updated: 8 July, 2008
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International Fund for Agricultural Development

Paper prepared by FAO, IFAD and WFP for the meeting of the Chief Executives Board for Coordination on 28-29 April 2008, Berne, Switzerland

International prices of basic food commodities have increased rapidly over the last three years. The FAO food price index rose by 9 percent in 2006 and by 23 percent in 2007. As of March 2008 wheat and maize prices were 130 and 30 percent higher than a year earlier. Rice prices have engaged in a steep upwards trend since the beginning of 2008. After recording relatively moderate increases of 9 percent in 2006 and 17 percent in 2007, the FAO All Rice Price Index gained 10 percent in February 2008 and another 10 percent in March. This situation poses a threat to food security in developing countries, and calls for urgent coordinated action by the international community and in particular by the United Nations. Without rapid and lasting reaction MDG 1 target for hunger reduction will be dramatically missed.  

Causes of High Prices and the Medium-Term Outlook
Six reasons explain the increase in food prices.

  • First, world cereal production fell by 3.6 percent in 2005 and 6.9 percent in 2006 due to bad weather in major producing countries.
  • Second, stock levels are very low, which magnified the impact of production shortfalls as markets worry about the lack of a buffer. The ratio of world cereal ending stocks in 2007/08 to the trend world cereal utilization is estimated at 18.7 percent, the lowest in three decades.
  • Third, petroleum prices and food prices are highly correlated, with an estimated correlation coefficient of more than 0.6. The rapid rise in petroleum prices exerted an upwards pressure on food prices as fertilizer prices nearly tripled and transport costs doubled over a two year period.
  • Fourth, increased demand from the biofuels sector also tended to push prices upwards. It is estimated that about 100 million tons of grain (some 4.7 percent of global cereal production) are being used for biofuels in 2007/8. In 2007/8 the United States alone is expected to use about 80 million tons of maize to produce ethanol, a 37 percent increase over the previous year.
  • Fifth, economic growth in some large developing countries is leading to changes in diet and increased demand for food crops. Over the last 15 years, meat consumption more than doubled in China and grew by 70 percent in Brazil and 20 percent in India. Since it takes some 5 Kg of cereals to produce 1 Kg of meat, this shift in diet is also leading to higher cereal prices.
  • Sixth, trade policies put in place by some countries, such as export bans, has contributed to higher prices in certain cases.

Prices remain high today although world cereal production recovered, increasing by 4.7 percent in 2007 and 2.6 percent in 2008 (projected). Available medium-term projections by the International Food Policy Research Institute (IFPRI) and by OECD/FAO indicate that food prices will remain above their previous trend level for the foreseeable future. Prices of food commodities for the next 10 years will be higher than during the previous 10 years, even though a small decline in 2009 or 2010 is expected. Those projections are explained by three factors. First, it is believed that the demand for biofuels will continue to rise rapidly, partly driven by high oil prices. According to the International Energy Agency (IEA) the share of the world’s arable land devoted to the growing of biomass for liquid biofuels could triple over the next 20 years. Second, developing country economic growth is expected to continue at about 6 percent a year with significant implications for food demand. Third, climate-change risks are likely to have adverse impacts on food production, compounding the challenge of meeting global food demand.

Impact on Developing Countries and Policy Responses
Soaring food prices have negative short-run effects on developing countries that depend on imports for their food security and where the vast majority of households, including in rural areas, are net food buyers. Hence, it is not surprising that increasing food prices have triggered riots, and even contributed to political instability. Unrest linked to high food price has already occurred in a number of countries, including Burkina Faso, Cameroon, Egypt, Guinea, Haiti, Mauritania, Mexico, Morocco, Nepal, Senegal, Uzbekistan and Yemen. This highlights the importance of increasing food prices as a political as well as a developmental issue.

The total cost of food imports for Low-Income Food-Deficit Countries (LIFDCs) was 24 percent higher in 2007 than in 2006, rising to $107 billion. Annual food import bills for these countries were more than twice their level in 2000. Having to deal with higher food and energy import prices is placing a heavy burden on LIFDCs, especially as they have to deal with existing problems of under-nourishment. African countries have been particularly hard hit.

