Understanding the crisis of soaring international food prices Maurice Saade Food and Agriculture Organization of the United Nations Regional Office for

Understanding the crisis of Understanding the crisis of soaring international food pricessoaring international food prices

Maurice SaadeMaurice Saade

Food and Agriculture Organization Food and Agriculture Organization of the United Nationsof the United Nations

Regional Office for the Near EastRegional Office for the Near East

Alexandria Media ForumAlexandria Media Forum April 18, 2008April 18, 2008

Overview Overview Soaring international food pricesSoaring international food prices

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1.1. Main featuresMain features & recent trends & recent trends

2.2. Underlying reasonsUnderlying reasons

3.3. ConsequencesConsequences

Maurice Saade, FAO, April 2008

Soaring food prices: recent trendsSoaring food prices: recent trends ______________________________________________________________

Source: FAO, Crop Prospects and Food Situation, April 2008 Maurice Saade, FAO, April 2008

FAO food price indices, 2005-2008

Soaring food prices: recent trendsSoaring food prices: recent trends ______________________________________________________________

Source: FAO, Crop Prospects and Food Situation, April 2008 Maurice Saade, FAO, April 2008

Soaring food prices: historical trends Soaring food prices: historical trends ______________________________________________________________

Source: FAO, various years Maurice Saade, FAO, April 2008

Soaring food prices: historical context Soaring food prices: historical context ______________________________________________________________

Source: World Bank Maurice Saade, FAO, April 2008

Soaring food prices: future trends?Soaring food prices: future trends? Medium-term projectionsMedium-term projections

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Source: OECD-FAO Agricultural Outlook 2007-2016 (Aug. 2007)

IFPRI’s modeling of cereals price changes IFPRI’s modeling of cereals price changes (2000-05 and 2006-15)(2000-05 and 2006-15)

Source: M. Rosegrant (prelim. results with IMPACT-Source: M. Rosegrant (prelim. results with IMPACT-WATER) .WATER) .

0

100

200

300

2000 2005 2010 2015

Rice Wheat MaizeOilseeds Soybean

US$/ton US$/ton


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1.1. Main features & recent trendsMain features & recent trends


3.3. Consequences Consequences


Soaring international food pricesSoaring international food prices

Underlying reasons?Underlying reasons? ______________________________________________________________

Interplay of complex factors

Supply vs. Demand factors

Short-term vs. Long-term

Temporary vs. Permanent (Structural)


Underlying reasons? Underlying reasons? Supply factorsSupply factors

(1) Unusual climatic events (2004-2006) lead to disruptions in production in key exporting countries

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Source: data from FAO, various years Maurice Saade,

FAO, April 2008

WheatWheat Coarse grainsCoarse grains

USUS 16%16% 12%12%

EUEU 14%14% 16%16%

AustraliaAustralia 52%52% 33%33%


(2) Historically low levels of global stocks ______________________________________________________________________________________________

Source: data from FAO, various years Maurice Saade,

FAO, April 2008


(3) Increasing fuel costs ______________________________________________________________________________________________

• Increasing costs of farm production (fertilizers, pesticides, farm machinery, pumping costs, etc)

• Transport costs: steep increase in marine freight costs


Underlying reasons? Underlying reasons? Demand factorsDemand factors

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(1) Long-term changes in the structure of food demand in developing countries: rapid economic growth has led to diversifying diets away from starchy foods to meat products.


Changing structure of consumption

Source: from The Economist, Dec. 6, 2007 Maurice Saade, FAO, April 2008

Consumption: 2005/1990 ratios Consumption: 2005/1990 ratios of per capita consumptionof per capita consumption

India China Brazil Nigeria

Cereals 1.0 0.8 1.2 1.0

Meat 1.2 2.4 1.7 1.0

Milk 1.2 3.0 1.2 1.3

Fish 1.2 2.3 0.9 0.8

Fruits 1.3 3.5 0.8 1.1

Vegetables 1.3 2.9 1.3 1.3

Source: FAO, various years Maurice Saade, FAO, April 2008

Source: Global Subsidies Initiative 2007 Source: Global Subsidies Initiative 2007 (adapted from von Braun, 2008)(adapted from von Braun, 2008)

