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Addressing agricultural price volatilities and food policy challenges in LDCs

Rachid AmuiUNCTAD, Special Unit on Commodities

UNCTAD Virtual Institute presentation 2011Venue: Geneva, 2011

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Presentation structure

1. Agricultural development

2. Food price volatility and food price rises

3. Government reaction

4. Implications for policy

5. UNCTAD actions to help address the emerging price volatility challenges

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Agriculture is crucial for LDCs

The agricultural sector is central to any development strategy for CDDCs, especially LDCs, because most of the population is linked to agriculture and dependent on it either directly or indirectly.

Agricultural development is key for broad-based economic growth and poverty reduction through:

– Enhancing food security (reliable and affordable supply)– Creating value-added and employment, especially for women and the

poor (rural and urban)– Providing capital and inputs to other economic sectors– Creating demand for the non-farm sectors– Improving export performance (integration in the global economy)

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Agriculture is crucial for LDCs In 2006, 28% of LDC GDP derived from the agricultural sector, (13% - ODCs) Agriculture employ 69% of LDC economically active population (53% - ODCs)

Evolution of agriculture employment as a % of total employment

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

LDC RGDP > 6%2006

LDC RGDP 3 - 6%2006

LDC RGDP < 3%2006

LDC Average

1980

2006

Evolution of the share of agriculture in total GDP

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

LDC RGDP > 6%2006

LDC RGDP 3 - 6%2006

LDC RGDP < 3%2006

LDC Average

1980

2006

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Agriculture is crucial for LDCs

70% of LDC population live in rural areas

The size of the LDC rural population is forecast to grow until 2020 and to decline thereafter, due to higher rates of urbanization

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Agriculture is crucial for LDCs

Agriculture has a better income distributional effect in mostly agrarian economies (WDR, 2008)

Agriculture has a high multiplier effect (1.5 to 2.7) Agriculture has a high proportion of labour force Therefore, economic growth, reduction of poverty and

hunger in LDCs cannot be achieved without successful agricultural and rural development as over 70% of LDC poor live in rural areas

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But agricultural productivity is low …

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And rural poverty in LDCs is high ….(% of population below the poverty line)

LDC poverty is high– In 2009, 35% of LDC

population live on less than $1 a day

– For LDCs to meet the MDG poverty target, extreme poverty rate must fall to 20% by 2015. UNCTAD projections show that LDCs likely to reach a rate of 33% by 2015.

Rural poverty is particularly acute in LDCs 0% 10% 20% 30% 40% 50% 60% 70% 80%

Sierra Leone

Zambia

Rwanda

Gambia

Mauritania

Mozambique

Bangladesh

Burkina Faso

Ethiopia

Uganda

United Rep. Of Tanzania

Cambodia

Nepal

percent

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Food Insecurityremains criticalThe average share

of the undernourished in the total LDC population, although declining since 1990, is still high.

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Rising food aid in LDCs

0

1

2

3

4

5

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2000 2001 2002 2003 2004 2005 2006 2007

%Food Aid as a Share of Total Aid in LDCs 2000 - 2007Food aid as a

share of total ODA is rising in LDCs

For example, Africa has a high dependency on food aid – nearly US$ 2 billion per year

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And a rising food import bill ….LDC food import bill rose from $6.9 billion in 2000 to $23 billion in 2008

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Whilst ODA to the sector is declining

0

4

8

12

16

20

0

2

4

6

8

10

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Percentage

Billio

n (20

04

US$)Share and level of ODA to agriculture

ODA to agriculture (billion 2004 US$)Share (% of agriculture to total ODA)

ODA to agriculture in developing countries has declined sharply between 1975-2005

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Improved agricultural performance will require investment and completion of Doha round

Increased public and private investment to: – increase farmer’s and private sector capacities– foster uptake of new technologies and innovations– develop infrastructure (roads, ICT etc.)– strengthen the capacities of State institutions to develop and

monitor appropriate policies– widen farmer access to microfinance institutions– provide financial investment and capacity building support

for agriculture and rural development through producer groups, cooperatives, NGOs etc

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Food price volatility and the causes

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Context 1:

The World Bank estimates that 119 million more people have been pushed into hunger as a result of the 2008 food crisis. There are now an estimated 1.02 billion malnourished people worldwide

Price fluctuations are inherent in agricultural markets – partly due to the supply-demand dynamics and the unpredictability of weather patterns and harvest yields.

