The dramatic rise in world food prices poses a challenge and, long term, an opportunity, writes ALAN MATTHEWS
ACCORDING TO the IMF, world food prices have increased by 46 per cent since end-2006. There is no question but that this recent sharp increase in world food prices has caught the world community by surprise.
While the immediate causes of these higher food prices have been well rehearsed, the severity of the increase has puzzled many observers. And the far-reaching consequences of this reversal of the familiar landscape of falling real food prices are still unfolding.
The rise in food prices is occurring in the context of even more dramatic increases in the prices of energy and industrial inputs, including metals and some agricultural raw materials. Clearly there are some common factors at work.
The current boom is largely associated with increased demand for commodities on the part of China and other fast-growing economies in Asia, which is outpacing the increases in supply. US dollar depreciation and low real interest rates provide a supportive financial environment.
Specific factors in the case of food include the emergence of biofuels as an additional source of demand, declining productivity growth, historically low food stocks and the thinness and lack of responsiveness of world markets.
There are good reasons for thinking that the current price boom represents a structural shift in the world food equation, and that prices will not return to more familiar levels in the medium-term.
On the demand side, the crucial change is the growing linkage between food and energy markets. Energy prices have always influenced food markets through their impact on the cost of agricultural inputs, notably fertiliser, agrichemical, irrigation and transport costs.
What is new is the way high energy prices now determine agricultural output prices through the possibility of switching agricultural feedstocks into energy production. If food prices were to fall after the current boom, this would stimulate an even faster growth in the global biofuels industry. This effectively puts a floor under the price of many agricultural commodities, provided energy prices stay high.
On the supply side, resource constraints in terms of land, water and the supply of new technologies have become more binding. Climate change is not expected to have any major overall impact one way or the other on global crop production in the next couple of decades, although it will favour the northern latitudes and make food production more difficult in tropical countries.
Higher food (and energy) prices have meant that food price inflation has led the overall rise in prices in developed countries over the past 12 months. The consequences in developing countries have been much more severe, given the more important role food plays in their economies.
Food accounts for 50 per cent of household spending in the Philippines, 46 per cent in India, 42 per cent in Indonesia and 33 per cent in China. Food price inflation hits low-income households in particular. Mass protests against food price increases have occurred in countries as diverse as Egypt, Cameroon, Morocco and Mexico.
Movements in food prices affect countries differently depending on whether they are exporters or importers of food. Similarly, within countries, households which are food producers are affected differently to households which are net purchasers of food.
A period of sustained high food prices has the potential to help address the scourge of global poverty, with currently 2.5 billion people living on less than $2 per day. Despite the widespread perception that poverty is urbanising rapidly in the developing world, about three-quarters of the developing world's poor still live in rural areas.
Not all of these people are food producers. Particularly in Asia, many of them will be landless labourers who nonetheless depend on the profitability of farming for their livelihoods. The empirical evidence shows strongly that growth in agricultural production has much greater pro-poor impacts than similar growth rates in the manufacturing or mining sectors.
If, and it is a big if, a period of sustained high prices can encourage governments in developing countries, and donors in developed countries, to reverse the decades-long neglect of their agricultural sectors, then we could see significant inroads into global poverty.
The problem lies in the timescale. The historic exploitation of agriculture in developing countries is reflected in discriminatory rural taxation, inadequate investment in rural infrastructure, a disproportionately low share of rural credit, insufficient funding of agricultural research and a disappointingly low rural allocation in public expenditure, including donor development assistance.
It will take years to reverse these policies and to bring about the necessary supply response. In the meantime, the short-run nutrition problems for poor households in developing countries caused by difficulties in accessing food at its current high price also need to be addressed.
The World Bank has warned that for many countries where progress in reducing poverty has been slow, the negative poverty impact of rising food prices risks undermining the poverty gains of the last five to 10 years.
Most immediate are the needs of refugees and internally displaced persons who are dependent on World Food Programme (WFP) food baskets for their survival. Government pledges to the WFP are in money terms, and that money will only buy half the grain that it did before.
The WFP is seeking $500 million in emergency assistance by May 1st. Ireland has increased its support for the WFP since 2000, but an exceptional situation requires an exceptional response.
There is a more general need to extend safety nets for vulnerable families which is best done through food voucher or food-for-
work schemes rather than attempting to impose price controls, export taxes or other forms of damaging market intervention. Funding needs to be provided to enable such schemes to be introduced or extended.
Agriculture needs to be given greater priority in donor aid programmes. The overall proportion of all official development assistance going to agriculture is currently only 4 per cent. Ireland's performance in this respect is a little above the average, but should be seen in the context that our partner countries are among the world's poorest and with the highest dependence on agricultural employment.
We need greater coherence with non-development policies, particularly in the areas of trade and energy policies. The EU's biofuel targets are certainly not helpful in the current food price environment, and could be made flexible rather than mandatory.
A successful outcome to the WTO Doha round trade negotiations would not, in itself, address the problem of high food prices. But by strengthening confidence in the world trading system as a secure source of supply, it could help to discourage countries from unilateral trade policy interventions which only serve to damage their trading partners.
Gordon Brown has written to the chairperson of the G8 group of industrialised nations asking for co-ordinated action to deal with rising food prices. Robert Zoellick, president of the World Bank group, called for a "new deal" for global good policy at the World Bank-IMF spring meeting in Morocco last week.
In Ireland, the imminent publication of the report of the Hunger Task Force called for in the White Paper on Irish Aid will provide an opportunity to redirect Irish Aid efforts into nutrition and agricultural development.
But the challenges are so urgent, and the need for leadership so great, that the Government should consider bringing forward the interim findings of this group by announcing already a significantly increased package of funding as a direct response to world food market developments.
Alan Matthews is professor of European agricultural policy at Trinity College Dublin