Ethanol production 1975 - 2007 (billion liters)Ethanol production 1975 - 2007 (billion liters)

BiodieselBiodiesel production production 1991 - 2007 (billion liters)1991 - 2007 (billion liters)

EthanolEthanol > 90% of biofuel > 90% of biofuel production; Brazil and US production; Brazil and US dominate the marketdominate the market

Biodiesel:Biodiesel: EU is the largest EU is the largest producer and consumerproducer and consumer

Underlying reasons? Underlying reasons? Demand factorsDemand factors (2) (2) The biofuels boomThe biofuels boom

Countries’Countries’ plans for Biofuel plans for Biofuel expansionexpansion

EthanolEthanol BiodieselBiodieselUSA: 16%USA: 16% USA:USA: 19% 19%

EU: 45%EU: 45% EU:EU: 37% 37%

Brazil: 8%Brazil: 8% Malaysia: 248% Malaysia: 248%

India: India: 15% 15% Indonesia: 143%Indonesia: 143%

China: China: 3%3% Thailand: Thailand: 70%70%

Source: USDA, 2006; 2007.Source: USDA, 2006; 2007.

(Adapted from von Braun)(Adapted from von Braun)

AnnualAnnual growth in biofuel production…2010/12 growth in biofuel production…2010/12

Source: Global Subsidies Initiative 2007Source: Global Subsidies Initiative 2007

The biofuels (subsidy-driven) boomThe biofuels (subsidy-driven) boom

Soaring international food prices - Underlying reasons?Soaring international food prices - Underlying reasons?

Summing upSumming up__________________________________________________________________________________________

CCritical question: The change in diet has been slow and incremental, it cannot explain the dramatic price movements of the past year.

• Very tight supplies: is this temporary? permanent? (impact of climate change?)

• Biofuel: Policy green lights for major expansion in biofuel in the USA and the EU: a clear signal to global markets for a major & permanent shift in demand for some crops + spin-offs to most agricultural commodities

• Market Panic!!Maurice Saade, FAO, April 2008


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1.1. Main features & recent trendsMain features & recent trends


3.3. Consequences Consequences


Soaring international food pricesSoaring international food pricesConsequences: Consequences:

Who gains?Who gains?

- Farmers in food exporting countries are the main gainers. In the USA, the world's biggest agricultural exporter, net farm income in 2007 is estimated at $87 billion, 50% more than the average of the past ten years. Farmers in food exporting countries are the main gainers. In the USA, the world's biggest agricultural exporter, net farm income in 2007 is estimated at $87 billion, 50% more than the average of the past ten years.

- Multinational Agribusiness, Int’l Grain traders, …. (the usual culprits!)Multinational Agribusiness, Int’l Grain traders, …. (the usual culprits!)

- Biofuel industryBiofuel industry

- Farmers in developing countries? Farmers in developing countries?

Only in some countries (major exporters) and only larger farmers who have the means to invest to expand productionOnly in some countries (major exporters) and only larger farmers who have the means to invest to expand production


Soaring international food pricesSoaring international food pricesConsequences: Consequences: Who loses? Who loses?

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Vulnerable countries: LDCs + LIFDCsVulnerable countries: LDCs + LIFDCs


Net importers of petroleum products and major grains


Soaring international food prices Consequences:Soaring international food prices Consequences: Who losesWho loses? ?

