Confronting the Food Price Challenge
by
Joachim von Braun
Power Point Presentation for the
International Agricultural Trade Research Consortium
Analytic Symposium
“Confronting Food Price Inflation:
Implications for Agricultural Trade and Policies”
June 22-23, 2009
Seattle, Washington
Confronting the Food Price
Challenge
Joachim von Braun
International Food Policy Research Institute
IATRC Symposium “Confronting Food Price Inflation: Implications for
Agricultural Trade and Policies”
Seattle, June 22, 2009
Overview
1. Food price developments
2. Prices, policy dynamics, and feedback
3. Prices and the poor
4. New institutional arrangements
Joachim von Braun, IFPRI, June 2009
Are we living in unusual times?
1872-2008 prices and population
Joachim von Braun, IFPRI, June 2009
Sources: J. von Braun, based on data from NBER Macrohistory database,
BLS CPI database, Godo 2001, OECD 2005, and FAO 2008;
Population data from U.S. Census Bureau Int’l database and UN1999.
Globalization of agriculture and food
systems
Global integration—across national borders—of
production, processing, marketing, retailing,
and consumption of agriculture and food items
Joachim von Braun, IFPRI, June 2009
Source: von Braun and Diaz-Bonilla 2008.
Trade globalization?
Agriculture trade in percent of production
Export/Production
1960s 1970s 1980s
1990s
2000-05
Latin America and the Caribbean
22.7
23.0
22.2
25.0
31.2
Sub-Saharan Africa a
Asia Developing
23.3
5.3
17.0
6.1
12.8
6.4
12.2
6.4
10.9
6.1
All Three Regions
11.6
11.3
10.5
10.7
11.2
1990s
2000–05
Import/Production
1960s 1970s 1980s
Latin America and the Caribbean
6.3
8.4
10.9
13.6
14.9
Sub-Saharan Africa a
8.7
6.3
8.1
8.6
11.1
Asia Developing
6.5
6.2
5.6
6.1
5.6
All Three Regions
6.8
6.7
7.0
7.8
7.8
a
Does not include South Africa.
Joachim von Braun, IFPRI, June 2009
Source: Data from FAOSTAT 2009/
High-value products in developing
countries on the rise
Domestic consumption
Joachim von Braun, IFPRI, June 2009
Exports
Source: WDR 2008 with data from FAOSTAT.
Widening gap in trade costs
Trade costs in processed foods in 2000:
- North: 73%
- South: 134%
Geography + history
matter more than
Infrastructure + institutions
(?)
Joachim von Braun, IFPRI, June 2009
Source: Olper and Raimondi 2009.
Commodity price spike, 2007-08
800
Corn
Wheat
Rice
Oil (right scale)
125
100
75
400
50
200
0
US$/barrel
US$/ton
600
Price spike
25
0
Closer linkages between commodity markets and
economic performance
Joachim von Braun, IFPRI, June 2009
Source: Data from FAO 2009 and IMF 2009.
Food prices in developing countries
stay high
Latest food price as of April 2009
(790 domestic price quotations in 58 developing countries)
78%
80
60
(%)
43%
40
17%
20
0
> 12 months earlier
Joachim von Braun, IFPRI, June 2009
> 3 months earlier
Highest on record
Source: FAO 2009.
Domestic prices of key staples remain high:
Wheat
Joachim von Braun, IFPRI, June 2009
Source: FAO 2009.
Domestic prices of key staples remain high:
Maize
Joachim von Braun, IFPRI, June 2009
Source: FAO 2009.
Domestic prices of key staples remain high:
Rice
Joachim von Braun, IFPRI, June 2009
Source: FAO 2009.