There are debates as to the extent to which activity in futures trades and over the counter markets for agricultural commodities impact on this volatility. Whatever the cause, extreme volatility in food prices deters producers from making the necessary investments for increasing productivity and production: this is one of the underlying causes of continued world-wide food insecurity.

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Long term commodity price trends …..

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Short-term commodity price trends 2010-2011…..

Food prices worldwide continued to rise in February 2011, and the recent spike in oil prices could push food costs even higher in the months ahead

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Causes of food and agricultural commodity price volatility

Common/ macro factors Sector-specific factors Economic growth Exogenous to agriculture Weak dollar Energy prices Fiscal expansion Weather Low cost of capital Strong demand "Speculation" Biofuels

Endogenous to agriculture Policies Underinvestment

Low stocks

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Context 2

The FAO food price index hit a new record in February, driven mostly by higher cereals, meat and dairy product prices;

The situation is not critical in Africa because of good harvests of maize and sorghum. In Asia edible oil and some cereal prices (e.g. wheat) are at high levels

A major factor behind recent cereals price volatility has been an abrupt disruption to food supplies, following a series of natural disasters in Australia, Pakistan, Vietnam and Thailand since Q3 2010

Increased demand for food from fast-growing BRICS populations

Growing demand for biofuels Higher fuel prices are also increasing the cost of food

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Food commodity price indices …..

The FAO Food Price Index averaged 231 points, up 3.4% from 12/ 2010. The highest level (both in real and nominal terms) since 1990.

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Food price increases in LDCs, volatility and impacts

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Food prices and volatility

There are two factors critical to explaining the transmission of international food price trends to domestic markets:• the relative share of domestic food demand satisfied by

either domestic food production or by food imports; and

• the ability of government / public policy to regulate domestic markets through trade policy at the border and/or the instruments of domestic policy (consumer subsidies, social safety nets, etc.).

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LDC Food price trends: Burundi 2008-2011

Wheat flour prices remain 20% higher than in mid 2008. Price stabilised since 01/2010

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LDC Food price trends: Cambodia

Rice retail prices have declined 4.5% since 01/2010. However edible oil prices have risen steadily since mid-2010.

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LDC Food price trends: Mali

Rice retail prices have declined since 01/2010.

Millet and sorghum prices have declined steadily since 01/2010.

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Impact of rising prices and volatility on LDCs

Food expenditure is on the rise; Rising oil prices are also eroding consumer spending power. The price of oil reached US$112 p.bl in March 2011

For food importing LDCs [36] Rising food prices increase import bills negatively affecting trade and current account deficits

For food exporting LDCs [14] limited benefit from higher prices due to inadequate access to land, weak productive capacities and higher costs linked to higher oil prices

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Impact of rising prices & volatility on farmers 1

Producers struggle to generate high returns and thus stabilize market supply due to lack of long-term support to agricultural production.

Given uncertain market opportunities and unpredictable prices, insecurity pushes farmers to adopt risk minimization strategies that discourage investment in intensification.

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Impact of rising prices & volatility on farmers 2

Farmers struggle to plan their economic activities, as price volatility makes it difficult to obtain a reasonable price every year. Often farmers invest (blindly) speculatively as they do not know whether they will cover production costs, which often leads to further indebtedness and less capacity to access loans for investment purposes.

The instability means that prices often do not serve as signals for farmers to make decisions on what to plant and when.

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Impact of rising prices and volatility on LDC poverty

Rapidly rising international food and energy prices in 2010 and early 2011 will have negative effects on poverty trends in LDCs:

Rising food prices are restricting the ability of households to meet essential subsistence needs

Rising food prices will have second-round effects on economic growth with farmers squeezed because of rising input and transport costs

For 20 LDCs, the price rises will exacerbate already-existing food emergencies

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Implications for policy

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Government reactions

Govts, net importers - high import prices and BOP difficulties; in the of case higher food prices, food insecurity.

