Overview of soaring food prices and country policy responses

1. Overview of soaring food prices and country policy responses Nancy MorganLivestock Policy Officer FAO/Regional Office, Bangkok

2. The price escalator: food commodity prices fall from their peaks….

3. The magnitude of the price changes Since early 2007 prices rose….. 98% 19% 232% 67% 80%

4. Factors underpinning rising prices…. • Since 2000, cereal demand has been outpacing production resulting in lower stocks and increased price volatility • High oil prices and energy costs… with biofuel policies strengthening linkages between food and energy • Recent droughts have aggravated recent price movements • Possible influence of speculators….

5. Strong commodity demand leads to lower stocks • Cereal production lower than demand since 2000 • Lower stock availabilities, stocks-use declines especially for rice and wheat. • Policies have changed over the past in major exporting countries and it’s expensive to carry stocks 60% of stock decline from China

6. What goes up usually comes down….. Even maize which in June jumped because of flooding in the US corn belt But maize prices shifted down nearly 35% in TWO Weeks! Markets characterized by incredible price volatility

7. Speculative pressures---- A more than doubling in futures trading of basic foodstuffs on the Chicago Board of Trade leads to more price volatility

8. Price movements seem to be out of line with historical trends Poultry prices will need to rise if maize price continue increasing US maize=$269 US cuts=$1,001

9. Let’s take a look at rice in Asia

10. A clear disconnect between wheat and rice price movements: what is going on? What happens to rice prices depends on the outlook for wheat. Wheat output to rise to 647 mmt (up 7%) in 2008. Influence of policies by major traders leads to the question…… An example of panic buying in a thin market Is this a food crisis or price crisis?

11. The linkages are clearer between commodity prices increases and high energy prices Index for light crude oil With additional pressure put on feedstock prices because of biofuel policies in selected countries

12. Oil consumption in China (million tons) The role of China in energy markets (slide from Dr, Hunaguang Qiu) China’s oil consumption share in the world (%) By 2006, crude oil consumption reached 350 mmt, 48% was imported. China is now one of major importers of oil in the world (after the US, EU and Japan)

13. The issue of fossil and biofuels: linkages do affect commodity prices, particularly maize Maize prices expected up 20% over previous estimates, to $164/tonne by 2017 High oil prices, increased demand for maize for ethanol production pushes up feed prices US, #2 yellow, Gulf

14. Economics of bio-energy Input costs High input costs slashing margins Margins ????? Source: USDA

15. Translating the impact of rising international prices across the chain International Local markets Farms Households

16. Impact of market shocks depend on trade situation: Asian agricultural imports double since 1990 1,000 tonnes • 48% of global imports; • Imports 12% of total regional • consumption Valued at $22 billion in 2004 • Asian agricultural imports • exceeded $165 billion in 2005, • more than double 1990’s level. • Cereals dominate imports but • growth has also been driven by • increased imports of oilcrops, • fruits, vegetables, and meats.

17. Vulnerability to higher cereal prices linked to dependence on international trade

18. A reminder: domestic prices don’t necessarily rise as much as international prices The exchange rate factor The Philippine peso rose by 33% since early 2006, making imports cheaper; recent devaluation… In an exporting country, such as Thailand, the appreciation reduces exporters earnings. In countries like Indonesia and Bangladesh with stable currencies, the impacts on local prices are highest

19. Also market impact linked to country policy responses Bans on rice exports:India, Vietnam, Cambodia, China Minimum Export Prices: Vietnam Increasing minimum purchase price (wheat and rice): China/India/Thailand Increase agricultural input subsidies: India/China Reducing import tariffs: Pakistan for wheat, Philippines considering for rice Selling rice stocks at subsidized prices: Subsidizing rice prices: Bangladesh Releasing public stocks: Indonesia Some policy interventions more market distorting than others

20. Rice and food security: Global => Household Assume that: • 30-40% of income of households below the poverty line is spent on rice (IRRI) • A 25% percent in the price of rice lead to a 7-10% decline in real incomes (IRRI) This implies that for those households, especially the urban poor (6% of the Central Province-disabled, students, elderly, migrants, refugees), real incomes will decline 10-40% (depending on magnitude of price increases). WHAT ABOUT PRODUCER’S RESPONSIVENESS TO HIGHER PRICES?

21. Policies to support Net Food Buyers(urban residents, small farmers, fisher folk, foresters, pastoralists and agricultural laborers) • Remove VAT, road blocks/taxes • Tax reduction on fuel for transport • Increase imports (compensatory finance arrangements by World Bank, IMF) • Food aid in kind • Requisition of private stocks • Releasing stocks • Price controls • Cash transfers or food vouchers • Food distribution in kind • Food subsidies • RAISING THE MINIMUM WAGE RATE!!!!!!

22. Responding to High Commodity Prices; Potential Impact of Policy Interventions Recognizing the differential impact of policies on different stakeholders at different times

23. The example of dairy price movements…. Domestic policies = price setting discourages local dairy development

24. Impacts in Asia: the case of the Pacific Islands Countries • Food security highly dependent on external factors • Domestic transportation more expensive that international freight • Cost of staples higher than in Australia • Inflationary risks from potential currency depreciation due to rising imports bills and wage hikes • Heavy dependence on imports in rural areas • Solutions: • Support social groups at risks • Interim wavers of imports tariffs on food imports/fuels • Provide free planting material for home gardens/domestic food products • Promote consumption of locally produced food

25. Activities undertaken by FAO Immediate emergency interventions in nearly 60 countries: • Value of US$ 27million from RP (mobilized a total of $47 million) • Provide farmers with agricultural inputs to ensure success of next planting season • Objectives: increase production and demonstrate that improved inputs increase yields • Moving towards medium term initiatives, supporting regional capacities. 14 countries in Asia-Pacific: Afghanistan, Bangladesh, Bhutan, Cambodia, DPR Korea, Mongolia, Nepal, Pakistan, Philippines, Sri Lanka, Timor-Leste

26. At the end of the day….. National Governments are the center of the response because the specific intervention has to be tailored for the context. Priorities: • Response to needs for food assistance and broader social protection • Distribution inputs/other ag. support=sustainable interventions in the medium term? • Influencing policies=nothing will work without an enabling environment. FAO Regional Office: Our challenge is to identify sustainable initiatives which draw on regional lessons but are tailored to national/sub-national contexts

27. Brief Summary • Causes are complex and linked to individual commodity markets • We need to consider carefully the “price” versus the “food” crisis issue. • Impact is contingent on the specific country situation, trade status, national policies, policy implementation. • Interventions should be carefully tailored FINALLY…..

28. There is an Opportunity to Revitalize Asian Agricultural Sectors through Benefiting from Higher Commodity Prices=> Wealth creation through Agriculture

29. Comprehensive Framework for Action(High-Level Task Force on the Global Food Crisis) • $US 1.2 billion –WFP to support assistance in 62 countries • Reserve of US$100 million for food related emergence response • Nutrition assessment/interventions UNICEF; US$50 million • FAO: procurement and distribution of seeds, fertilizers and other inputs. • IFAD: $200 million provides smallholder farmers access to inputs/services • World Bank $1.2 billion of rapid financing for expansion of safety nets, input distribution, financing of imports through World Bank Food Crisis Reponses Programme • Additional balance of payments support under IMF’s existing Poverty Reduction and Growth Facilities (PRGF), around $180 million.