Experts gather at George Washington University to tackle rising food prices and their effects on the poor. They define three alarming new trends and discuss how to address them now.

Unstable Food Prices

By Stephen C. Smith
George Washington University

The scourge of hunger today is worse than it was a decade ago. In the aftermath of the first food price spike and the 2008-2009 global financial crisis, for the first time more than one billion people were significantly malnourished. Conditions improved slightly in 2010, but food prices spiked again in 2011, pushing the United Nations Food and Agriculture Organization's food price index to a record high. About 925 million are currently hungry, not far from the all-time record. A family living in poverty in a low-income country may spend almost three-quarters of their income on food.

Although prices have fallen somewhat from their peak earlier in 2011, "high food prices are likely to continue and volatility may increase in coming years, making farmers, consumers and countries more vulnerable to poverty and food insecurity," according to the FAQ's State of Food Insecurity in the World 2011 report.

When food prices rise, so does hunger. In summer 2011, the United Nations declared a famine under way in parts of Somalia. Tens of thousands of people have died, a majority of them children, according to the U.N. Severe hunger caused by drought, conflict and inequity is now found throughout the Horn of Africa. One problem is that some local food is exported out of the famine-struck area. The reason is simple: starving people don't have sufficient means to buy food, so traders sell it elsewhere, fetching a higher price.

Looking closely at the links between food prices and malnutrition can help leaders, governments and organizations lay a foundation for building sound policies and programs to end hunger.

Over the previous 40 years the world has learned to grow much more food, and prices fell substantially for a time. The Green Revolution brought improved crop varieties to Asia and productivity rose, increasing output and pushing prices down. Incomes of people living in poverty rose—not nearly enough, but many were able to afford more food than before. And in some parts of the world—China most prominently—incomes grew enough that many millions of people were able to add animal-based foods to their diet.

The United Nations declared Oct. 31, 2011, the "Day of 7 Billion," a world population milestone. Within about 35 years, more than 9 billion people will need access to adequate food. Indeed, in May 2011 the U.N. raised its estimate of the peak population to 10 billion by the end of this century. But the number of people is the smaller part of the problem. The critical issue is what the people do: how much do they consume, in what ways, and what environmental damage do they cause? Without some needed adjustments, a return of the world food problem is threatening.

Extreme Poverty
Graphic courtesy of Food and Agriculture Organization of the United Nations. By 2002, food prices started an unmistakable rising trend; in addition, prices became more variable and volatile; and finally, a third problem of upward spikes of food prices emerged.

The Rising Food Price Trend

Clearly, rising food prices harm people living in poverty. But the effects are subtle. If the price of corn rises, as it did in 2007, smallholder corn producers, who sell a little of their corn on local markets and whose incomes are slightly below the absolute poverty line, may find that this price rise increases their incomes to pull them out of absolute poverty.

On the other hand, for those with too little land to be able to sell corn and who are net buyers of corn on markets, this price increase can greatly worsen their poverty. Farm laborers can find that at least a little of the higher corn prices get passed on to them in the form of higher wages, and this can more than make up for higher food prices. But the urban poor— a growing faction of people living in poverty—are nearly always hurt by food price increases. Often the evidence suggests that many of the rural poor are hurt as well, sometimes substantially.

Increasing Food Price Volatility

Greater volatility also makes it hard to plan for sufficient food. Smallholder farmers, many of them living in poverty yet also selling some of their harvest on the market to pay for other essentials, now face greater risks.

The good news is that some years they get a pleasant surprise and find higher prices for their goods at the market. But, in other years, unexpectedly low prices can be disastrous. When they can do little more than pay for costs to farm, the family may face severe malnourishment.

The New Scourge: Food Price Spikes

Upward price spikes pose a third challenge for ending hunger. You can see two spikes in Figure 1. These sudden changes are about prices going up for a time, and far more than can be accounted for by any normal volatility (even while volatility is also rising). These spikes particularly harm people living in poverty who are not in the agricultural sector, such as urban dwellers and people on the margins of rural society. Although the poor often devise ingenious ways of saving even in the harshest of conditions, major food price spikes can overwhelm the ability of struggling families to cope.