Policy response, food insecurity: safety nets food reserves (national/regional) increased productivity enhancing investments to address vulnerability

through increased incomes, etc and increases resilience to shocks

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Policy responses to rising commodity prices in selected African LDCs, 2008-2010 Asia-Pacific

Consumption Production Management & regulation of food markets

Food assistance

Cash transfers

Food for work

Price subsidies

Price controls

Lower taxes

Prod / Input

subsidies

Lower taxes

Lower import tariffs

Export bans/ tariffs

Build-up food

reserves

Price support

Import bans or raise tariffs

Burkina Faso • • • • • • • • • Burundi • • • • • • • Chad • • • Ethiopia • • • • • • • • • Mali • • • • Niger • • • • • Rwanda • • • • Senegal • • • • • • • Tanzania • • • • Uganda • • •

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Policy responses to rising commodity prices in selected Asian and Pacific LDCs, 2008-2010 Asia-Pacific

Consumption Production Management & regulation of food markets

Food assistance

Cash transfers

Food for work

Price subsidies

Price controls

Lower taxes

Prod / Input

subsidies

Lower taxes

Other support

Lower import tariffs

Export bans/ tariffs

Build-up food reserves

Price support

Import bans or raise tariffs

Afghanistan • • • • Bangladesh • • • • • • • • • • • • Cambodia • • • • • • • Kiribati • • Myanmar • Nepal • • Timor Leste • • • • Yemen • • • •

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Addressing the impact of price volatility 1

Some strategies used by Farmer organizations’ include: Collective storage and marketing Warrantage Contract farming Agricultural exchanges Contractual relationship with processors Establishment of regional cooperatives Production support: input credits and training (IT, CEF) Guarantee fund Price and Volume controls Buffer stocks Security fund

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Addressing the impact of price volatility 2

Government can play a key role in their operations, often serving as the major trading partner for their products. The current challenge is to develop a joint public-private partnership approach to market regulation and agricultural development.

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Addressing the impact of price volatility 3

This could involve: (i) the introduction of a combination of instruments that aim to anticipate

market behavior (e.g. G20 AMIS), (ii) a consultative decision-making approach that brings together supply

chain stakeholders and government actors, (iii) price negotiations between public and private players.

FOs often take care of the production support needs of their members, but the government still has a role to play in facilitating access to agricultural finance.

Although FOs often test new contractual forms to market their products, the government may need to improve trader regulation and take steps to create a secure environment (by registering contracts, offering possibilities to take legal recourse, etc.).

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Addressing the impact of price volatility 4 Governments needs to improve its capacity to stock food in case

of crisis or price volatility. Trade organizations offer a potential / adequate framework for

negotiations to improve dialogue between the private and public sectors. They exist in several agri-food industries. It would be useful for them to develop their potential to: (i) to oversee contracts between sector actors and (ii) negotiate with government authorities.

Regional integration, the free movement of goods and the implementation of a regional agricultural policy should be considered as driving forces for domestic agricultural production.

Improved agricultural productivity and technological adaptation and innovation remains the sine qua non of future African food security.

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Policy implications

Agrarian development programmes are needed to raise investment and stimulate agricultural productivity

Increased public spending on R&D to improve agricultural technology and raise productivity is essential

OECD countries should avoid reducing aid to LDC agriculture. Recent trends with ODA for agriculture declining from 18% to 4% of total ODA needs to be reversed

Social protection measures for poorest food consumers will be required Strengthen mechanisms to manage and cope with risk among smallholder

farmers, notably a range of financial and insurance tools Promote sustainable approaches to agricultural intensification, which are both

adaptable and resilient to shocks that affect food supply and result in price volatility

The G20 must deliver on its L`Aquilla commitments and this year respond positively to the need to reduce commodity price volatility

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UNCTAD actions to help address the challenge of volatility

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UNCTAD actions: Warehouse Receipt Systems (WRS)

UNCTAD are developing new warehouse receipt systems (WRS) in Africa EU-funded All ACP Agricultural Commodities Programme (AAACP):

1. Best practice sharing and capacity building on WRS/warrantage; 2. Developing WRS/warrantage for specific agricultural

commodities, such as gum Arabic in Mali and coffee & cocoa in Cameroon.