Households around the developing world, where food represents 60-80 percent of consumer spending, are suffering from domestic food inflation. In Cote d’Ivoire prices of rice in March 2008 were double their level of a year earlier, while in Senegal wheat prices by February 2008 were twice the level of a year ago and sorghum was up 56 percent. In Nigeria, prices of sorghum and millet have doubled in the past five months. In Somalia, the price of wheat flour in the northern areas has almost tripled over twelve months, and in Sudan (Khartoum) it increased by 90 percent. The price of maize in Uganda was 65 percent higher in March 2008 than in September 2007. In March 2008 maize prices in Mozambique (Maputo) were 43 percent higher than a year ago. Rice prices in the Philippines increased by 50 percent in the past two months. In Sri Lanka, prices of rice in March 2008 were almost double those of a year ago, while in Bangladesh they increased by 66 percent over the same period. In February 2008 bread prices in Tajikistan were double their levels of February 2007, while in Armenia the price of wheat flour has increased by one-third during the same period. Food prices in Haiti increased by 50-100 percent over the last year.

Risk analysis conducted by WFP in a number of countries suggests that the impact on household food security will be significant. It is likely that high food prices will make the fight against hunger and poverty an uphill struggle if no additional actions are taken to mitigate the impact. The vast majority of poor rural and urban households in developing countries are net food buyers who are negatively affected by higher prices. According to World Bank household data less than 10 percent of poor households in Bolivia, Ethiopia and Bangladesh are net sellers of food. Simulations by FAO using household data from Malawi indicate that a 10 percent increase in food prices leads to a 1.2 percent income loss for the poorest quintile in rural areas and a 2.6 percent income loss for the poorest urban quintile. According to this analysis, only the richest rural quintile gain from an increase in food prices.

Faced with this situation, many governments have tried to limit the increase in domestic food prices by raising subsidies, lowering import tariffs or imposing export restrictions. By keeping domestic prices below international levels those interventions provide short-term relief for distressed consumers, but could also have negative effects for three reasons. First, by maintaining farm-gate prices artificially low they discourage the much needed supply response and productivity increase that is required for long-term food security. Second, export restrictions lower supply on international markets, pushing prices higher and aggravating the global situation. Third, higher subsidies and/or lower taxes and tariffs increase the pressure on national budgets and reduce fiscal resources available for much needed public investment and other developmental expenditures.

Recommendations for Action by the UN System
A fully co-ordinated response is required from the international community to meet emergency food needs, to enable poor small holder farmers to boost their production both in the next growing season and in the medium and long term, to provide macro-economic support for poor net food importing countries and to deliver progress in the Doha trade round. The need for urgent action is increasingly widely recognised, and it is likely to be a focus for world leaders including in the context of the G8 summit and UNGA.. The recent call from the Development Committee of the World Bank and IMF for a “New Deal for global food policy” is welcome in this regard – and is fully in line with the ‘twin track approach” long advocated by the Rome-based agencies for tackling hunger and malnutrition.

The UN system is uniquely positioned to catalyse and help co-ordinate such a system-wide effort and to support developing countries to deal with the impact of soaring prices on food security, and to seize the opportunity offered by higher demand to expand their agriculture and fight rural poverty. Strong coordination is needed to ensure maximum impact. The three Rome based agencies have decided to create a joint coordinating group of senior managers to maximize synergies from their respective interventions and to engage jointly with the World Bank and leading regional institutions. Action by the UN system would cover three areas: crisis response, emergency safety nets and social protection; enhancing the supply response and agricultural development; and policy support and advice to governments. The UN’s capacity (including FAO and WFP) in  monitoring , rapid assessment, and analysis of the rapidly changing food price situation and its impact on vulnerability to hunger will be essential in supporting the UN and national government response in all three of these areas.

The international development community, and many developing countries themselves, have paid insufficient attention to investing in small-holder farmers in recent years; this has been clearly reflected both in budget allocations and in declining for agriculture. The UN system can play an important role in helping to ensure that the appropriate lessons are learned from this experience for the policies of the future.

