberalisation; and they cost consumers and taxpayers in the North a lot of money). The question is political, however.

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To what extent is the current rise in food prices related to the biofuel rush? Will this trend pave a way to wider recognition of GM food? And is there any other way to dramatically improve the agriculture industry’s productivity?
Yu Kong, China

Steven Were Omamo: Increased production of biofuels is not the only driver of demand growth and price increases for cereal commodities. Other factors pushing up prices are increased demand from China and India for feed use, and also transport costs, which have also risen because of the relatively high price of oil.

The relationship between the price of food and the acceptability of GM food is not entirely clear. At present, the latter would appear to be driven more by biosafety and human health concerns than by market forces.

The Asian Green Revolution featured introduction of yield enhancing technology in a context of government intervention to support farm output prices and subsidise farm input prices, alongside major public investments in extension systems and rural infrastructure, particularly roads and irrigation. Also crucial was political leadership and courage at the highest levels - leadership that shaped strategic priorities and mobilised strategic investments in line with those priorities. Dramatic increases in agricultural productivity are likely to require a similar package of responses.

Marc Cohen: Demand for biofuels is clearly one of the drivers in higher global food prices, as is increased demand for feed for animals to produce meat in Asia, especially China. Poor weather in many parts of the world, possibly related to global warming, is another factor. It is likely that genetic engineering will be attractive to many producers, especially if the technology can develop traits such as drought tolerance, or traits related to fuel production.

That said, conventional plant breeding and agroecological approaches also have a great deal to offer in terms of boosting productivity, so it is mostly likely that a range of approaches will be pursued. For poor farmers, it may not be possible to adopt genetically modified varieties due to cost of seeds and prohibitions on using saved seed due to intellectual property rights protection. Conventional breeding and agroecological or organic approaches, moreover, are not politically controversial, whereas agricultural biotechnology remains very contentious.

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How do you envisage world food production continuing at the level needed to feed an ever increasing population when hardly any farmers worldwide are receiving prices for their produce which cover production costs?
Ian McDonnell, Portaferry

Steven Were Omamo: The kinds of farming communities that we serve do indeed face market prices that do not favour increased production. Low product prices in these areas are linked to a range of inefficiencies in markets borne of poor market infrastructure and institutions. These market inefficiencies must be addressed if poor farmers’ huge potential for contributing to world food production is to be realised. Also key to unleashing this source of food are investments in increasing farm productivity and expanding access to farm finance.

Marc Cohen: The current rise in prices means that it will be economic for many farmers to produce more, although there is clearly a trade-off among demand for food, feed, fuel, and fiber. It is important for developing countries to invest in their own agriculture, both as a source of food but also as a source of income. In the poorest countries, agriculture is the main source of employment, exports, revenues, economic growth, and poverty reduction.

The member states of the African Union have agreed to boost agricultural spending to 10 per cent of government budgets by 2010, so this is indeed recognised in the developing world. But trade barriers and subsidies in developed countries are a big problem for developing countries’ exports, and subsidise imports from developed countries can have a big negative impact on developing country production.

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By growing crops for biofuels farmers are reducing the space for the growth of food crops, creating a two-fold benefit for farmers. Firstly, the demand for biofuels is high and their production is supported by government subsidies, making this a lucrative venture. Secondly, the reduced supply of food crops increases their market value. Do you agree with this assertion, and what can be done to prevent agriculture exploiting this situation at the expense of inflationary pressures for consumers?
Ian Dawson, University of Southampton, UK

Steven Were Omamo: The WFP has recognised that biofuels are likely to present major challenges in relation to our work, although there are also some possible opportunities. The challenges include sustained higher prices and volatility of basic food commodities, which is partly attributable to biofuel production. The opportunities come in the possibilities that biofuel production presents for farmers in the developing world. Biofuel production in developing countries could increase income-generating opportunities and the value of arable farmland. This could mean benefits for farmers.

This is offset, however, by recognition that the agricultural economy in many parts of the world, especially in Africa, is undercapitalised and uncompetitive, suggesting more limited scope to respond to these opportunities. In those areas that do benefit from relatively regular rainfall, farmers could participate in the so-called ”biofuel revolution,” but only if the right investment and a sustainable, development-friendly international biofuels regime is in place.

Marc Cohen: I agree that a major factor in the rise in food prices is biofuel demand, and that farmers are benefiting from higher prices and subsidies. It would be good policy but difficult politics to reduce or eliminate the subsidies in light of the higher prices. Also, government could offer incentives to farmers to sell their crops for use as food rather than fuel. Low-income consumers can be protected from the harm of food price inflation by expanding safety net programs, such as food stamp benefit levels in the US, or the public distribution system in India. However, that will be expensive and in the US would require legislation (since food stamp benefit levels are not indexed for inflation).