3. Commissioned two studies to review the recent development of warehouse receipting, warrantage and similar initiatives in six Eastern & Southern African countries and five West African countries.

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UNCTAD actions: Supply chain finance and MIS

• UNCTAD has also organized regional workshops and provided direct technical assistance on supply chain finance and market information systems, for example:

Atelier De Validation De L'etude De Faisabilite Sur La Creation d'un Fonds De Garantie Pour La Filiere Coton en Cote D'ivoire. 28-29 Juillet 2010, Abidjan, Cote d’Ivoire

Factoring/Receivable Discounting: A Financing Tool for Agriculture Sector Development - Organized by UNCTAD and the Caribbean Development Bank. 4-5 November 2009 - Christ Church, Barbados (Savannah Hotel).

CARICOM/UNCTAD/CARDI Workshop on the Establishment of a Regional Market Intelligence System & Development of a Sustainability Claims Portal for the Caribbean, 17 - 19 February 2011, Port of Spain, Trinidad and Tobago.

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UNCTAD actions: Support to the improvement and development of LDC commodity exchanges

Since 2010, UNCTAD has organized regional workshops and provided direct technical assistance to Commodity Exchanges in several countries: UNCTAD and the Securities and Exchange Commission of Ghana (SEC-

Ghana) Joint Workshop on "Charting the Way Forward Toward the Implementation of a Commodities Exchange and a Warehouse Receipt System in Ghana", 15-16 September, 2010, Accra, Ghana.

Further development and upgrade of the Dominican Republic’s Commodity Exchange performance (BOLSAGRO), and link to regional electronic exchange, December 2010.

Stakeholder consultation Workshops with representatives of the Capital Markets and Securities Authority, CFC, and the Tanzanian Ministry of Finance and Economic Affairs on “The creation of the Tanzania Commodity Exchange (TCX)”, Tanzania, June 2010.

Regional capacity building workshop on “Enhancing the functioning of cereals markets in West Africa”, 9-11 December 2010 in Accra, in partnership with the ROPPA and the CILSS.

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UNCTAD actions: Consensus building through its intergovernmental machinery

Contributions to the inter-agency G20 report on: Price Volatility in Global Food and Agricultural Markets: Policy Responses, 2011.

UNCTAD’s Multi-Year Expert Group Meetings both in 2010 and 2011 have discussed price volatility of agriculture commodities and its implications for developing countries.

Both UNCTAD Global Commodity Forums of 2010 and 2011 have specifically addressed these issues: Price Volatility, determinants, potential developments and impact, Policy options to Reduce Price Volatility: Market information and

transparency, Stocks, Use of Futures markets, Domestic and trade policies Coping with volatility in the short run: Emergency food reserves, international

and national safety nets Coping with volatility in the long run: Market-based mechanisms to stabilize

food import bills Coping with volatility in the long run: Measures to increase resilience of

agriculture

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UNCTAD actions: Infocomm partnerships

UNCTAD through its e-portal INFOCOMM develops partnerships with specific authoritative sources of information (e.g.: ICAC for cotton).

INFOCOMM has also partnered CIRAD (Centre de coopération internationale en recherche agronomique pour le développement), to deliver a market report on latest trends on the world rice market on a monthly basis CIRAD will also help UNCTAD deliver an upgraded version of Infocomm e-profile on rice.

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Thanks for your attention!

For more information on the UNCTAD SUC’s research and technical assistance activities see:

http://www.unctad.info/en/Special-Unit-on-Commodities For UNCTAD activities under the AAACP see:

http://www.unctad.info/en/Special-Unit-on-Commodities/Events-and-Meetings/All-EU-ACP-For more information see: Price volatility in food and agricultural markets: Policy responses (Downloadable -

http://www.oecd.org/dataoecd/40/34/48152638.pdf) Comprehensive framework for action, July 2008 (Downloadable:

http://www.un.org/issues/food/taskforce/Documentation/CFA%20Web.pdf)