Food Prices and Policies

1. Food Prices and Policies Economic Implications, Agribusiness, Global Markets, Biofuels, and the Green Revolution

2. State of the World and Food • In 1996, 180 countries at the UN FAO decided to cut hunger by half by 2015. • Five years later at the first World Food Summit, several delegations noted that developed countries subsidize their farmers by $1billion a day! • The result of such subsidization is a depressing of world prices for poor farmers.

3. Food Food Price Index, FAO July. 2011 http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/

4. State of the World and Food • Between 2005-mid 2008, world food prices increased 87 percent. • The WFP stated that higher food prices threatens the long-term international food security (WFP, 2008). • Food price increases are not new, between 1971 to 1974, world food prices increased nearly 141 percent (IMF, 1996).

5. Food Food Price Index, FAO July. 2011 http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/

6. State of the World and Food • After the peak in 2008, food prices fell by nearly 28 percent. • Price fluctuations could be attributed to • Shifts in demand and supply of food. • In 2009, food prices fell, but in 2010, world food prices rose above the highs of 2008.

7. Food Food Price Index, FAO July. 2011 http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/

8. Demand and Supply Shifts $ S2 Supply P2 P1 Demand Q Q1 Q2

9. Demand and Supply Shifts $ Supply P2 P1 D2 Demand Q Q1 Q2

10. State of the World and Food ? • Demand • Income growth in Asia (India vs. US) • Fuel • Run on the market • Exchange rates • Supply • Bad weather in Pacific rim • Rising petroleum prices • Transport, • Fertilizer • Land Use • Government interventions

11. Food and Fuel • Runge and Senauer (2007) state, • Biofuels have tied oil and food prices together in ways that could profoundly upset the relationships between food producers, consumers and nations in the years ahead, with potentially devastating implications for both global poverty and food security.

12. Monthly Food and Fuel Price Indices Food Price Index, FAO July. 2011 http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/ Short-Term Energy Outlook - Real Energy Prices, EIA, June 7, 2011 http://www.eia.gov/emeu/steo/realprices/index.cfm

13. Food vs. Fuel Debate • The World Bank says world maize production increased by 51 million metric tons between 2004 and 2007 • Over the same year the consumption of maize used in ethanol increased by 50 million metric tons. • Other consumption of maize also increase by 33 million metric tons.

14. Food vs. Fuel Debate • Estimates of the effects of biofuels on food prices are between 10 and 40 percent. • Who is hurt? • The diet of consumers in developed nations do not depend as heavily on grains and oilseeds. • However, the diet of consumers in the developing world, depend heavily on grains and oilseeds.

15. Annual Food Price Indices (2002-2004=100) Food Price Index, FAO July. 2011 http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/

16. Annual Food Price Indices(2002-2004=100) Food Price Index, FAO Sept. 2009 http://www.fao.org/worldfoodsituation/FoodPricesIndex/en/

17. Annual Food Price Indices(2002-2004=100) Food Price Index, FAO July. 2011 http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/

19. Those Hurt • According to the World Bank in 2005, 2.56 billion people (47% of the world) lived on less than $2 a day. • Studies suggest that among the world’s poorest, caloric consumption falls 0.5 percent whenever average food prices increase by 1 percent. • According to IFPRI, the number of food-insecure people in the world would increase over 16 million persons for each percentage increase in real prices of staple foods.

20. Those Hurt • According to the World Bank in 2005, 2.56 billion people (47% of the world) lived on less than $2 a day. • The world’s poorest people spend between 50 to 80 percent of household income on food. • Large increases in the prices of staple foods will lead to malnutrition.

21. Monthly Food Price Indices (2002-2004=100) Food Price Index, FAO July. 2011 http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/

22. Monthly Food Price Indices (2002-2004=100) Food Price Index, FAO July. 2011 http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/

23. Monthly Food Price Indices (2002-2004=100) Food Price Index, FAO July. 2011 http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/

24. Subsidies for Biofuels • Historically, biofuels could never be made without subsidies; however, high gas prices and technological improvements are adjusting this picture, slightly.

25. Subsidies for Biofuels • Steenblik (2007) estimates that Australia, Canada, the EU, Switzerland, and the US subsidized biofuels around $11 billion in 2006. • In the US alone, corn was subsidized by $8.9 billion in 2005, being dwarfed by tax credits, grants, and government loans. • The US government grants ethanol blenders a tax break of $0.51 per gallon.

26. Subsidies for Biofuels • In 2005, the US mandated the use of 7.5 billion gallons of biofuels by 2012. • The US government established Renewable Fuel Standard (RFS), which sets a minimum biofuel use level. • Six billion gallons of ethanol are needed because of the elimination of the fuel additive MTBE.

27. Subsidies for Biofuels • The EU through the Common Agricultural Policy (CAP) supports agricultural production which will help her achieve 5.75 percent of fuel from biofuels by 2010 and 10 percent by 2020.

28. Subsidies • Brazil has supported biofuels since the 1970s through • Incentives, • Technical standards, • Investing in technologies, and • Market promotion. • Asian nations are now jumping on the bandwagon.

29. Prices and Ethanol • With the support to the industry demand, ethanol production can pay higher price premiums for corn. • Leading to the substitution of other crops to corn, which will increase other grain prices.

30. Prices and Ethanol • Likewise the higher oil prices, which ethanol is a substitute, will bid up the price for corn. • If oil reaches $80 per barrel, ethanol producers could pay over $5 per bushel. Note corn prices before the price spike were around $2. • If oil falls to $30 per barrel, ethanol is not profitable unless corn is $2 per bushel, which suggests the need for subsidies.

31. The Future of World Food Prices • Westhoff (2010) notes that food prices fluctuate from year to year. • Several factors can be linked to the year to year variation in food prices: • Weather • Income • Population • Technology • Energy

32. Future Scenarios • Scenario 1: Food prices will stay in line with overall inflation from lower population and rising income. • Scenario 2: Food prices will rise because of increasing demand for meat and biofuel. • Scenario 3: Food prices will fall because of slower population growth rates and income increases.