Transmission from int’l to domestic prices
varies by country and by product
Items with positive statistical significant coefficients with respect to
the international prices in t (month) and t-4
international price
in regression
ln_wheat_int
Mexico
ln_sweet_bread
ln_white_bread
ln_bread_decaja
ln_cookies
ln_other_cookies
ln_wheat_flour
ln_pastry
Guatemala
0 ln_bread
0 ln_pasta
1 ln_pastry
0
0
0
0
El Salvador
1 ln_bread
2 ln_macaroni
1 ln_bread_sweet
ln_crackers
1
2
1
2
Honduras
ln_bread_loaf
ln_spaghetti
ln_wheat_flour
ln_crackers
ln_bread_semitas
ln_corn_int
ln_corn
ln_tortillas
ln_corn_flour
ln_rice_int
ln_rice
0 ln_corn
0 ln_tortillas
0 ln_corn_flour
ln_corn_milling
1 ln_rice
1 ln_corn
0 ln_tortillas
1
0
2 ln_rice
2 ln_corn
2 ln_tortillas
ln_corn_flour
ln_cornflakes
2 ln_rice
0
1
1
2
1
0
0
0
0
0
Nicaragua
ln_bread
ln_bread_loaf
ln_bread_loaf_sliced
ln_spaghettis
ln_wheat_flour
ln_cookies
ln_crackers
ln_candy_polvoron
ln_corn
ln_tortillas
ln_corn_flour
ln_cornflakes
ln_rice
1
1
1
2
1
2
1
1
0
0
1
1
2
We report “.” when the null is rejected for maximum rank equal to 1,2,…,N-1
international price
in VECM
ln_wheat_int
Costa Rica
ln_bread
ln_bread_square
ln_bread_sweet
ln_cookies
ln_crackers
ln_wheat_flour
1
0
2
0
2
2
ln_corn_int
ln_tortillas
ln_corn_flour
0 ln_cereals
0
0
ln_rice_int
ln_rice
1 ln_rice
0 ln_rice
ln_rice_selected
ln_rice_premium
Joachim von Braun, IFPRI, June 2009
Panama
ln_bread
ln_flour
ln_pasta
ln_crackers
ln_cereals
0
1
2
1
0
Dominican Republic
ln_bread1
1
ln_bread2
1
ln_spaghetti
1
ln_pasta
1
Ecuador
dln_bread
dln_bread_baguette
dln_flour
dln_cookies
dln_pasta
dln_spaghetti
Peru
1 ln_bread_cereals
2
2
0
0
0
dln_corn
2 ln_bread_cereals
1
1 ln_bread_cereals
1
0 dln_rice
0
0
2
Source: Robles and Torero 2009 (forthcoming in Economica).
Price transmission, Uganda
Correlation of global and Ugandan price and food index
series, Jan 2000–July 2008
No lag
One-month
lag
Threemonth lag
Maize
0.672
0.524
0.312
Rice
0.875
0.734
0.500
Food Commodity
Index
0.779
0.755
0.707
Joachim von Braun, IFPRI, June 2009
Source: Benson, Mugarura, and Wanda 2008.
Reasons for the change in price trends
1. Income and population growth
2. Energy and biofuels
3. Slow agricultural growth
4. Speculation and financial crisis
Joachim von Braun, IFPRI, June 2009
1. Income and population growth
• Annual income growth high in 2005-07
-
10% in developing Asia, 6% in Africa
3% in industrialized countries
…but slowed down in 2008-09
-
6% in developing Asia, 4% in Africa
-1% in industrialized countries
• Population grew by 78 million per year in
2005-09, reaching 6.8 billion in 2009
- Expected to reach 9.1 billion by 2050
Joachim von Braun, IFPRI, June 2009
Sources: IMF 2009 and UN 2009.
2. Energy and biofuels
• Energy prices now affect not just agric. input
prices, but also output prices strongly via
biofuel-land competition
• IMPACT Model: Increased biofuel demand in
2000-07 contributed to 30% of weighted
average increase of grain prices
Joachim von Braun, IFPRI, June 2009
3. Slow agricultural growth
Annual total factor productivity growth, 1992-2003
%
East Asia
2.7
South Asia
1.0
East Africa
0.4
West Africa
1.6
Southern Africa
1.3
Latin America
2.7
North Africa & West Asia
1.4
All regions
2.1
Joachim von Braun, IFPRI, June 2009
Source: von Braun et al. 2008.
4. Speculation
Number of contracts
Grain and oilseed futures and options - Ave. daily volume
And closure of commodity exchanges (India, China, etc.)
Joachim von Braun, IFPRI, June 2009
Source: Chicago Board of Trade 2008.
Speculation and prices:
Evidence of causality
Indicator of speculation activity
Commodity
Wheat
Corn
Soybeans
Rice
1.