Poor consumers mainly urban, but also rural Poor consumers mainly urban, but also rural (most small farmers are net buyers of food)(most small farmers are net buyers of food)

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Price-effects for Price-effects for BangladeshBangladesh five-person household living on five-person household living on one dollar-a-day per personone dollar-a-day per person

Spend…their $5Spend…their $5

$3.00$3.00 on foodon food

$.50 on household energy $.50 on household energy

$1.50 on$1.50 on nonfoodsnonfoods

A 50% increase in food and energy prices A 50% increase in food and energy prices requires them torequires them to cut $1.75 cut $1.75 of their expendituresof their expenditures

Cuts will be made most in food expenditures: Cuts will be made most in food expenditures: Reduced diet quality, and Reduced diet quality, and Increased micronutrient malnutritionIncreased micronutrient malnutrition Increased indebtedness?Increased indebtedness?(Adapted from von Braun, 2008)(Adapted from von Braun, 2008)

Source: Spiegel Online, April 14, 2008 © DER SPIEGEL 16/2008, All Rights Reserved

Soaring food prices: consequencesSoaring food prices: consequences

Soaring international food prices -- Consequences:Soaring international food prices -- Consequences: __________________________________________________________________________

• Oil price inflation + Food price inflationWhat next? Lessons from the 1970s• Generalized global inflation• Massive indebtedness (countries +

households)?• Global recession? Stagflation?• Sharp increase in interest rates to combat

inflation?• Looming debt crisis?• Painful period of global economic (+political?)

transition? …. exacerbated by climate change!


Soaring international food prices Soaring international food prices

ConclusionsConclusions:: ____________________________________________________________In search of solutions – where to begin?In search of solutions – where to begin?

* Need to better define the crisis: * Need to better define the crisis:

- Soaring prices: temporary? permanent?Soaring prices: temporary? permanent?

- Will prices go down? At what level?Will prices go down? At what level?

Accurate and frequent price projections are pre-Accurate and frequent price projections are pre-requisite for formulating appropriate policiesrequisite for formulating appropriate policies



ConclusionsConclusions:: ____________________________________________________________

In search of solutions – where to begin?In search of solutions – where to begin?

Emergency/Short termEmergency/Short term: urgent need to prevent famines and social : urgent need to prevent famines and social unrest (100 million NEW hungry people?) unrest (100 million NEW hungry people?) focus on protecting focus on protecting the the social safety netssocial safety nets (including food subsidies) (including food subsidies)

- Allocate sufficient funds to countervail the increase in prices Allocate sufficient funds to countervail the increase in prices (major role for the “real IMF”)(major role for the “real IMF”)

- Rationalize food subsidies to target the most needyRationalize food subsidies to target the most needy




In search of solutions – where to begin?In search of solutions – where to begin?

Longer term issuesLonger term issues: :

- Food consumption: major reforms to the food subsidy systemsFood consumption: major reforms to the food subsidy systems

- Food production: make sure that farmers are not isolated from Food production: make sure that farmers are not isolated from international markets so that they could benefit from price increases to international markets so that they could benefit from price increases to expand productionexpand production

- Policies and measures to encourage farmers to invest in Policies and measures to encourage farmers to invest in sustainablesustainable agriculture (role of the “real World Bank” and others)agriculture (role of the “real World Bank” and others)

- Increased public investments in agriculture (research, extension, Increased public investments in agriculture (research, extension, infrastructure, etc)infrastructure, etc)




Increasing evidence that Increasing evidence that biofuelbiofuel is the main is the main “culprit” behind the soaring food prices:“culprit” behind the soaring food prices:

Strong advocacy is needed to convince Strong advocacy is needed to convince governments (US + EU) to reverse their governments (US + EU) to reverse their policies on biofuel: Although politically difficult, policies on biofuel: Although politically difficult, it is still possible to change course before the it is still possible to change course before the policies become irreversiblepolicies become irreversible


Political forces Political forces of biofuelsof biofuels

Energy security

Environment/ Climate

Agriculture

Actual welfare Actual welfare effectseffects

Biofuels will hardly contribute to energy securityBiofuels will hardly contribute to energy securityThe share of biofuels in road transport: ca. 3-4% in The share of biofuels in road transport: ca. 3-4% in 20302030

(Adapted from von Braun, 2008)(Adapted from von Braun, 2008)

Agriculture

Environment/ Climate

Energysecurity

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FAO World Food Situation Portal

http://www.fao.org/worldfoodsituation/

Thank you

شكرا

Documents

Understanding the crisis of soaring international food prices Maurice Saade Food and Agriculture Organization of the United Nations Regional Office for