More extensive government intervention might be desirable from consumers point of view, but will be resisted by farmers and industry, and the political strength of the latter is high in the wealthy countries. In developing countries, where much of the population remains rural, farmers have less clout, but many food buyers are themselves farmers, so the politics are quite complicated. There is the possibility that the high prices will eventually stimulate a supply response that will moderate prices, but that would take time and is not guaranteed.

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As far as corn price is concerned, would you say that US subsidies for producing ethanol have a significant influence? Furthermore, do you think these subsidies will remain, even in the case of a change in administration in Washington? Finally, do you expect ethanol producers to accelerate R&D projects on alternative biomass sources?
Bertrand Montel, Montreal, Canada

Jeffrey Currie: Yes, the US subsidies make corn based ethanol production economically possible given current technology. We estimate that corn based ethanol has a cost of above $80/barrel. The 51cent/gallon subsidy on ethanol in the US essentially creates a $20/barrel subsidy, making it competitive with crude oil at $60 and beyond. We don’t think the subsidies will be reduced in the near term, as this is driven by domestic politics.

Finally, alternative technology exists, but is currently uneconomic at today’s energy prices. Biomass alternatives will likely come to market, but it will likely require a decade and extensive R&D expenditures.

Marc Cohen: Subsidies for ethanol have had a significant influence, but the increased demand generated by higher petroleum prices is probably more influential, and has led to significant investments in processing facilities by larger firms. That said, the subsidies will remain, because they are driven by politics, not market forces. They are popular among farmers (and the related industry) in states that produce large amounts of corn.

Those actors provide support to politicians in both major political parties to assure that they continue to get subsidies. The politics are therefore regional, not partisan, so a change in party will not make a difference (and in any event, the federal role in agriculture is historically a Democratic project, not a Republican one, although today there is bi-partisan support from politicians in both parties with strong rural constituencies). Finally, I do expect continued R&D on various biomass sources, particularly since there will be political pressure to seek alternatives to corn, in light of rising food prices.

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What can actually be done to reduce the high food prices we are seeing around the world?
Javier Gonzalez, Buenos Aires, Argentina

Jeffrey Currie: The problem is that trade barriers in biofuels and agriculture products result in inefficient uses of globally available crop lands. By removing these trade barriers, land use would be more efficiently allocated, resulting in lower agricutlure prices.

Marc Cohen: Over the next several growing seasons, it is entirely possible that farmers around the world will increase their plantings in response to the higher prices, and that the increased supply will then reduce prices. That was certainly the pattern with previous price spikes, as in the late 1990s. However, we have had several years of falling cereal stocks, and biofuel demand was not such a large factor in the late 1990s. Nor did we face spiking petroleum prices then.

There is no global system of buffer stocks, or a globally coordinated system of national cereal reserves that could be used to moderate price swings, although proposals for such systems have been around for decades. On the other hand, many national governments, in both the south and the north, do have social programs that can ease the burden of higher prices for vulnerable populations. Aid donor support for such programs in the poorest countries will be very important in the short- to medium-term.

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Which grain-exporting countries will most benefit from the rising demand from an increasing world population and decreasing supply from bad weather and reduced acreage?
John Bruk, Vancouver, Canada

Marc Cohen: The gains may not all go to the traditional food exporters, such as the US and Canada, since parts of North America are also experiencing poor weather this year. Also, it is not so clear that population growth is driving increased demand. In Asia, demand is rising for meat, which in turn requires more feed, as a result of urbanisation and income growth. In addition, the rate of population growth has slowed in Sub-Saharan Africa, due to HIV/Aids and other diseases.

Jeffrey Currie: Brazil and Argentina. Both are biggest soybean exporters, but at the same time, Brazil also pursues sugarcane based ethanol, which will tend to undermine marginal acreage expansion into soybeans.

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Will the demand from China and India and the use of crops for biofuels sustain food price inflation? Do the structural changes to supply and demand mean that we are seeing what is essentially a long-term shift?
Sunil Singh, London, UK

Steven Were Omamo: World population growth, increasing demand for meat and dairy products in several developing countries, and demand for grains and oilseeds for production of biofuels have increased the overall demand for agricultural commodities. These developments could sustain agricultural prices over the short and medium term – reversing a long-term trend of declining prices – and increase their volatility, as the current model of crop-based biofuels is increasingly tying energy and agricultural prices together.

The current generation of biofuel technologies uses food crops such as sugarcane, corn, beet, wheat and sorghum to produce ethanol; and sunflower, soy, palm, or coconut to produce biodiesel. However, second-generation technologies for biofuel production, when ready for commercial use, will convert cellulose into ethanol using switchgrass, corn stems, wood chips or any other agricultural by-product. These technologies could allow for cheaper and more environmentally friendly biofuels without taking food out of the food chain, potentially reducing upward pressure on food prices.

