Responding to
Higher and More
Volatile Food Prices
Christopher Delgado
World Bank/ARD
IATRC
December 13, 2011
Joint with Rob Townsend, Sergiy Zorya, Iride Ceccacci, and
Saswati Bora (all World Bank/ARD)
Global Food Price Volatility and its Drivers
The context of global grain price volatility
3
• Steadily rising grain demand vs. increasingly uncertain
supply
• Combined with stock draw-downs and lack of info on
new players
• Greater links between oil and food markets
• Slow down in grain crop yield growth in developing
• Increased water scarcity and reached land frontier
• Increasingly variable climate
• Food price spikes contribute to social tension and
provoke aggravating short-run policy responses
Long-term commodity prices 1948-2010
Indices, Deflated 2000 = 100
4
350
300
Korean
War
Oil
Crises
Agriculture
250
200
150
Metals
100
50
Energy
0
1948
1954
1960
1966
1972
Source: World Bank, DECPG
1978
1984
1990
1996
2002
2008
Food demand + production shocks + stocks
= food price volatility
5
2,000
1,900
1,800
40
Stock-to-Use
Production
Consumption
35
30
1,700
25
1,600
20
1,500
15
1,400
10
Percent (Stock-to-Use)
Millions MT (Consumption, Production)
World Maize, Wheat, Rice
Real maize prices vs. stocks-to-use 1960-2011
Source: Sergiy Zorya and Varun Kshirsagar, World Bank, using USDA data
Stocks-to-use changes (%) 2009-11 for exporters
more pronounced than for world
Source: Compiled from USDA WASDE Nov. 2011
The grain growth trends 1960-2011
(average annual growth rates %)
1960-2011
1960-2003
2003-2011
Consumption
2.5
2.5
2.5
Production
2.4
2.3
2.8
(of which Yield)
1.9
1.9
1.7
(of which Area)
0.5
0.4
1.1
Consumption
3.0
2.8
3.8
Production
2.9
2.7
3.7
Rice/Wheat/Maize
Maize alone
Source: Robert Townsend, World Bank, using USDA data
Many factors affecting commodity prices:
2001/05 compared to 2006/10
9
2001-05
2006-10
Change, %
Crude oil prices (US$/barrel)
33
75
+130
Exchange rate (US$ against a broad index of currencies)
119
104
-13
Interest rate (10-year US Treasury bills)
4.7
4.1
-14
Funds invested in commodities (US$ billion)
30
250
+730
GDP growth, low and middle income countries, annual
5.0
5.8
+16
Industrial production, low and middle income countries, annual
6.3
7.1
+13
Stocks-to-use ratio of maize, wheat, and rice (months of consumption)
3.2
2.5
-20
Biofuels production (million of barrels per day equivalent)
0.4
1.3
+200
Average yields of wheat, maize and rice (tons/hectare)
3.8
4.0
+7
Growth in yields (percentage change per year)
1.4
1.0
-32
Natural disasters (droughts, floods, and extreme temperatures)
374
441
+18
Source: John Baffes, World Bank
A framework for simulating food price
behavior 1960-2011
A simulation of world
grain supply and
demand:

Supply:

Demand:

Market equilibrium: S=D

Market price:

Market price changes:
10
Actual
Simulated
Drivers of world food prices
11
Average Food Price Levels
Food Price Volatility
Dependent on:
Dependent on:
Long-term change
in demand
[component of ∆𝛼𝑑 ]
Long-term demand
responsiveness to prices
[component of 𝛽𝑑 ]
- Population
- Income
- Biofuels
- Share of food in consumption
- Biofuels mandates
- Oil/maize price ratio
Long-term change
in supply
[component of ∆𝛼𝑠 ]
Long-term supply
responsiveness to prices
[component of 𝛽𝑠 ]
- Area planted
- Yield changes
- Output and input market
integration
- Price risk management
Short-term change in demand
[component of ∆𝛼𝑑 ]
-
Oil prices volatility
Exchange rate volatility
Financial speculation
Precautionary hoarding
Food reserves
Short-term demand
responsiveness to prices
[component of 𝛽𝑑 ]
- Stock release policies
- Oil/maize price ratio
Short-term change in supply
[component of ∆𝛼𝑠 ]
Short-term supply
responsiveness to prices
[component of 𝛽𝑠 ]
- Droughts and floods
- Share of production in more
volatile production regions
- Trade policy responses (export
bans and sharp reductions in
import tariffs)
- Trade openness
Preceding Ten Year Growth Rates (% p.a.) in Cereal Yields
in Developing Countries 1960-2008
3.5
3.0
2.5
2.0
Era of High Prices and
Green Revolution
Era of Declining
Real Prices &
Benign Neglect
Era of
?
1.5
1.0
0.0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0.5
Land has become an increasingly limited
resource
Global land area for 13 major crops increased
by 27 million ha in the last 5 years: China,
Argentina, India, Brazil, Ukraine, Russia, and SS
Africa accounted for 24 million ha
13
Source: USDA
Uncultivated land, not much left
Source: Fisher and Shah (2010)
Tightening links between grain and
historically volatile oil prices
14
The link between oil and fertilizer prices
has strengthened since 2005
Source: World Bank
Ag is more energy intensive
Source: GTAP
Export Volume Index
(1990/91=100)
Grain exports from new main exporters are more
variable than from traditional exporters
Example of Wheat
500
Black Sea region
Latin America
OECD exporters
450
400
350
300
250
200
150
100
50
0
1990/1991
1995/1996
Source: USDA
2000/2001
2005/2006
2010/2011
Outlook
Preferred Response
16
World food prices are
expected to remain
higher and more
volatile than their pre2007 levels
Short term price
volatility is
increasingly becoming
a long term
phenomenon
Exploit Opportunities
 Productivity growth
 Link farmers to markets
Manage risks
 Improve information and
ensure early discussion by
policymakers
 Invest in agricultural
resilience
 Improve safety nets
Actual Responses to Price Volatility
Up to half of the 250% rice price increase in
2008 was due to policy
Rice Price 2004-2008 US$/mt
1200
Philippines buying > $1,000/ton
1000
Japan sells 200,000 ton WTO stocks to Philippines;
record harvests f orecast
800
Philippines buying > $700/ton
600
Vietnam introduces export restrictions
400
200
Source: Aldaz-Caroll 2008
1-Jul-08
1-Apr-08
1-Jan-08
1-Oct-07
1-Jul-07
1-Apr-07
1-Jan-07
1-Oct-06
1-Jul-06
1-Apr-06
1-Jan-06
1-Oct-05
1-Jul-05
1-Apr-05
1-Jan-05
1-Oct-04
1-Jul-04
1-Apr-04
1-Jan-04
0
India imposes export restrictions
Rice price transmission from global market to
consumers in 2008 different across asia
World price pass-thru (%) between Q207 and Q208
90
81
78
70
54
44
50
30
4
10
-10
Cambodia
(June)
Thailand
(April)
Vietnam
(May)
Philippines
(June)
China
(June)
-3
Indonesia
(April)
Transmission of price peaks limited and uneven
Source: Aldaz-Caroll 2008
Reality Check: Countries Facing Food Price Protests And
Riots, January 2007- May 2008
Source: USAID Office of Food for Peace
Actual country responses to the 2008 food
price spike (N=77)
21
Reduce Taxes on Foodgrains
Increase supply using foodgrain stocks
East Asia
Export Restrictions
MENA
SAR
Africa
Price Controls/Consumer Subsidies
LAC
ECA
None
0
10 20 30 40 50 60 70 80 90 100
Source: FAO - State of Agricultural Commodity Markets, 2009
More detail on actual country policy responses
2007-2008 (N=81)
