Is there a crisis?

2010 ended with food prices at their highest since 2008, when the world was in the grip of a crisis sparked by very expensive staple grains. It led to riots in some countries, toppled at least one government and drove more than a billion people to hunger. 



IRIN among other questions had then asked if the jump in cereal prices had been foreseen, and if anything could be done to turn the situation around; here we examine the 2010 spike.



Question: Are the December 2010 prices a crisis in the making?



Most experts see the hike as a temporary peak, but there is some debate on whether food prices reached the benchmark for a crisis, as recorded in June 2008.



“The hike is a price shock … we are not in a global crisis – it is not that we have run out of global supplies,” said Abdolreza Abbassian, secretary of the Intergovernmental Group on Grains at the Food and Agriculture Organization (FAO).



Countries faced a potential crisis depending on whether they had ample supplies or the financial capacity to import countries, he said.



FAO’s food price index for December 2010 was one percent higher than in June 2008, but the prices of staple grains were 13 percent below their peak in June 2008.



The World Bank noted in an analysis that food prices in December 2010 were still eight percent below the 2008 peak.



Roger Waite, the European Commission’s spokesman on agriculture said, “Markets are tight for some commodities, and the average price is considerably higher than recent averages, but still not on a par with the price spikes seen in 2008,” and cited the World Bank figures to make his point



Waite said the FAO food price index figures for December 2010, which showed prices slightly higher than in June 2008, “give a weighted average figure based on exports from developing countries. As a result, it gives greater weight to sugar and vegetable fats, for example, where market prices really are exceptionally high.”



Derek Headey, who co-authored a book with Shenggen Fen on the 2007/08 food price crisis, said the current global environment was very similar. “I would say we are now in a crisis. The FAO food price index is at the same level it was in June of 2008, while the FAO cereal price index is at about 85 percent of its 2008 peak. Sugar prices are at a record high. And there are also some worrying food inflation trends in a variety of developing countries.”



Headey, a researcher at the International Food Policy Research Institute (IFPRI), commented that the current hike was a “bit of a bubble … the supply response in agriculture is slow because it is seasonal – it would only take one good crop in a major producer, such as the US, to send prices tumbling down again.”



In its recently released Global Food Price Monitor FAO said the prices of wheat and maize in the first half of January 2011 stayed at the high levels of December 2010.



Q What caused the price hike?










''Countries faced a potential crisis depending on whether they had ample supplies or the financial capacity to import countries''

The experts agree that the weather has been an important factor. Cereal prices, especially that of wheat, started climbing in the second half of 2010 as severe drought and fires slashed production in Russia and Ukraine, two of the world's largest producers. 



The news drove up wheat prices in some countries by 45 percent, and even as much as 80 percent in others during the second half of 2010. Canada, another major wheat producer, was also hit by extremely bad weather, and an export ban imposed by Russia added further impetus.



Headey cited the global financial crisis as another reason, which had “prompted a number of governments – particularly the US – to pump money into their economies and lower interest rates. Together with a very weak US dollar, these factors provide a macro-environment that is conducive to higher commodity prices, including higher oil prices, which also impact food process through production and transport costs.”



Headey and Waite (of the European Commission) added the diversion of food crops into biofuel production to the list.



“Another major factor has been speculation, highlighted by the doubling of the world wheat price in two weeks last August [2010], on the back of poor forecasts for the Ukraine and Russia,” Waite said.



There was more weather-related bad news. FAO’s Global Price Monitor said wheat remained expensive in January 2011, as persistent rains and floods hampered exports from Australia, another top producer. Dry conditions in some wheat-growing areas of the US had also aided higher prices.



Dry weather in Argentina, and a drop in the estimated size of the US maize harvest, have kept prices of that staple high.



But good harvests of rice have led to a slight decline in the price, which had risen moderately in the past several months, the monitor noted.