Jeffrey Currie: Yes, as these factors have created a structural upward shift in trend demand growth for agriculture products. Historically, the overall demand for agriculture products has grown at about 1.5 per cent per annum (pa). These factors you list have already accelerated trend demand growth to around 2.0 per cent pa and will likely take it to 2.6 per cent pa over the next decade.

Over the past four decades, agriculture demand growth was met through yield expansion, not acreage expansion. Going forward, increasing yields will no longer meet the faster trend demand growth, requiring acreage expansion for the first time in decades. Growing acreage is substantially more expansive than simply tweaking yields as it requires expensive infrastructure development, which will put upward pressure on the cost structure and long-term prices, much like we have seen in energy and metals.

But more importantly, if you can turn agriculture products into energy, then an arbritrage relationship must exist between the two, creating what we like to call ”bushel-to-barrel” convergence. Therefore, if you believe in the sustainability of higher long-term oil prices as we do, then you must also believe in the sustainability of higher long-term agriculture prices.

Marc Cohen: Sunil Singh raises the interesting question of a long-term structural shift. It is difficult to predict exactly what will happen. The increased demand may generate a substantial supply response that moderates prices over the next few years. But this may not happen. We face competing demand for water as well as cereals - from industry, households, and for ecosystem services as well as agriculture - and that is another long-term driver of higher food prices.

A big related question is whether smallholder farmers in developing countries will be able to reap some benefit from higher global prices, or whether all the gains will go to big commercial operators in the North and South.

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Outside soft commodities where biofuel demand is altering the demand picture, what are the drivers for higher prices and which commodities have the most bullish prospects?
Sean Diffley, US

Jeffrey Currie: Soybeans, soybeans, and soybeans. There are four key drivers:

1) Strong demand growth for protein from the emerging markets will create significant leverage to soybeans as soybeans are the primary livestock feed in the emerging markets.

2) Soybeans are being crowded out through crop rotation to grow corn and other ethanol related crops.

3) The use of genetically modified soybeans has a 65 per cent penetration rate, which is the highest among all crops, leaving less room for yield improvements.

4) Soybeans are the most inefficient producer of biofuels, creating 60 gallons/acre versus sugarcane at 750 gallons/acre, so even a modest use of soybeans for biofuel use will create a very leveraged pull on demand.

Marc Cohen: It is clear that rising petroleum prices are a big driver in other price increases. These raise transportation costs, and the costs of petroleum-based products, such as fertilizers.

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The UN World Food Programme’s recent warning that it would be forced to reduce food aid unless donor countries provide extra funds raises the question of how to reduce the need for such aid in the first place. Should the UN invest more heavily in research focused on achieving sustainable improvement of agricultural productivity in developing countries?
Anon

Steven Were Omamo: The WFP is currently able to meet the emergency food needs of 90m people worldwide. Maintaining this level of support is proving increasingly challenging, but we have not yet had to reduce our reach because of high commodity prices.

It is indeed very important to invest in agricultural productivity growth, especially in smallholder areas. But the increased supplies induced by such investments must be absorbed on market otherwise farm-gate prices fall and farmers become less willing to adopt improved technologies. We now buy 77 per cent of the food we deliver from 70 developing countries. This is allowing us to explore avenues for using our purchasing power to contribute to agricultural development by linking small farmers to markets and helping to develop market institutions. When paired with productivity-enhancing supply-side investments, interventions of this kind could be very effective in addressing the root causes of food insecurity.

Jeffrey Currie: These countries were squeezed out of the global production system by low agriculture prices to begin with. Big subsidies in US and Europe created low agriculture prices and pushed a lot of family, small farms in Africa and Latin America into bankruptcy. Now if agriculture prices can be sustained at higher levels, we may see a reversal of this. However, the problem is to rebuild the infrastructure following decades of destitution, which aid would help. In addition, technology aid should also help in terms of raising farming efficiencies.

Marc Cohen: The anonymous poster is quite correct that investments in agricultural productivity in developing countries are essential for long-term food security and famine prevention. And indeed, the level of development assistance from all donors going to agriculture and rural development is far lower today in real terms than it was in the early 1980s; this issue needs urgent attention.

Also important are approaches that focus on employment, such as India’s new national employment guarantee scheme, which assures public employment when people lose their regular sources of livelihood, so that they can continue to purchase food. Nevertheless, food aid is likely to remain important in the near term, particular for dealing with complex emergencies involving violent conflict, such as that in Darfur, Sudan, and other situations in which people become refugees or internally displaced. The food could be sourced from within the affected country or externally, as is most appropriate to the situation.

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