22
Source: OECD (2010)
Short-term policy responses observed in 2008
affecting long-run outcomes
(given in increasing order of possible negative
impact on long-run policy options)
Good
1.
2.
3.
4.
5.
6.
Reduce (permanently)Food Grain Taxes/Tariffs
Still good,
School Feeding Programs
but more
Cond’nal Cash Transfers to the Poor
difficult to
avoid
Targeted Food Subsidies
operational
problems or
Food for Work
negative
impact on
Food Aid
incentives
Worse short-run responses observed in 2008
7.
8.
9.
10.
10.
11.
(given in increasing order of likely negative impact on long-run
policy objectives)
Build-up of Gov’t Buffer Stocks for Distribution (governance and cost
are issues, but has the fall-back situation in the exporting countries
changed?)
Food Rationing (not sustainable over time)
Price Controls (bad other than in very
short term special circumstances)
Ad Hoc and Temporary Reductions in Tariffs
(the equivalent for net importers of export
taxes for net exporters)
Export Restrictions/Taxes
Not Good
Inflexible Export Bans
Preferred Responses to Price Volatility
Preferred measures to address food price
levels & volatility longer-term
26
Measure to Reduce Average Food Price Escalation
Measures to Reduce Food Price Volatility
Long-term change in
supply [component of ∆𝛼𝑠 ]
Long-term supply responsiveness
to prices [component of 𝛽𝑠 ]
Short-term change in
supply [component of ∆𝛼𝑠 ]
Short-term supply responsiveness
to prices [component of 𝛽𝑠 ]
- Raise crop yields
- Facilitate land markets
- Better use of price risk
management tools
- Strengthen market integration
- Develop more weather
tolerant varieties
- Trade openness
Long-term change in
demand [component of
∆𝛼𝑑 ]
Long-term demand
responsiveness to prices
[component of 𝛽𝑑 ]
Short-term change in
demand [component of
∆𝛼𝑑 ]
Short-term demand responsiveness
to prices [component of 𝛽𝑑 ]
- Increase transparency
of agricultural markets
- Efficient stock management
- Shift to market based
biofuels policies
Reducing levels requires productivity increases
in developing countries
27
Raising crop yields and their resilience is the single most important action needed
for an enduring solution to global food security
 Narrow the gap between average farm and experimental yields
 Generate yield-enhancing and resiliency technologies
 Improve water management, including irrigation
Yield gaps are large in developing countries
Country
United States
France
Italy
Argentina
China
Thailand
Philippines
Indonesia
Pakistan
Mexico
India
Test mean
yields (bu/ac)
199
221
231
188
153
121
105
107
148
181
142
Test mean yield
stdev (bu/ac)
36
31
29
52
30
22
29
32
21
54
35
No. of
tests
723
133
76
88
140
184
277
51
50
113
114
Test plot data for maize yields, 2008 to 2010, Monsanto Corp.
Source: Abbott at el. (2011)
Country average
yields (bu/ac)
157
144
147
114
85
66
41
38
46
52
36
Yield gap
(bu/ac)
42
78
85
74
68
56
65
69
103
128
106
Yield gap
(%)
21%
25%
27%
29%
45%
46%
61%
64%
69%
71%
75%
Other measures to address high food
price levels
28







Secure land rights for poor farmers
Shift to market-based biofuels policies:
Improve farmer access to price risk management via
financial instruments
Improve trade openess, market infrastructure, market
information systems, access of producer organizations
Improve analysis and outreach on implications of different
policy alternatives
Improve safety net infrastructure for faster better mitigation
of shocks, avoiding more negative alternatives
Build capacity for all of above
Trust is the scarcest currency in global grain
markets




Avoid short-term policy responses to short-term food
insecurity that have adverse longer-term implications
for both food security and market development
Decrease the asymmetries of information that create
transactions costs in international grain markets
Recognize the absolute imperative governments face
to provide food security in the face of crisis, including
through solidarity from better off neighbors
Improve the consistency of market signals