Confronting The Food Price Challenge By Joachim Von Braun
Confronting the Food Price ChallengebyJoachim von BraunPower Point Presentation for theInternational Agricultural Trade Research ConsortiumAnalytic Symposium“Confronting Food Price Inflation:Implications for Agricultural Trade and Policies”June 22-23, 2009Seattle, Washington
Confronting the Food PriceChallengeJoachim von BraunInternational Food Policy Research InstituteIATRC Symposium “Confronting Food Price Inflation: Implications forAgricultural Trade and Policies”Seattle, June 22, 2009
Overview1. Food price developments2. Prices, policy dynamics, and feedback3. Prices and the poor4. New institutional arrangementsJoachim von Braun, IFPRI, June 2009
Are we living in unusual times?1872-2008 prices and populationJoachim von Braun, IFPRI, June 2009Sources: 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 foodsystemsGlobal integration—across national borders—ofproduction, processing, marketing, retailing,and consumption of agriculture and food itemsJoachim von Braun, IFPRI, June 2009Source: von Braun and Diaz-Bonilla 2008.
Trade globalization?Agriculture trade in percent of productionExport/Production1960s 1970s 1980s1990s2000-05Latin America and the Caribbean22.723.022.225.031.2Sub-Saharan Africa aAsia Developing23.35.317.06.112.86.412.26.410.96.1All Three oduction1960s 1970s 1980sLatin America and the Caribbean6.38.410.913.614.9Sub-Saharan Africa a8.76.38.18.611.1Asia Developing6.56.25.66.15.6All Three Regions6.86.77.07.87.8aDoes not include South Africa.Joachim von Braun, IFPRI, June 2009Source: Data from FAOSTAT 2009/
High-value products in developingcountries on the riseDomestic consumptionJoachim von Braun, IFPRI, June 2009ExportsSource: WDR 2008 with data from FAOSTAT.
Widening gap in trade costsTrade costs in processed foods in 2000:- North: 73%- South: 134%Geography historymatter more thanInfrastructure institutions(?)Joachim von Braun, IFPRI, June 2009Source: Olper and Raimondi 2009.
Commodity price spike, 2007-08800CornWheatRiceOil (right scale)12510075400502000US /barrelUS /ton600Price spike250Closer linkages between commodity markets andeconomic performanceJoachim von Braun, IFPRI, June 2009Source: Data from FAO 2009 and IMF 2009.
Food prices in developing countriesstay highLatest food price as of April 2009(790 domestic price quotations in 58 developing countries)78%8060(%)43%4017%200 12 months earlierJoachim von Braun, IFPRI, June 2009 3 months earlierHighest on recordSource: FAO 2009.
Domestic prices of key staples remain high:WheatJoachim von Braun, IFPRI, June 2009Source: FAO 2009.
Domestic prices of key staples remain high:MaizeJoachim von Braun, IFPRI, June 2009Source: FAO 2009.
Domestic prices of key staples remain high:RiceJoachim von Braun, IFPRI, June 2009Source: FAO 2009.
Transmission from int’l to domestic pricesvaries by country and by productItems with positive statistical significant coefficients with respect tothe international prices in t (month) and t-4international pricein regressionln wheat intMexicoln sweet breadln white breadln bread decajaln cookiesln other cookiesln wheat flourln pastryGuatemala0 ln bread0 ln pasta1 ln pastry0000El Salvador1 ln bread2 ln macaroni1 ln bread sweetln crackers1212Hondurasln bread loafln spaghettiln wheat flourln crackersln bread semitasln corn intln cornln tortillasln corn flourln rice intln rice0 ln corn0 ln tortillas0 ln corn flourln corn milling1 ln rice1 ln corn0 ln tortillas102 ln rice2 ln corn2 ln tortillasln corn flourln cornflakes2 ln rice0112100000Nicaragualn breadln bread loafln bread loaf slicedln spaghettisln wheat flourln cookiesln crackersln candy polvoronln cornln tortillasln corn flourln cornflakesln rice1112121100112We report “.” when the null is rejected for maximum rank equal to 1,2, ,N-1international pricein VECMln wheat intCosta Ricaln breadln bread squareln bread sweetln cookiesln crackersln wheat flour102022ln corn intln tortillasln corn flour0 ln cereals00ln rice intln rice1 ln rice0 ln riceln rice selectedln rice premiumJoachim von Braun, IFPRI, June 2009Panamaln breadln flourln pastaln crackersln cereals01210Dominican Republicln bread11ln bread21ln spaghetti1ln pasta1Ecuadordln breaddln bread baguettedln flourdln cookiesdln pastadln spaghettiPeru1 ln bread cereals22000dln corn2 ln bread cereals11 ln bread cereals10 dln rice002Source: Robles and Torero 2009 (forthcoming in Economica).
