Food and Development - Rising Food Prices Responding to the Crisis Katherine Sierra Vice President, Sustainable Development The World Bank World Bank Group Donor Forum on Partnerships, Programs, and Trust Funds, Paris, France May 20-21, 2008

75% of the world’s poor are rural and most are involved in farming. In the 21 st century agriculture remains fundamental for poverty reduction, economic growth and environmental sustainability.

The Stakes Are High High food prices may have already pushed 100 million people into poverty over the last two years. The doubling of food prices could set back the fight against poverty by 7 years. For more than 2 billion people, high food prices are now a matter of daily struggle, sacrifice, and even survival.

The Stakes Are High Rising food prices risk losing recent gains in reducing malnutrition. Malnutrition threatens this -- and future -- generations. Already hunger and malnutrition are the underlying causes of death of over 3.5 million children every year. Not a temporary phenomenon – high food prices are expected to stay high in the medium term (above 2004 levels through to 2015).

Why have food prices risen? Main drivers of food price inflation Fundamentals -Supply and Demand INCREASING DEMAND:  Sustained food demand from emerging markets, especially demand for protein and fresh fruits and vegetables – e.g., Russia, China and India  Diet changes, from grain to more diversified diet, meats and dairy with higher derived demand for grains and oilseeds  Biofuel mandates => demand shift, particularly in the United States (corn-based ethanol), and Europe (rapeseed for biodiesel), Argentina (soybeans for biodiesel)

Why have food prices risen? Main drivers of food price inflation Fundamentals -Supply and Demand DECREASING SUPPLY: Very low stock to use ratio for grains due to:  Shortfalls in grain production due to droughts in Australia, Canada, Eastern Europe  Disappearance of intervention stocks in USA and EU due to policy reforms  Competition from biofuels

Why have food prices risen? Main drivers of food price inflation Fundamentals -Supply and Demand INCREASING PRODUCTION COSTS Increasing costs of energy, fertilizer and other commodity dependent agricultural inputs DECLINING DOLLAR Declining dollar drives up prices of all commodities, including agro-commodities. SPECULATION AND INFLATION HEDGE Inflow of funds causes commodities to diverge from trading on their fundamentals

Major Policy Messages Avoid short-term responses to short-term food insecurity that have difficult longer-term implications Short-run instruments affect income distribution (by definition), and may create rents that require planning exit strategies in advance Short-run instruments that work well in one situation may not in another, depending on:  institutions, capacity  governance requirements  size of country and history of trade, etc. Promote new opportunities for longer-term agricultural growth

Some Short-Run Options Reduce Food Grain Taxes/Tariffs School Feeding Programs Cash Transfers to the Poor Targeted Food Subsidies Cash for Work Food for Work and Food Aid Build-up Gov’t Buffer Stocks for Distribution Food Rationing Price Controls Export Restrictions/Taxes Export Bans Worse policy choices Better policy choices

Reform Existing Subsidy and Other Programs Where: India and OECD countries are candidates, but not being done currently Works best if: Prices likely to remain high; strong production support system is in place Likely effects: Fiscal savings with minimal impact on producer revenues; possible other savings if subsidies can be reduced Possible pitfalls: Increased volatility of domestic grain prices; increased international price volatility if country is a big grain trader and domestic production is more variable

Shift from Public to Private Procurement Where: Bangladesh Works best if: Roads & communications well-developed; pro-market policy environment including freedom to stock and access to foreign exchange Likely effects: More reliable grain supplies; large fiscal savings; smaller grain stocks for the same level of price stability; larger territorial spread in prices. Possible pitfalls: Collusion among a few large traders and emergence of cartel; exit of private traders if devastated by border closures

More Market-based Approaches to Risk Management Where: Malawi is experimenting with index based weather insurance; South Africa has regional futures market for key staples Works best if: Is a middle-income country with strong institutions and instruments are used by private sector Likely effects: Lower domestic grain price volatility Possible pitfalls: Involvement of state marketing agencies as competitors in the grain trade

Higher Investment in Grain Productivity Where: Brazil, Malaysia and Thailand Works best if: Viable agricultural support systems already in place; favorable rural investment climate; adequate policy oversight/analysis of the sector. Likely effects: rising average yields, farm incomes, and production; lower grain prices over time; poverty alleviation and growth over time (WDR 2008). Possible pitfalls: Public investment has insufficient provision for public goods, including operations and maintenance; need to invest in sustainability under increased pressure on natural resources.

International Action Finance Ministers at the April 2008 World Bank-IMF Spring Meetings endorsed a “new deal” for a global food policy to embrace a short, medium and long-term response:  Support for safety nets  Work and conditional cash transfer programs  Increased agricultural production  Better understanding of the impact of biofuels  Action on the trade to reduce distorting subsidies and trade barriers.

International Action Response from the international community  World Food Programme call for $755 million UN Secretary General creates UN-system led High-Level Task Force (Heads of Agencies) Senior Steering Committee (led by John Holmes and David Nabarro) Developing comprehensive plan for action Preparing resolutions for governments meeting at FAO in Rome (June 3-5) Developing 5-10 concrete actions for announcement at Rome meeting

International Action Upcoming high-level gatherings  UN – ECOSOC special session on global food crisis (New York, May 20)  TICAD (Yokohama, May 28-30)  High-Level Conference on Food Security (Rome, June 3-5)  G-8 (Hokkaido, July 7-9)  High-Level Event of the UN General Assembly on MDGs (New York, Sept. 25)

World Bank Group Action With UN system and others, identifying countries most in need and provide rapid assessments, concessional financing and support Invest in Policy and Analytical Work Analyses to better understand impact of biofuels Policy reforms to reduce distorting subsidies and other trade barriers Gender impact Nutrition impacts Encourage constructive policy responses in rich and poor countries Global Food Crisis Response Program under discussion  Umbrella for providing rapid Bank support for a comprehensive response to the crisis,  Provides balance between short run food stabilization and measures to ensure countries able to cope better in medium term.  Facilitates adaptation to new realities of high and more volatile food prices.  Additional financing from Bank surplus also proposed In Parallel, increase longer term action and lending to enhance Agricultural Productivity (infrastructure, R&D, etc.) Work with CGIAR for major scale-up of agriculture research

World Bank Group Action Some examples…. Africa: Free up $100 million for Burundi, Burkina Faso, Madagascar, Ghana, Mali, Niger, and Cote d'Ivoire by restructuring existing operations Haiti: Provide $10 million for actions geared to poor children and other vulnerable groups Bangladesh: Provide $320 million to fill the fiscal gap created by high food and oil prices

75% of the world’s poor are rural and most are involved in farming. In the 21 st century agriculture remains fundamental for poverty reduction, economic growth and environmental sustainability.