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Food Price Volatility and Insecurity

Author: Toni Johnson
Updated: January 16, 2013

Introduction

In 2008, food prices globally rose to unprecedented levels. While there was a marked drop in the next year, prices spiked again in mid-2011, exceeding 2008 levels and remaining relatively high through the rest of year and all of 2012. Many factors influence food price volatility, including agriculture and energy policy, commodity prices and market speculation, extreme weather events, rising global demand, and falling surplus stocks. Experts say this volatility has a dire impact on the world's poorest populations and without increases in agriculture production and improvement in food distribution, the world will have trouble feeding a growing population in the next two decades, and reducing hunger rates as targeted under the UN Millennium Development Goals.

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The Global Food Market

Just fifteen food crops make up 90 percent of the world's energy intake, according to the UN Food and Agriculture Organization (FAO), with rice, maize (corn), and wheat comprising two-thirds of that number. The world grows more grains (PDF)--also known as cereals--than any other crop type. Much of the global increase in food prices stems from staple grains, which in some countries can represent more than half of calorie intake. According to the World Bank, due to an incredibly dry summer in the United States and Europe, global corn and soybean prices reached all-time highs in July 2012, while wheat soared to prices comparable to 2011 peaks. Because grains also represent a major food source for livestock, higher grain prices have contributed to higher dairy and meat prices. The USDA predicts that domestically, prices will continue to rise in 2013 at a rate of 3 to 4 percent.

A June 2011 report to G20 agriculture ministers from ten major NGOs, including the World Trade Organization, the World Bank, and the UN World Food Program, noted that by 2050, food demand (PDF) will have increased by between 70 percent and 100 percent to meet a projected population growth of at least 2.5 billion additional people. "This alone is sufficient to exert pressure on commodity prices," the report said.

Growth in agriculture production is largely expected to come from increased crop yields and will primarily be located in developing countries, according to a 2009 UN report (PDF). Experts say there is plenty of opportunity to improve farming techniques in the developing world. Meeting projected demand will require increasing cereal production by an additional one billion tons, up from more than two billion tons currently, and more than doubling meat production from current levels. However, according to a 2011 report by the OECD, annual growth in agriculture production (PDF) in the next decade is forecast to be a third less than the annual growth in the previous decade. The report estimates that a 5 percent increase or decrease in harvest yield in major grains can lead to as much as a 25 percent difference in price.

Food Price Volatility

According to the FAO, price volatility has been extremely rare in agricultural markets, but the global food system is becoming increasingly vulnerable to it. The 2011 NGO report argued that "volatility becomes an issue for concern and for possible policy response when it induces risk-adverse behavior that leads to inefficient investment decisions and when it creates problems that are beyond the capacity of producers, consumers, or nations to cope."

But Christopher Barrett of Cornell University and Marc Bellemare at Duke University argue in Foreign Affairs that high prices, not volatility, are the real problem. "Throughout the world but especially in low-income countries, the poor are overwhelmingly net food consumers, while farmers are generally better-off net sellers," they contend. "Rising prices hurt consumers by reducing their purchasing power but benefit producers by increasing their profits."

Some contributors to high prices and volatility include:

  • Energy Prices and Biofuels. Oil prices have experienced record highs in the last five years. Fuel is used in several aspects of the agricultural production process, including fertilization, processing, and transportation and is an important factor in agricultural output and product price. According to data from the U.S. Department of Agriculture, the U.S. farm industry's total expenditures on fuel and oil rose 23 percent between 2009 and 2011. Agriculture Secretary Tom Vilsack said that "if oil prices keep going up as they have recently, that could have a greater impact on food costs than what's associated with what's going on with the drought." The OECD estimates that the slowdown in agriculture production in the next decade will primarily come from higher fuel and fertilizer costs.