Price transmission, UgandaCorrelation of global and Ugandan price and food indexseries, Jan 2000–July 2008No lagOne-monthlagThreemonth lagMaize0.6720.5240.312Rice0.8750.7340.500Food CommodityIndex0.7790.7550.707Joachim von Braun, IFPRI, June 2009Source: Benson, Mugarura, and Wanda 2008.
Reasons for the change in price trends1. Income and population growth2. Energy and biofuels3. Slow agricultural growth4. Speculation and financial crisisJoachim von Braun, IFPRI, June 2009
1. Income and population growth Annual income growth high in 2005-07-10% in developing Asia, 6% in Africa3% 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 in2005-09, reaching 6.8 billion in 2009- Expected to reach 9.1 billion by 2050Joachim von Braun, IFPRI, June 2009Sources: IMF 2009 and UN 2009.
2. Energy and biofuels Energy prices now affect not just agric. inputprices, but also output prices strongly viabiofuel-land competition IMPACT Model: Increased biofuel demand in2000-07 contributed to 30% of weightedaverage increase of grain pricesJoachim von Braun, IFPRI, June 2009
3. Slow agricultural growthAnnual total factor productivity growth, 1992-2003%East Asia2.7South Asia1.0East Africa0.4West Africa1.6Southern Africa1.3Latin America2.7North Africa & West Asia1.4All regions2.1Joachim von Braun, IFPRI, June 2009Source: von Braun et al. 2008.
4. SpeculationNumber of contractsGrain and oilseed futures and options - Ave. daily volumeAnd closure of commodity exchanges (India, China, etc.)Joachim von Braun, IFPRI, June 2009Source: Chicago Board of Trade 2008.
Speculation and prices:Evidence of causalityIndicator of speculation activityCommodityWheatCornSoybeansRice1.Monthly volume (futures contracts CBOT)2. Monthly open interest (futures contracts CBOT)3. Ratio volume to open interest (1)/(2) (futurescontracts) (Apr/05 Oct/07) (Dec/04 Jun/07) (Sep/05Mar/08 )4.Ratio non-commercial positions to total reportablepositions (long)5.Ratio non-commercial positions to total reportablepositions (short)6.Index traders net positions (long – short positions)*- (Jan/05Jul/07) (Jan/06 –May/08) (Aug/05Feb/08)N/A“ ”: evidence of causalityStarting period of evidence of causality in parenthesis* It combines futures and options positions, data available since January 2006.Joachim von Braun, IFPRI, June 2009Source: von Braun, Robles, Torero 2008.
4. And financial crisisFood- and financial crises linkagesFinancialcrisisFood crisisBut Who drives Whom?Joachim von Braun, IFPRI, June 2009Source: von Braun 2008.
Oil price per barrel, PPI – commoditiesCore inflation, effective federal funds rateCommodity prices, inflation,and monetary policy in the USAEnd-2004: oil price spill to other commodities, effect on core inflation2004-07: Tight monetary policy triggered recession (from housingmarket defaults to decreased consumption and incomes)Joachim von Braun, IFPRI, June 2009Source: Data from US Bureau of Labor Statistics.
Overview1. Food price developments2. Prices, policy dynamics, and feedback3. Prices and the poor4. New institutional arrangementsJoachim von Braun, IFPRI, June 2009
Decreased market distortions ?Producer support 998%PS Ec1999%PS %PSESource: 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 oftrade protectionism with high prices?Export restrictions in 2008 were serious! Tariff increases do not explain trade decline Trade financing an issue in the recessionPotential costs of rising protectionism are high! Failed Doha round: up to -11.5% in worldtrade (volume) if tariffs increase to theircurrent WTO limits (bound level)Joachim von Braun, IFPRI, June 2009Source: Laborde, Torero 2009, IFPRI.
And reversal in grain stock policyCereal stocks206.9200Million chim von Braun, IFPRI, June 2009IndiaEUSource: Based on data from FAO 2009.
