Understanding the crisis of soaring international food prices Maurice Saade Food and Agriculture Organization of the United Nations Regional Office for the Near East Alexandria Media Forum April 18, 2008 April 18, 2008

Overview Soaring international food prices _______________________________ 1.Main features & recent trends 2.Underlying reasons 3.Consequences Maurice Saade, FAO, April 2008

Soaring food prices: recent trends _______________________________ Source: FAO, Crop Prospects and Food Situation, April 2008 Maurice Saade, FAO, April 2008 FAO food price indices,

Soaring food prices: recent trends _______________________________ Source: FAO, Crop Prospects and Food Situation, April 2008 Maurice Saade, FAO, April 2008

Soaring food prices: historical trends _______________________________ Source: FAO, various years Maurice Saade, FAO, April 2008

Soaring food prices: historical context _______________________________ Source: World Bank Maurice Saade, FAO, April 2008

Soaring food prices: future trends? Medium-term projections _______________________________ Maurice Saade, FAO, April 2008 Source: OECD-FAO Agricultural Outlook (Aug. 2007)

IFPRI’s modeling of cereals price changes ( and ) Source: M. Rosegrant (prelim. results with IMPACT-WATER). US$/ton

Overview Soaring international food prices _______________________________ 1.Main features & recent trends 2.Underlying reasons 3.Consequences Maurice Saade, FAO, April 2008

Soaring international food prices Underlying reasons? _______________________________ Interplay of complex factors Supply vs. Demand factors Short-termvs. Long-term Temporary vs. Permanent (Structural) Maurice Saade, FAO, April 2008

Underlying reasons? Supply factors _______________________________________________ Underlying reasons? Supply factors (1) Unusual climatic events ( ) lead to disruptions in production in key exporting countries _______________________________________________ Source: data from FAO, various years Maurice Saade, FAO, April 2008Wheat Coarse grains US 16% 16% 12% 12% EU 14% 14% 16% 16% Australia 52% 52% 33% 33%

Underlying reasons? Supply factors _______________________________________________ Underlying reasons? Supply factors (2) Historically low levels of global stocks _______________________________________________ Source: data from FAO, various years Maurice Saade, FAO, April 2008

Underlying reasons? Supply factors _______________________________________________ Underlying reasons? Supply factors (3) Increasing fuel costs _______________________________________________ Increasing costs of farm production (fertilizers, pesticides, farm machinery, pumping costs, etc) Transport costs: steep increase in marine freight costs Maurice Saade, FAO, April 2008

Underlying reasons? Demand factors _______________________________________________ (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. Maurice Saade, FAO, April 2008

Changing structure of consumption Source: from The Economist, Dec. 6, 2007 Maurice Saade, FAO, April 2008

Consumption: 2005/1990 ratios of per capita consumption Consumption: 2005/1990 ratios of per capita consumption IndiaChinaBrazilNigeria Cereals Meat Milk Fish Fruits Vegetables Source: FAO, various years Maurice Saade, FAO, April 2008

Source: Global Subsidies Initiative 2007 (adapted from von Braun, 2008) Ethanol production (billion liters) Biodieselproduction Biodiesel production (billion liters) Ethanol > 90% of biofuel production; Brazil and US dominate the market Biodiesel: EU is the largest producer and consumer Underlying reasons? Demand factors (2) The biofuels boom

Countries’ plans for Biofuel expansion Ethanol Biodiesel Ethanol Biodiesel USA: 16%USA: 19% EU: 45%EU: 37% Brazil: 8% Malaysia: 248% India: 15%Indonesia: 143% China: 3% Thailand: 70% Source: USDA, 2006; (Adapted from von Braun) Annual growth in biofuel production…2010/12

Source: Global Subsidies Initiative 2007 The biofuels (subsidy-driven) boom The biofuels (subsidy-driven) boom

Soaring international food prices - Underlying reasons? Summing up _____________________________________________ C Critical 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

Overview Soaring international food prices _______________________________ 1.Main features & recent trends 2.Underlying reasons 3.Consequences Maurice Saade, FAO, April 2008

Soaring international food prices Consequences: 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. -Multinational Agribusiness, Int’l Grain traders, …. (the usual culprits!) -Biofuel industry -Farmers in developing countries? Only in some countries (major exporters) and only larger farmers who have the means to invest to expand production Maurice Saade, FAO, April 2008

Soaring international food prices Consequences: Who loses? _____________________________________ Vulnerable countries: LDCs + LIFDCs Maurice Saade, FAO, April 2008

Net importers of petroleum products and major grains Maurice Saade, FAO, April 2008

Soaring international food prices Consequences: Who loses? Poor consumers mainly urban, but also rural (most small farmers are net buyers of food) _____________________________________ Maurice Saade, FAO, April 2008

Price-effects for Bangladesh five-person household living on one dollar-a-day per person Spend…their $5 $3.00 on food $.50 on household energy $.50 on household energy $1.50 on nonfoods A 50% increase in food and energy prices requires them to cut $1.75 of their expenditures A 50% increase in food and energy prices requires them to cut $1.75 of their expenditures Cuts will be made most in food expenditures: Reduced diet quality, and Reduced diet quality, and Increased micronutrient malnutrition Increased micronutrient malnutrition Increased indebtedness? Increased indebtedness? (Adapted from von Braun, 2008)

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

Soaring international food prices -- Consequences: _____________________________________ Oil price inflation + Food price inflation What 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! Maurice Saade, FAO, April 2008

Soaring international food prices Conclusions : ______________________________ In search of solutions – where to begin? * Need to better define the crisis: -Soaring prices: temporary? permanent? -Will prices go down? At what level? Accurate and frequent price projections are pre- requisite for formulating appropriate policies Maurice Saade, FAO, April 2008

Soaring international food prices Conclusions : ______________________________ In search of solutions – where to begin? Emergency/Short term: urgent need to prevent famines and social unrest (100 million NEW hungry people?) focus on protecting the social safety nets (including food subsidies) -Allocate sufficient funds to countervail the increase in prices (major role for the “real IMF”) -Rationalize food subsidies to target the most needy Maurice Saade, FAO, April 2008

Soaring international food prices Conclusions : ______________________________ In search of solutions – where to begin? Longer term issues: -Food consumption: major reforms to the food subsidy systems -Food production: make sure that farmers are not isolated from international markets so that they could benefit from price increases to expand production -Policies and measures to encourage farmers to invest in sustainable agriculture (role of the “real World Bank” and others) -Increased public investments in agriculture (research, extension, infrastructure, etc) Maurice Saade, FAO, April 2008

Soaring international food prices Conclusions : ______________________________ Increasing evidence that biofuel is the main “culprit” behind the soaring food prices: Strong advocacy is needed to convince governments (US + EU) to reverse their policies on biofuel: Although politically difficult, it is still possible to change course before the policies become irreversible Maurice Saade, FAO, April 2008

Political forces of biofuels Energy security Environment/ Climate Agriculture Actual welfare effects Biofuels will hardly contribute to energy security The share of biofuels in road transport: ca. 3-4% in 2030 (Adapted from von Braun, 2008) Agriculture Environment/ Climate Energy security

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