IFIs Pt. 2: World Bank on LDCs, Rising Food Prices

♠ Posted by Emmanuel in , at 3/06/2008 01:24:00 AM
I am certain that you are all aware of rising food prices every time you visit the local grocery store. The impact of elevated prices has been harsh to several developing countries, especially those that need to import substantial amounts of foodstuffs. The World Bank offers this summary citing the usual culprits: diversion of crops to biofuels, the economic ascent of China and India, etc. (See this earlier post as well on other causes.) The dynamic of rising food prices is largely novel in the developing world's context. While there are elements of "cost push" inflation such as higher costs for transporting agricultural products, it is largely driven by "demand pull" inflation from fast-growing developing nations. Neo-Malthusianism, indeed. Also, it is a development truism that as folks get wealthier, their food consumption increases markedly.

In Mexico City, mass protests about the cost of tortillas. In West Bengal, disputes over food-rationing. In Senegal, Mauritania, and other parts of Africa, riots over grain prices. And in Yemen, children march in public to call attention to child hunger. This chain of events is in stark contrast to the falling food prices that consumers have come to expect over the past several decades.

On February 13, the FAO announced that 36 countries are in crisis as a result of higher food prices and will require external assistance. In many of these countries, food insecurity has been worsened by conflict, floods, or extreme weather.

Last month, in Davos and in Addis Ababa, World Bank President Robert Zoellick called for action to tackle hunger and malnutrition in a world of rising food prices. "Hunger and malnutrition are the forgotten Millennium Development Goal. It has gotten less attention, but increased food prices and their threat – not only to people but also to political stability – have made it a matter of urgency to draw the attention it needs,” he said.

While headline news about high food prices is a relatively recent phenomenon, the broader upswing in commodity prices began in 2001. Large structural shifts in the global economy—including growing demand in China and India—have been steadily reflected in commodity price increases, especially of metals and energy.

Food prices have increased in response to many factors: higher energy and fertilizer prices; increased demand for biofuels, especially in the U.S. and the European Union; and droughts in Australia and other countries. World grain stocks are at record lows and next year’s prices depend on the success of the next harvest in the northern hemisphere.

Wheat prices (US$) have increased by 200 percent, and overall food prices (US$) have risen by 75 percent since the turn of the century. Adjusting for exchange rates and domestic inflation reduces the price increases faced by developing countries—but these increases are still severe for millions of poor consumers.

“The increases in grain prices are not caused by short-term supply disruptions, as is the normal case, and it will likely take several years for supplies to increase to rebuild stocks and allow prices to fall,” said Don Mitchell, Lead Economist in the World Bank's Development Prospects Group...

The root causes of the phenomenon of rising food price—high energy and fertilizer prices, the demand for food crops in biofuel production, and low food stocks—are likely to prevail in the medium term.

Energy and fertilizer prices are projected to stay high. Already, fertilizer prices have increased 150 percent in the past five years. This is very significant, because the cost of fertilizer is 25 to 30 percent of the overall cost of grain production in the U.S. (which supplies 40 percent of world grain exports).

The demand for biofuels will also probably rise. A quarter of the U.S. maize crop (11 percent of the global crop) went into biofuel production this year, and the U.S. supplies more than 60 percent of world maize exports. Notably, the U.S.—one of more than 20 countries to require biofuels use—has just doubled its biofuels mandate by 2015.

“The biofuels surge makes things worse by adding high demand on top of already high prices and low stocks,” said Mitchell, “Ethanol and biodiesel produced in the U.S. and EU don’t appear to be delivering on “green” promises either, making them very controversial.”

In addition, surplus production capacity is scarce. The E.U.’s “set aside” lands, originally intended to keep surpluses low, have already been brought into production. And U.S. Conservation Reserve lands would give low yields, even supposing legislation to move them into production was in the works.