Creation of cartels? 2008, Vietnam, Thailand, and Burmaattempted to form a rice cartel June 2009, Russia, Ukraine, Kazakhstan toform a 'grain pool’ to:- manage stocks and prices- improve infrastructure incl. rail and portcapacityJoachim von Braun, IFPRI, June 2009
Result: Accumulation of marketinefficienciesMarket efficiency:From “hypothesis”to “fact”to “myth”?(Justin Fox, 2009)Joachim von Braun, IFPRI, June 2009
Rise in food protests800700600205001540010300200# of riotsUS /ton25MaizeWheatRiceRiots (right)5100Joachim von Braun, IFPRI, June 70Source: J. von Braun based on data from FAO 2009 and news reports.
Looking for land:Overseas land investments to secure food supplies, 2006–09Joachim von Braun, IFPRI, June 2009Source: von Braun and Meinzen-Dick 2009,with data compiled from media reports.
Overview1. Food price developments2. Prices, policy dynamics, and feedback3. Prices and the poor4. New institutional arrangementsJoachim von Braun, IFPRI, June 2009
Rising number of hungry people in thedeveloping world(in million) 1 bil.Joachim von Braun, IFPRI, June 2009WFS targetData source: FAO 2006, 2008, 2009.
1.4 billion people remain poor in thedeveloping worldPoverty at 1/day, 2005 PPP80East Asia and Pacific1.2South Asia1.0Sub-Saharan Africa0.8Billions% of population60400.4East Asia and PacificSouth AsiaSub-Saharan Africa200.60.200.019811987Joachim von Braun, IFPRI, June 200919931999200519811987199319992005Source: Chen and Ravallion 2008.
High food prices reach the poor Poor countries fully participate in foodprice shocks Poor households are reached by highprices (Dorosh, Dradri, Haggblade 2009)- Coping strategies vary, and includeswitching to non-traded food itemsJoachim von Braun, IFPRI, June 2009
Maize and sweet potato pricesZambezia, Mozambique 2006-200812mzpkg10wspkg86420Joachim von Braun, IFPRI, June 2009Source: R. Labardo, A. de Brauw HarvestPlus, 2008.
People in low-income countries are verysensitive to changes in food pricesPrice elasticities of maize in ZambiaHighestimateLowestimateNorthSmall farmRural nonfarmMiddle and urban richUrban mall farmRural nonfarmMiddle and urban richUrban al aggregate-0.64-0.43Joachim von Braun, IFPRI, June 2009Source: Dorosh, Dradri and Haggblade 2009.
Human costs of volatile prices are highPrice stocks and malnutrition in Kordofan children,Jan 1981-Dec 1986Teklu, von Braun, Zaki 1991.And must be included in sound econ. analysis ofprice volatilityJoachim von Braun, IFPRI, June 2009
Overview1. Food price developments2. Prices, policy dynamics, and feedback3. Prices and the poor4. New institutional arrangementsJoachim von Braun, IFPRI, June 2009
Strategic agenda1. Promote pro-poor agriculture growth withtechnology and institutional innovations2. Facilitate open trade and reduce marketvolatility3. Expand social protection and childnutrition actionJoachim von Braun, IFPRI, June 2009
For long-term agric. growth:Double public agric. R&D to impact povertyR&D allocation(mil. 2005 ) in # of Agr. outputgrowth (% pts.)2008-20202008*2013poor (mil.)2008-2020SSA6082,913-143.82.8S orldCGIAR investment to rise from US 0.5 to US 1.0 billionas part of this expansionJoachim von Braun, IFPRI, June 2009Source: von Braun, Shenggen Fan, et al. 2008.
What to do about volatility?1. Keep trade open at times of global andregional food shortage is a must2. Regulation of food commodity markets? (onlyas part of financial markets)3. Establish grain reserves policy at global level(emergency reserve, shared physicalreserves, and a virtual reserve a newinstitution at global level needed)Joachim von Braun, IFPRI, June 2009
Institutional design behind virtualreservesIntelligence unit Modelfundamentals Model dynamicprice band Trigger alarmFutures marketHigh level technicalcommission Approve interventionAppointJoachim von Braun, IFPRI, June 2009Countrycommitment tosupplying funds
Support pro-poor food and nutritioninterventionsProtective actions e.g.: Cash transfers Employment-based food security programsPreventive actions e.g.: School feeding Early childhood nutrition programsFocus on children, women, and poorestJoachim von Braun, IFPRI, June 2009
www.ifpri.orgJoachim von Braun, IFPRI, June 2009
Rice Oil (right scale) Price spike Source: Data from FAO 2009 and IMF 2009. Closer linkages between commodity markets and . Domestic prices of key staples remain high: Wheat Source: FAO 2009. Joachim von Braun, IFPRI, June 2009 Domestic prices of key staples remain high: Maize
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