Crisis Response and Safety nets.
The top priority should be to ensure access of the most vulnerable to food, which can be achieved through emergency assistance and expanded safety net programs. Those would include assistance in the form of food, vouchers or cash transfers, employment programmes (food or cash for work), school feeding and insurance schemes. Targeted programmes, addressing the nutritional status of pregnant and lactating women, children less than five years of age and other vulnerable groups such as people living with HIV/AIDS or tuberculosis, could be scaled up.

WFP has extensive experience in the development of safety-net programmes, but it will require additional resources in order to respond effectively to the current situation. The high food and fuel prices mean that WFP can reach fewer people with the same resources. Food aid deliveries have declined almost continuously from 15 million MT in 1999 to 7 million MT in 2006. The cost for WFP to deliver food to beneficiaries has increased by more than 70 percent over the period 2002-07. Further increases between the end of 2007 and early 2008, mean additional costs to simply meet the already assessed and Board-approved needs for WFP programmes for 2008.

Supply response.
Support needs to focus particularly on enabling poor rural producers – those least able to respond to changing market signals – to expand their production and seize the opportunity offered by higher commodity prices. In fact, cereal production by LIFDCs (excluding China and India) declined by 2.2 percent in 2007 as international prices were rising. Yields in many LIFDCs continue to be much lower than the rest of the world as they lag in the use of fertilizers, high yielding varieties, irrigation, integrated nutrient and pest management, and conservation tillage.

In response to soaring food prices, FAO has launched an initiative on December 17, 2007 to support governments in most affected countries to enhance the supply response from agriculture. Work on this initiative is carried out in partnership with other Rome-based agencies, the World Bank and regional institutions such as NEPAD. The initiative focuses on ensuring that farmers have access to the necessary inputs (seeds and fertilizers) to boost production, and includes working with governments to identify urgent investment needs in agriculture with the aim of reducing the huge productivity gap in developing countries. Country consultation missions (including FAO, WB, IFAD and WFP) are ongoing in Burkina Faso, Mauritania, Senegal and Mozambique in order to assess the situation and provide recommendations for immediate action. The success and sustainability of this initiative requires increased resources for agriculture, from donors and national governments. Further attention will be attracted by the High Level Conference on World Food Security and the Challenges of Climate Change and Bioenergy to take place in Rome 3-5 June.

In 2008 IFAD will provide financing to developing countries to support agricultural and rural development projects worth around US$1.3 billion and proposes to raise this level in the coming years to about US$ 2 billion annually. Most of these funds will support governments to finance their programmes and projects aimed explicitly at enabling poor rural men and women to increase their agricultural production and  incomes. In consultation with FAO and WFP, IFAD is discussing with borrowing governments and other local partners how to reorient existing investment programmes and shape those being developed to help meet the new challenges posed by soaring food prices. Addressing this issue is also a priority for IFAD grant programme which supports inter alia the CGIAR system and farmers organisations.  

Policy support.
Countries demand policy advice and support from the UN system to mitigate the impact of high food prices, improve the food security situation, protect the productive assets –including land - of rural poor households and benefit from the opportunities that high food prices create for farmers. The UN system can disseminate experiences and best practices to help countries to learn from past experience and to prepare their policy frameworks and strategies. This work could include:

  • helping design food insecurity and vulnerability monitoring systems;
  • identifying and assessing the effectiveness of various measures (e.g. off season utilization of irrigated land for producing short duration vegetables or other crops, distribution of seeds and fertilisers through various schemes) that could enhance the ability of producers to respond to improving market signals;
  • assessing the impact of changing support to and taxes on food commodities;
  • analyzing how to use existing food distribution systems effectively and determining the most appropriate targeting criteria for food sales to vulnerable groups;
  • assessing the appropriate role of food reserves for reducing intra-annual price fluctuations and emergency shortfalls;
  • developing appropriate long-term social protection policies and systems that ensure sustainability of results from crisis response emergency safety net interventions; 
  • determining the most effective means of enabling the private sector to participate more fully in agricultural development and in particular play a critical role in trade of food and supply of agricultural inputs; and
  • assessing the most effective and least distortive ways of using trade measures to deal with international  price fluctuations.
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