Monthly volume (futures contracts CBOT)
2. Monthly open interest (futures contracts CBOT)
3. Ratio volume to open interest (1)/(2) (futures
contracts)
+
(Apr/05 Oct/07)
+
(Dec/04 Jun/07)
+
(Sep/05Mar/08 )
4.
Ratio non-commercial positions to total reportable
positions (long)
5.
Ratio non-commercial positions to total reportable
positions (short)
6.
Index traders net positions (long – short positions)*
-
+
(Jan/05Jul/07)
+
(Jan/06 –
May/08)
+
(Aug/05Feb/08)
N/A
“+”: evidence of causality
Starting period of evidence of causality in parenthesis
* It combines futures and options positions, data available since January 2006.
Joachim von Braun, IFPRI, June 2009
Source: von Braun, Robles, Torero 2008.
4. And financial crisis
Food- and financial crises linkages
Financial
crisis
Food crisis
But Who drives Whom?
Joachim von Braun, IFPRI, June 2009
Source: von Braun 2008.
Oil price per barrel, PPI – commodities
Core inflation, effective federal funds rate
Commodity prices, inflation,
and monetary policy in the USA
End-2004: oil price spill to other commodities, effect on core inflation
2004-07: Tight monetary policy triggered recession (from housing
market defaults to decreased consumption and incomes)
Joachim von Braun, IFPRI, June 2009
Source: Data from US Bureau of Labor Statistics.
Overview
1. Food price developments
2. Prices, policy dynamics, and feedback
3. Prices and the poor
4. New institutional arrangements
Joachim von Braun, IFPRI, June 2009
Decreased market distortions ?
Producer support estimates
Indonesia
30
80
20
60
10
40
0
Percent
Percent
India
-10
-20
20
0
-20
-40
-30
-60
-40
1985
1987
1989
1991
1993
%PSEc
1995
1997
1999
-80
2001
1985
1987
1989
%PSE
1993
1995
%PSEc
China
1997
1999
2001
2003
%PSE
Vietnam
30
80
20
60
10
40
0
Percent
Percent
1991
-10
-20
20
0
-20
-40
-30
-60
-40
-80
1995
1996
1997
1998
%PS Ec
1999
%PS E
2000
2001
1985
1987
1989
1991
1993
%PSEc
1995
1997
1999
2001
%PSE
Source: Orden et. al 2007.
Global Trade Restriction Index: 1985-89=23%, 2000-04=12%
(Lloyd, Croser and Anderson 2007)
OECD producer support: 1986-88=37%, 2005-07=26% (OECD 2009)
Joachim von Braun, IFPRI, June 2009
But now a new wave of
trade protectionism with high prices?
Export restrictions in 2008 were serious!
• Tariff increases do not explain trade decline
• Trade financing an issue in the recession
Potential costs of rising protectionism are high!
• Failed Doha round: up to -11.5% in world
trade (volume) if tariffs increase to their
current WTO limits (bound level)
Joachim von Braun, IFPRI, June 2009
Source: Laborde, Torero 2009, IFPRI.
…And reversal in grain stock policy
Cereal stocks
206.9
200
Million tonnes
2006
150
2009
149
100
50
39.4
25.8
54.5
44.4
0
China
Joachim von Braun, IFPRI, June 2009
India
EU
Source: Based on data from FAO 2009.
Creation of cartels?
• 2008, Vietnam, Thailand, and Burma
attempted to form a rice cartel
• June 2009, Russia, Ukraine, Kazakhstan to
form a 'grain pool’ to:
- manage stocks and prices
- improve infrastructure incl. rail and port
capacity
Joachim von Braun, IFPRI, June 2009
Result: Accumulation of market
inefficiencies
Market efficiency:
From “hypothesis”
to “fact”
to “myth”?
(Justin Fox, 2009)
Joachim von Braun, IFPRI, June 2009
Rise in food protests
800
700
600
20
500
15
400
10
300
200
# of riots
US$/ton
25
Maize
Wheat
Rice
Riots (right)
5
100
Joachim von Braun, IFPRI, June 2009
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
0
Jul-07
0
Source: J. von Braun based on data from FAO 2009 and news reports.
Looking for land:
Overseas land investments to secure food supplies, 2006–09
Joachim von Braun, IFPRI, June 2009
Source: von Braun and Meinzen-Dick 2009,
with data compiled from media reports.
