OECD Forum 2011: The new IMF is the street

Press briefing on food price volatility with OECD’s Ken Ash – head of the Trade and Agriculture Directorate and Professor Paul Collier of Oxford University, author of The Bottom Billion.

Ken Ash argues that speculation can’t explain the volatility we’ve seen recently, and neither can any other single factor. Growing demand; conversion of land used to grow food crops to biofuel crop production;  currency fluctuations, notably as the dollar rises and falls; extreme weather events like droughts and floods; rising oil prices – meaning petroleum-based inputs such as fuel and fertilizer are costlier; and government policy, including export restrictions and hoarding all play a role.

There’s also the fact that only a relatively small share of global food supplies is traded, so increases and decreases of food commodities available for export can have a big impact on the markets.

Such a complex set of factors means that the policy response has to be sophisticated. The focus has to shift towards helping poor consumers via a combination of social safety nets, humanitarian aid, risk management tools, financial instruments to cope with currency fluctuations, and means to improve the capacity of poorer countries to produce food or buy it.

The poor suffer most from volatility and are the most vulnerable to food insecurity. In fact, hunger – to give lack of food security its starker name – is not a problem of global food supply. The obesity epidemic and mountains of food waste are two indications that there’s more than enough for everybody. The problem is, the poor can’t afford to buy enough food.

There are more hungry people now that  food prices have risen, but as Ken Ash points out, the majority of them were also hungry when prices were low. The answer has to come from economic growth and n economy-wide improvement in living standards.

Paul Collier agrees. One of the cruel paradoxes is that many of the hungry are farmers. There are too many people trying to make a living from inefficient agriculture in developing countries, and they can’t even feed themselves and their families. That said, for Collier, the main victims are the urban poor, who may spend half their money on food.

As prices rise, some people eat less. “Some people” often means children. This has long-term as well as immediate effects. Children who suffer from malnutrition for two years are likely to suffer from stunted physical and mental growth, and to pass on this handicap to their own children.

The solution may not be linked to the cause. If growing demand from increasingly wealthy Asian consumers is one of the reasons for price increases, the answer isn’t to plunge Asians back into poverty, it is, as Ken Ash argued, to improve incomes elsewhere.

Collier and Ash also agree that trade bans are a particularly dysfunctional response. If big producers can’t export surplus production when prices rise, they’ll have no reason to invest in boosting productivity.

Collier identifies three “follies” in the food situation.

The European folly was to ban the production of GM crops in 1996. Africa copied this, without analysing the benefits GM crops could bring to a continent that needed to adapt quickly to climate change and the need to exploit less favourable soils.

The US folly was to imagine it could grow its way out of an energy crisis by encouraging biofuels. Even if the whole of US crop production went to biofuels, it would still only provide 8% ;of national energy needs. Rich consumers don’t mind paying more for food to boost energy supplies – food is a relatively less important budget item for them than fuel. The opposite is the case for the poor.

Africa’s folly, encouraged by many NGOs and development agencies, was to resist commercial agriculture, and concentrate on inefficient, small-scale producers (and at the other and of the scale, accept land-grabs from export-oriented international investors).

When asked to forecast food prices, Ken Ash went for a gradual decline in real terms, but from a higher plateau, although weather extremes and oil price uncertainties could derail this.

For Paul Collier, volatility is the most likely forecast, and countries have to be prepared. For poor countries, this means hedging against volatility in their budgets by setting aside sums in case prices rise significantly (aid could help establish such funds).

Events in the Arab world show what can happen when the poor can no longer afford to eat. Food riots preceded the present calls for democracy and political reforms, and governments have to be aware that they’re answerable to their people and not just to national elites and international financiers.

When I spoke to him after the briefing, Collier summed up his view of the Arab Spring by saying that “The new IMF is the street!”.

Fueling hunger? Biofuel grain “could feed 330 million”

Over a billion people already suffer from hunger, and food security in 70 developing countries is projected to deteriorate over the next decade according to USDA’s Economic Research Service.

It’s not that there isn’t enough food. A new study by the Earth Policy Institute  shows that the grain grown by US farmers in 2009 to make biofuels was enough to feed 330 million people at average world consumption rates.

The report argues that in a fight between cars and people, the cars would win. The amount of grain needed to fill the tank of an SUV with ethanol just once could feed a person for a year. Even if the entire US grain crop were converted to ethanol, it would satisfy at most 18% of US automotive fuel needs.

The grain needed to fill an SUV’s tank with ethanol just once could feed a person for a year

So are people going hungry to keep cars running? Biofuels push up prices for agricultural commodities, but as an OECD report  points out, this is only part of the explanation.

Food is a relatively minor item in the spending of most families in OECD countries. It represents only 10% to 15% of the household budget, and as this post shows, much of the food bought is thrown away. (That said, the USDA estimates that 14.6% of US households were “food insecure” at some time during 2008.)

In developing countries, food represents half to three-quarters of budgets, so anything that pushes up prices has a more dramatic effect. Moreover, the diets of lower income families have higher shares of cereals, roots and tubers. Prices of these staples tend to increase more strongly due to biofuel expansion than meat and dairy products.

On the other hand, most of the poor in developing countries live in farm households, so higher prices for agricultural commodities  can create new opportunities, at least for farmers with a surplus to sell and the means to get it to market.

The increase in the prices farmers get for their products, whether due to biofuels or not, may help some rural households. But for most people, especially in rapidly expanding urban centres, it’s bad news, and being poor makes it even worse.

Useful links

OECD Agricultural Outlook 2009-2018 on food, feed and fuel

OECD on bioenegy