Market and Trade Policies over Food Security

1. Maximo Torero m.torero@cgiar.org Market and Trade Policies over Food Security Asia Food Security Situation Roundtable, January 09, 2012

2. High and volatile food prices: A new reality? • Food prices have been high and volatile, spiking in the 2007-08 and the 2010-11 food price crises. • High food prices hurt urban households (particularly the poor) and rural households who buy food, though some farmers benefit • Volatile food prices can harm both consumers and producers, who cannot make optimal investments under uncertainty. • They cause poor people to eat less, and less-nutritious, food. • They especially harm countries with high net food imports.

3. Real prices of agricultural commodities and oil: 1990-2011 (weekly)

4. Historical Evolution of Corn Prices: 1990-2011 (weekly) Source: USDA. Deflated using U.S. CPI

5. Measuring excessive food price variability • NEXQ (Nonparametric Extreme Quantile Model) is used to identify periods of excessive volatility • NEXQ is a tool developed by IFPRI to analyze the dynamic evolution of the returns over time in combination with extreme value theory to identify extreme values of returns and then estimate periods of excessive volatility. • Details of the model can be found at www.foodsecurityportal.org/excessive-food-price-variability-early-warning-system-launched and in Martins-Filho, Torero, and Yao 2010).

6. Excessive food price variability for hard wheat

7. What are the effects? • Price transmission study estimates price transmission effects from international agricultural commodity markets to food domestic prices: • Focus is on wheat and rice • Welfare impact study: What is the impact on households welfare of changing food prices? • Income loss at the household level, effects on poverty, cost of compensating the poorest households.

8. A.Price transmission. Summary of findings, final comments • For large international price shocks transmission (co-movement) is evident. Evidence suggests that during food crisis (2007-2008) domestic prices responded in all countries and almost all cities. • For larger time horizons (moderate price fluctuations) transmission effects are also present but less evident. • Transmission effects are heterogeneous across countries, across products and across cities within a country

9. A. Price transmission. Summary of findings, final comments – example for consumers! Source: Robles (2010)

10. A.Price transmission. Summary of findings, final comments • In Bangladesh, there is high transmission elasticity for both rice and wheat. This transmission is stronger for wheat (0.7) than for rice (0.43) • In Pakistan high transmission for rice (both irri and basmati) : range 0.53– 1.0. Wheat transmission is on average lower, and more variation across cities: in the range 0 - 0.82. No transmission for wheat flour • In Vietnam: positive rice transmission in the range 0.3 - 0.9. For wheat flour, transmission effects are lower (only positive in 5 out of 9 cities ranging from 0.12 to 0.35)

11. B. Welfare impact. Summary of findings, final comments • Welfare impact is more or less similar in Bangladesh and Pakistan. In Vietnam impact effects are different. • The fraction of households that are worse off is around 80% in Bangladesh and Pakistan. In Vietnam, 50.6 % • In urban areas the great majority suffer losses. Then potential benefits are in rural areas. However, in Bangladesh and Pakistan 3/4 do not benefit. In Vietnam is the opposite, 64.2 % are better off. • Regressive effect pattern. This regressive pattern is more evident in urban areas

12. B. Welfare impact. Summary of findings, final comments • Regressive effect !!! When we look at loser households in all 3 countries the poor suffer more (relative to their expenditure level)…

13. B. Welfare impact. Summary of findings, final comments • The aggregate losses are largest in Bangladesh, almost 7% of national consumption expenditure. • In Bangladesh it would be expensive to fully compensate the bottom 40%: 2.54% of national consumption expenditure is required. In Vietnam only 0.31% is required.

14. B. Welfare impact. Summary of findings, final comments • In Bangladesh and Pakistan poverty rates increase, especially in urban areas • And in both countries around 80% of the rural poor are worse off • In Vietnam there is an important positive effect on poverty (national poverty rate decreases 7.8% percent points)…

15. Linking key medium and long term drivers Page 15

16. Ratio of grain stocks to use1996/97-2011/12

17. Major exporters of maize wheat and rice2008 % of world exports

18. Maize production and use for fuel ethanolUSA 1995-2010

19. World food price increases and climate changevarious scenarios (2010-50)

20. Increasing financial activity in futures markets • The volume of index fund increased by a dizzying 2,300 percent between 2003 and 2008 alone. • Today only 2 percent of commodity futures contracts result in the delivery of real goods • For example in corn, the volume traded on exchanges (front contracts) is more than three times than the global production of corn!

21. Secondary responses: Effects on world prices of trade policy reactions for selected countries Source: Bouet and Laborde, 2009. MIRAGE simulations

22. Policies addressing price spikes and food price volatility Drivers Market charact Coping • Revise biofuel policies • Regulate financial activities in food markets • Adapt to and mitigate extreme weather and climate change • Invest in agricultural research and development • Establish national social protection systems • Improve emergency preparedness • Invest in smallholder farmers and sustainable climate-adaptive agriculture • Foster and support nonfarm income opportunities • Balance global export market structures through the promotion of pro-poor agricultural growth • Build up food global and regional emergency reserves • Collect and share information on food markets

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