Overview
1. Food price developments
2. Prices, policy dynamics, and feedback
3. Prices and the poor
4. New institutional arrangements
Joachim von Braun, IFPRI, June 2009
Rising number of hungry people in the
developing world
(in million)
>1 bil.
Joachim von Braun, IFPRI, June 2009
WFS target
Data source: FAO 2006, 2008, 2009.
1.4 billion people remain poor in the
developing world
Poverty at $1/day, 2005 PPP
80
East Asia and Pacific
1.2
South Asia
1.0
Sub-Saharan Africa
0.8
Billions
% of population
60
40
0.4
East Asia and Pacific
South Asia
Sub-Saharan Africa
20
0.6
0.2
0
0.0
1981
1987
Joachim von Braun, IFPRI, June 2009
1993
1999
2005
1981
1987
1993
1999
2005
Source: Chen and Ravallion 2008.
High food prices reach the poor
• Poor countries fully participate in food
price shocks
• Poor households are reached by high
prices (Dorosh, Dradri, Haggblade 2009)
- Coping strategies vary, and include
switching to non-traded food items
Joachim von Braun, IFPRI, June 2009
Maize and sweet potato prices
Zambezia, Mozambique 2006-2008
12
mzpkg
10
wspkg
8
6
4
2
0
Joachim von Braun, IFPRI, June 2009
Source: R. Labardo, A. de Brauw HarvestPlus, 2008.
People in low-income countries are very
sensitive to changes in food prices
Price elasticities of maize in Zambia
High
estimate
Low
estimate
North
Small farm
Rural nonfarm
Middle and urban rich
Urban poor
-0.92
-1.04
-0.61
-0.53
-0.52
-0.59
-0.45
-0.39
South
Small farm
Rural nonfarm
Middle and urban rich
Urban poor
-0.60
-0.58
-0.16
-0.24
-0.33
-0.33
-0.12
-0.18
National aggregate
-0.64
-0.43
Joachim von Braun, IFPRI, June 2009
Source: Dorosh, Dradri and Haggblade 2009.
Human costs of volatile prices are high
Price stocks and malnutrition in Kordofan children,
Jan 1981-Dec 1986
Teklu, von Braun, Zaki 1991.
And must be included in sound econ. analysis of
price volatility
Joachim von Braun, IFPRI, June 2009
Overview
1. Food price developments
2. Prices, policy dynamics, and feedback
3. Prices and the poor
4. New institutional arrangements
Joachim von Braun, IFPRI, June 2009
Strategic agenda
1. Promote pro-poor agriculture growth with
technology and institutional innovations
2. Facilitate open trade and reduce market
volatility
3. Expand social protection and child
nutrition action
Joachim von Braun, IFPRI, June 2009
For long-term agric. growth:
Double public agric. R&D to impact poverty
R&D allocation
(mil. 2005 $)
 in # of
+ Agr. output
growth (% pts.)
2008-2020
2008*
2013
poor (mil.)
2008-2020
SSA
608
2,913
-143.8
2.8
S Asia
908
3,111
-124.6
2.4
4,975
9,951
-282.1
1.1
Devel.ing
World
CGIAR investment to rise from US$0.5 to US$1.0 billion
as part of this expansion
Joachim von Braun, IFPRI, June 2009
Source: von Braun, Shenggen Fan, et al. 2008.
What to do about volatility?
1. Keep trade open at times of global and
regional food shortage is a must
2. Regulation of food commodity markets? (only
as part of financial markets)
3. Establish grain reserves policy at global level
(emergency reserve, shared physical
reserves, and a virtual reserve > a new
institution at global level needed)
Joachim von Braun, IFPRI, June 2009
Institutional design behind virtual
reserves
Intelligence unit
• Model
fundamentals
• Model dynamic
price band
• Trigger alarm
Futures market
High level technical
commission
• Approve intervention
Appoint
Joachim von Braun, IFPRI, June 2009
Country
commitment to
supplying funds
Support pro-poor food and nutrition
interventions
Protective actions e.g.:
• Cash transfers
• Employment-based food security programs
Preventive actions e.g.:
• School feeding
• Early childhood nutrition programs
Focus on children, women, and poorest
Joachim von Braun, IFPRI, June 2009
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Joachim von Braun, IFPRI, June 2009