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Thought for Food: the Causes and Consequences of Soaring Food Prices

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Thought for Food: the Causes and Consequences of Soaring Food Prices

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    1. Thought for Food: the Causes and Consequences of Soaring Food Prices Nora Lustig J. B. and Maurice C. Shapiro Visiting Professor of International Affairs Elliott School of International Affairs, George Washington University

    2. FIGURE 1 Evolution of Real Food Commodity Prices (2007=100), January 1957-June 2008

    3. FIGURE 2: Food Commodity Price Index (2005=100), January 2002-August 2008

    4. FIGURE 3: Food Commodities Prices, January 2002-August 2008

    5. Soaring food prices are a cause of concern… Significant and immediate setbacks Poverty reduction Social stability Inflation Rules-based trading system

    6. Why did food commodities prices rise? Supply-side constraints; a new trend Surge in demand due to the increase in production of biofuels Macroeconomic factors and export restrictions

    7. SUPPLY-SIDE CONSTRAINTS Until recently, performance of agriculture viewed as a success Output growth surpassed population growth Price of grains steadily declined At the turn of this century, success story was coming to an end Land and water scarcity Slow technical progress

    8. Predictions vs. Reality Standard forecasting models predicted prices would rise at .26 percent a year between 2002-2030 But prices rose by about 20 percent a year between 2002 and July 2008, or 100 times more than the “business as usual” scenarios

    9. What changed in such a fundamental way? Demand for grains and oilseeds outpaced supply (Figure 4 on stocks-to-use ratio) Supply: Between 2000 and 2007 harvested area for grain grew at 0.4 percent and yields grew at 1.3 percent a year; combined growh 1.7 percent Demand for grain for food consumption purposes grew at 1.7 percent a year => no surges in consumption on the part of China or India

    10. FIGURE 4 World Stocks-to-Use Ratio for Grains and Vegetable Oils (in percent), 1960/61-2008/09

    11. Excluding the demand for industrial use (that is, biofuels), supply and demand grew at the same pace

    12. TABLE 1: World Demand and Supply Summary: Corn, Wheat, Rice and Soybeans

    14. Surge in demand for industrial (biofuels) use of corn and oilseeds Figure 5 Between 2004 and 2007 Feed use of corn grew by 1.5 percent a year and food use of oilseeds grew by 3 percent a year Industrial use grew by 36 percent and 11 percent, respectively

    15. FIGURE 5: Demand of Corn for Fuel in the United States and Evolution of Corn prices, 1995-2008

    16. Price increases of corn and oilseeds used for biofuels Partly policy-induced But partly due to higher oil/gasoline prices

    17. FIGURE 6: Gasoline prices and U.S. ethanol production, 1995-2007

    18. FIGURE 2: Food Commodity Price Index (2005=100), January 2002-August 2008

    19. FIGURE 7: Export Restrictions and the Price of Rice, June 2007-July 2008

    20. FIGURE 8: Food Protests, January 2007-May 2008

    21. Macroeconomic Factors Depreciation of the dollar Expansionary monetary policy/low interest rates in the United States

    22. FIGURE 9: The Dollar and Food Commodities Prices, January 2000-June 2008

    23. FIGURE 10: Commodity Prices in Major Currencies, January 2000-June 2008

    24. Curious fact: Since mid-2007 to mid-2008 price rises accelerated while the global economy has been slowing down

    25. FIGURE 11: Monetary Policy in the U.S. and Food Commodities Prices, June 2006-June 2008

    26. FIGURE 12: Real Interest Rate and Commodity Prices, January 2007-August 2008

    27. Impact of Rising Food Commodities Prices on Developing Countries Inflationary and balance of payments pressures Fall in living standards of particularly poor net buyers of food

    28. FIGURE 13a: Number of Countries with Positive and Negative Impact on Current Account from World Food and Oil Price Increases

    29. FIGURE 13b: Number of Countries with Positive and Negative Impact on Current Account from World Food and Oil Price Increases (cont.)

    30. FIGURE 14: Median Inflation in 120 non-OECD countries (y-o-y, in percent)

    31. Policy Options The increase in food commodities prices is real: Accommodate increase; inflation will be higher in the short-term Contain inflationary pressures with tight fiscal and monetary policies =>Prudent accommodation of price increase desirable to mitigate reduction in economic activity

    32. Policy Options The increase in food commodities prices is a monetary phenomenon: Appreciation of the local currency Targeted policies: lowering of import tariffs and taxes; export taxes; export bans and restrictions; general price subsidies; price controls Combination of appreciation of exchange rate with targeted policies Targeted policies should be temporary and used with moderation More easily reversed Least distortionary and regressive Least onerous from fiscal point of view

    33. FIGURE 15: Targeted Measures to Contain Price Increases

    34. Food Price Increases and Poverty Food Price Dilemma: Higher (lower) food prices hurt poor net buyers (net sellers) of food Evidence: in majority of countries, higher food prices increase poverty

    35. FIGURE 16: Percentage points change in poverty rates from 2005-7 price changes Source: Ivanic and Martin (2008)

    36. FIGURE 17: The Food Crisis: Social Protection Policies in Low and Middle-Income Countries

    37. Existing Safety Net System Inadequate Safety net programs are inexistent or small When they exist, they are not designed to respond to shocks

    38. Programs to Mitigate Impact on the Poor Transfers in cash and in kind Food-for-work or workfare programs School feeding programs And for the poor who have access to a plot of land, expand Access to improved seeds and fertilizers Access to credit and land Technical assistance

    39. Thank you. Nora Lustig nlustig@gwu.edu J. B. and Maurice C. Shapiro Visiting Professor of International Affairs Elliott School of International Affairs, George Washington University

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