Rising Food Prices
Graphic courtesy of Food and Agriculture Organization of the United Nations

Leading experts on food prices and their impact on people living in poverty convened at George Washington University on Sept. 30 for a daylong conference to better understand these three food price problems and consider action plans. More than 100 participants took part in the discussion.Why Is This Happening? Leading Experts Weigh In

The Rising Food Price Trend

Food prices are about 80 percent higher than they were in 2000, reversing a long declining trend of previous decades. Nora Lustig, a professor of Latin American Economics at Tulane University, said some of the price increases reflect longer-term forces that if left unchecked will lead to higher future food prices. These forces include diversion of food to biofuels production, increase in demand for grains through shifts to meat production due to higher incomes in China and elsewhere, a possible slowdown in the growth of output per acre of agricultural commodities, higher energy prices affecting agricultural input costs, and a decrease in available land to convert to farming. Finally there is the negative impact of climate change on developing-country food production, with far worse effects likely ahead of us.

Long-term forces cannot explain the volatility, let alone the spikes. But the spikes were exacerbated by a number of unfavorable policies that interfered with food prices, such as subsidies and mandates for biofuels. As Alain de Janvry, a professor of agricultural and resource economics at the University of California at Berkeley, pointed out, "the demand for energy is simply so big compared to the food market that it could completely overwhelm any price predictions" that do not take energy policy into account.

Furthermore, there is not a large global market for food in relation to total demand. Most countries strive for food self-sufficiency, largely for national security reasons. Embargoes of food exports by such countries as Egypt, Vietnam and Russia reflect this reluctance to allow a freer global market when it comes to food.

The World Bank reported in 2008 that growth in output per acre was leveling off and that prices would continue rising. In fact, prices increased far faster than even the World Bank predicted. Lustig explained that while "food is energy for human survival, food commodities have turned into industrial commodities, energy for machines." The result is less energy for people—at best, more expensive energy—when so many remain deprived of even a minimum of calories. "A majority of studies show that those who get hurt outnumber those who benefit" when food prices increase, she said.

Unstable Food Prices


In the 20th century, food prices fell close to 1 percent per year. Dr. Keith Fuglie, an economist at the U.S. Department of Agriculture, said that in the early 1900s, falling shipping costs steered prices lower, with producers sending food from where it was grown cheaply and abundantly to where food prices were high. In the later decades of the 20th century, rising output per acre drove prices down.

Today, that yield growth is slower, but Fuglie found we are still making gains despite smaller additions to inputs than before (especially the smaller number of workers in agriculture). This is a new and encouraging discovery. It should be putting downward pressure on food prices. Looking ahead, these forces may continue to slow the rate at which food prices increase. Findings like Fuglie's help reassure us that, while new problems complicate work toward a world free of hunger, with continued commitment the goal can still be attained.

But Fuglie also found that these gains were not present in Africa, where most of the increase in population is expected. And although encouraging, his work is retrospective: It does not take into account the projected worsening of environmental stresses not only from climate change but from localized deforestation, water scarcity, falling water tables, declining soil fertility, erosion, salination and other pollutants.

Increasing Food Price Volatility
As climate change increasingly plays into agricultural productivity, output will be more volatile, said Maximo Torero, an economist and division chief at International Food Policy Research Institute. Even if today's price volatility is a passing phase due to unregulated financial markets and other bad policies, volatility in some form will still be with us. So we have to take it seriously and plan to cushion people living in poverty from its harmful effects.

Most of the factors pushing food prices up are also worsening the volatility of those prices, Torero said. For example, just a few countries account for the majority of exports of most staples. Government mandates to use ethanol, a corn-based biofuel, also increase volatility as well as price. And as volume in futures markets has increased, this also makes the price of food vulnerable to volatility: High volatility attracts more financial market participants, who learn that they can make money on trading, which can amplify instability. Finally, high futures market prices lead to high current market prices, a consequence of speculation.

Food Prices


Food Price Spikes

Food price spikes are certainly not unprecedented. Remember the major shocks of the 1970s? But food price spikes returned with a vengeance in this century and conditions threaten more.

Joachim von Braun, a professor at the University of Bonn and former director general of International Food Policy Research Institute, said the new spikes are driven by three factors:

  • Energy markets: High oil prices are not just raising the costs of fertilizer but also giving farmers in rich countries incentive to use their crops for biofuel.