    The world has experienced a major growth in biofuel production, in part due to higher fuel prices, particularly in the United States. However, some argue that biofuels compete with food production and negatively impact prices. U.S. increases in corn production have largely gone to ethanol rather than to human consumption or animal feed. Corn-based ethanol rose from 15 percent of total U.S. corn production in 2006 to an estimated 40 percent in 2012. The 2011 NGO report recommends G20 countries end biofuel mandates and subsidies (PDF) and open "international markets so that renewable fuels and feed stocks can be produced where it is economically, environmentally, and socially feasible to do so."
  • Grain Stocks. Increased use of grains to meet the demand for meat and biofuels has largely contributed to a major increase in cereals demand (PDF), writes Brian D. Wright at the International Food and Agriculture Trade Policy Council. Grain reserves--carryover supplies that can provide a cushion for market fluctuations and seen as an indicator of market tightness--have declined significantly, falling from a roughly 110-day supply before 2000 to a 64-day supply in 2007-2008. Global stocks are expected to continue to fall in 2013, with corn stocks predicted to fall to a nine-year low. Wright notes that low stocks contribute to the kind of price shocks seen in 2008 and 2010-2011. Researchers from the FAO note that "ample and highly liquid commercial stocks held by major international suppliers appear a necessary and sufficient condition to instill confidence in world markets and to lessen the probability of future bouts of extreme global volatility" (PDF). However, other analysts have dismissed stocks as an important factor in higher prices (PDF).
  • Population Trends. The growth of the middle class in developing countries has increased demand for food generally and for meat in particular, placing greater pressure on grain consumption. Meat, dairy, and oils (PDF) are expected to rise from about 20 percent of current calorie intake in developing countries to nearly 30 percent in the next forty years. Livestock feed currently represents about 55 percent of consumption (PDF) of coarse grains (corn, sorghum, and barley), according to the FAO. A number of experts say the growth in meat consumption harms overall food security, since the production of one serving of meat takes more land, water, and energy than the production of a serving of corn or rice. Growing urbanization, particularly in the developing world, contributes to lifestyles that include higher consumption of meat and commercial foods (PDF). As more people leave rural areas for cities, a lack of investment in modernized farm equipment and irrigation techniques increases the burden on developing-world farmers, precisely as they dwindle in number and need to increase production capacity.
  • Commodities Markets. Similar to the debate over oil prices, non-sector participants--like pensions and hedge funds--in the agricultural markets are considered by some to be a driver of price volatility. Critics argue that such speculation should be curbed, because food access is ultimately a humanitarian issue. Others say market speculators are reacting to uncertainty rather than driving it. "Speculators make money out of understanding and providing insurance against volatility," writes Brookings' Homi Kharas. "The volatility inherent in the food marketplace causes speculation, not the other way around." Still, a June 2011 report from Oxfam says that is it possible excessive speculation can temporarily amplify volatility (PDF) and contribute to food price bubbles. Many experts have said one way to lower uncertainty caused by commodities' trading is to increase markets' transparency and get countries to accurately report food stocks. Since commodities are pegged to the dollar, the currency-exchange rate volatility seen in recent years also has had an impact on food prices.
  • Weather and Climate Change. Disasters such as drought and flooding can cause catastrophic damage to crops. A string of recent bad weather in 2010, 2011, and 2012 and related disasters such as wildfires in some of the world's biggest food exporters have helped raise prices to record levels. Severe droughts in the summer of 2012 across the U.S. Midwest and Eastern Europe in parts of Russia, Ukraine, and Kazakhstan have also pushed prices even higher. July saw a month-over-month increase of 25 percent in corn and wheat prices and 10 percent in overall food commodities, figures that could go higher in 2013.

    Climate change is forecast to spur more crop-damaging weather events (PDF) and impact water supplies and the availability of arable land, especially in the developing world. Countries in South Asia and parts of Africa, some of which have the world's fast growing populations, could lose more than 5 percent of their growing season, the FAO forecasts, placing an estimated 370 million people in jeopardy due to diminished food security. These regions already contain large populations considered chronically hungry. Experts say policies and technologies to adapt crops to climate change and increase water supplies will be needed.
  • Trade policy. Most crops do not cross national boundaries; few have international trade rates higher than 20 percent of what is grown. However, prices and export controls can disproportionately impact import-dependent countries. "[F]ood price inflation is not simply the result of supply and demand," says a June 2011 Oxfam report (PDF). "[A] more globalized food system equals a more interdependent one too--which makes the system vulnerable to zero-sum games when governments or other key players succumb to panic or herd behaviors." According to the UN's World Food Program, over forty countries in 2008 imposed some form of export ban in an effort to increase domestic food security. Many economists say hoarding, particularly in some rice-producing countries, exacerbated the 2008 food-price crisis. Following a 2010 drought and wildfires, Russia limited exports of wheat and wheat prices more than doubled, according to the World Bank.
Food Security and Policy Implications

Higher food prices have the greatest impact in developing countries. "[F]or the planet's poorest two billion people, who spend 50 to 70 percent of their income on food, these soaring prices may mean going from two meals a day to one" (ForeignPolicy), writes Lester Brown, president of the Earth Policy Institute. Aid groups including the UN World Food Program (WFP) point out that three food price shocks (2008, 2010, 2012) in five years have increased the number of chronically hungry people and jeopardized efforts to reduce global hunger. High prices also mean that monetary pledges for food aid buy less than before. The WFP states that every 10 percent increase in food prices necessitates an additional $200 million to buy the same amount of food. In 2010, the WFP bought 25 percent less food with the same amount of money than the year before.

Record high prices can likewise contribute to political unrest. Researchers at the New England Complex Systems Institute have demonstrated a link between food crises and instability in the Middle East and North Africa region. Food prices in the Middle East led to a wave of bread riots in 2008 and were a contributing factor in the 2011 Arab Spring uprisings.

A G8 meeting at Camp David in 2012 reaffirmed commitments to food security, including the fulfillment of a $20 billion pledge established at the 2009 summit in L'Aquila. The G20 also established the Agricultural Market Information System, which tracks food commodity markets and acts as an early warning system for volatile prices.

Barrett and Bellemare argue it is a mistake to focus on price volatility (ForeignAffairs). "Instead, policymakers should consider measures that prevent increases in food prices, such as removing barriers to international agricultural trade and increasing investment in scientific research on crop productivity improvement, soil and water conservation, and renewable energy that does not compete with food for land," they contend. "Policymakers should also focus on innovative ways to reduce post-harvest losses, which run to nearly 50 percent in many low-income countries, often due to insufficient or sub-standard storage, refrigeration, and processing facilities."

Albert Troszczynski contributed to this report.

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