Q: How is the hike affecting developing countries?


































































Biggest food price hikes within a month (Nov-Dec 2010)
CountryFoodByReason
Somalia

(Baidoa)
sorghumalmost 50 percentdry weather
Afghanistan

(Herat)
wheat, wheat flour20 percentglobal prices, fuel prices
Mozambique

(Nampula)
maizealmost 15 percentdrop in production
Nigeria

(Kano)
sorghummore than 10 percentfloods
Uganda

(Kampala)
maizemore than 10 percentdriven by demand in the region
Zimbabwe

(Harare)
maizemore than 10 percentseasonal increase, reduced stocks
Madagascarrice10 percentheavy rains, fuel costs, global prices
Thailand

(Bangkok)
ricealmost 10 percentfloods
Source: FAO, World Bank & FEWS-NET 

Fortunately, most developing countries had experienced good harvests and were unaffected by the global price hike, said Abbassian. “People look at the impact in a few countries and tend to ignore the 60 or 70 countries that are unaffected and call it a crisis.” Although it took time for global price hikes to be transmitted to domestic markets, the impact was determined mostly by local conditions.



The World Bank said in its analysis that the high prices of wheat had already been transmitted to some developing countries. “The price of wheat flour registered double digit growth during the July-October [2010] period in Kyrgyzstan (35%), Mauritania (21%), Afghanistan (18%), Sudan (17%), Armenia (13%), Azerbaijan (12%), Pakistan (11%), and Bolivia (11%).”



FAO’s Global Food Price Monitor said the price of wheat had jumped by 20 percent, and that of bread by more than five percent within a month in December 2010 in Herat, Afghanistan’s third largest city.



The steep hike in the wheat flour price could be partly explained by high fuel costs – the World Bank analysis pointed out that Afghanistan lacked the capacity to mill wheat and imported the flour from neighbouring Pakistan and Kazakhstan.



Headey noted that developing countries varied considerably in how much they imported, and some countries could even benefit from the weaker US dollar.



The World Bank red-flagged the governments of Egypt, Jordan and Lebanon, which rely heavily on wheat imports while consumers are insulated by price subsidies and the government bears the brunt of high costs.



Yemen imported 82 percent of its requirement and was “particularly vulnerable”. The country “has physical wheat reserve stocks equivalent to less than a month of its average monthly wheat consumption and has limited fiscal space,” the Bank said. “A 50 percent increase in the wheat price would translate into an estimated increase in the import bill of nearly 1 percent of GDP [gross domestic product], or more than 20 percent of foreign reserve.”



Morocco and Tunisia are expected to produce less grain and were also vulnerable. Morocco is projected to double its spending on food and fuel subsidies.



Tunisia is experiencing unrest at the moment, triggered partly by poor living conditions.





















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In contrast, good maize harvests in countries such as Kenya have seen prices fall, but lower rice production in Vietnam has made this staple more expensive.



When prices rise, the first casualty is good quality food. In a survey of 20,000 households in Afghanistan during the 2007/08 food price crisis, the World Bank found that most families sacrificed diversity in their diet – moving from nutrient-rich foods like meat, fruit and vegetables to staples like wheat – to cope with increased costs.



In the “quality-quantity trade-off”, rural homes experienced small declines in calorie intake, while urban homes were able to buffer the shock of reduced calories by lowering their intake of nutrient-rich foods in larger measures.



Q. What can countries do?



IFPRI’s Headey lists releasing stocks of grains and reducing tariffs on imported food items. “In some instances, countries could use exchange rate policies to buffer the impact,” he suggested.



Most experts are not in favour of export bans, which tend to exacerbate the situation. FAO’s Abbassian said countries that needed to import could negotiate more favourable terms.



As long-term solutions, all the experts advocated scaling up safety nets and production in countries that had the capacity.



Q Are higher prices here to stay?



This seems to be the case. In their book, Headey and Fen looked at the food price projections prepared by the US Department of Agriculture, and jointly by FAO and the Organization for Economic Cooperation and Development (OECD), which predicted higher equilibrium prices – the outcome of usual supply and demand factors like population and economic growth, oil price trends and biofuel use – over the next 10 years.



“Once equilibrium prices are already higher, there is a greater potential for short-run factors to induce tremendous short-run volatility, because markets are already tight,” Headey noted.



A good analogy would be how a light drizzle can cause a flood in an area that has been experiencing heavy rainfall for a period of time, as the ground is already saturated.



A similar situation played out after the 1974 food price crisis, Headey said. “Prices were higher over the next decade or so, but there was also more volatility.”



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