     

  • Financial markets: There is a clear and growing link between food market volatility and financial crises.

     

  • Speculation: The "speculation effect partly depends on the 'nervousness' of the market," von Braun explained. "What is called speculation actually stabilizes prices when the market is less nervous," because it can push markets to find prices consistent with supply and demand more quickly. But speculation is destabilizing "when the market becomes nervous as a result of changes in fundamentals, policies and structures." Shifts in sentiment can result in spikes.

 

Finding Solutions: What Can Be Done?

The Rising Food Price Trend

Experts agree the food supply must be increased through technological and institutional innovations that benefit subsistence and smallholder farmers. Investing in sustainable agricultural growth can also counteract rising scarcities, de Janvry said. He and other members of an expert panel hosted by the UNFAO agree productivity must be boosted in sub-Saharan Africa.

Governments must invest in smallholder productivity in the face of climate change and resource scarcity, Torero and de Janvry said. Torero also stressed the need to reduce waste by cutting both postharvest loss in developing countries and gross and unnecessary waste in developed countries.

Markets can be a great help in keeping price increases in check. When prices rise, this should create an incentive for people to invest in agriculture, increasing its productivity. When these constructive market forces are impeded, people living in poverty also suffer through higher food prices.

Increasing Food Price Volatility

We need to have safety nets in place when prices rise, Lustig said. "Even if aggregate poverty measures show a decline (most don't), shouldn't we protect the extreme poor from becoming poorer as a result of higher food prices?"

Graphic courtesy of Food and Agriculture Organization of the United Nations

Like other analysts, de Janvry and the UNFAO panel called for improved international trade rules. The rules in place today were conceived in the context of structural overproduction by major producers who subsidized production and exports. World Trade Organization negotiations failed to resolve this problem. Subsidized exports from the United States and other developed countries greatly harm small farmers in low-income countries who cannot compete against an artificially low price bankrolled by subsidies from the U.S. government.

"Negotiations need to be reopened from the perspective of access to food for consumers in poor countries," said de Janvry, particularly "multilateral rules for disciplines on export restrictions, better respect of contractual obligations by commercial actors," and protection of "poor consumers from undue competition by rich consumers."

De Janvry also suggests that mandates for using biofuels "should be coordinated to help stabilize world food prices instead of contributing to price spikes." This means that only when food prices are so low that they harm small farmers should we stimulate demand—for example through corn for use as ethanol—but remove subsidies and mandates as soon as prices start to rise to where they can harm poor consumers.

De Janvry also recommended a focus on smallholder farming as a cheap and effective safety net for the poorest rural and peri-urban people. Of course, this has been part of Heifer International's focus for many decades and remains relevant in a world of food price volatility and insecurity.

Rising Food Prices

Food Price Spikes

When food prices surge, Lustig recommended that countries "use targeted safety nets: food stamps, school feeding programs, food-for-work, food distribution programs" that reach poor families and vulnerable people.

Beefing up the world's stockpile of food could also help stabilize prices and head off spikes, de Janvry said, adding that the global community must "reopen the debate on coordination of storage policies." Torero and von Braun also proposed the need for a global emergency grain reserve. Von Braun suggested creating an international grain reserves bank to curb food price volatility.

De Janvry prescribed improving international trade rules and regulating speculation to help stabilize food prices, while Torero pointed out that regulation cannot be so heavy-handed that it undermines the stabilization effect. A balance has to be found.

Torero proposed an international working group to regularly monitor the world food situation and trigger action to prevent excessive price volatility. The World Bank took on this task in November, and reported that factors "bode well for food prices in the coming months."

Piecemeal efforts won't work when it comes to attacking high and volatile food prices, said de Janvry, who called for a global effort. "Can the world get organized to avoid recurrent food crises?" he asked.

The three food price threats—toward higher prices, greater variance, and dangerous price spikes—have harmed many people living in poverty. It is important to address food price issues now, while there is time to prevent matters from becoming even more serious in coming years. Governments, international and nongovernmental organizations, academia, small farmers and the private sector, working together, can all make important contributions.

Learn more about Heifer's long-term, sustainable solutions to ending hunger and poverty around the world.