Two cheers for lower food prices: Good for poor consumers and not the real issue for farmers

Jonathan Brooks, Head of Agro-food Trade and Markets Division, OECD Trade and Agriculture Directorate

What’s the difference between a Mississippi mud pie and a Haitian mud cake? The answer is mud. The mud pie is a dessert containing vast amounts of chocolate. The mud cake is literally that, mud with some salt and margarine mixed in. At one time, only pregnant women in poor areas ate mud cakes, in the hope of getting some calcium or other minerals. But following the sudden rise in food prices in 2008, mud cakes became a staple for thousands of Haitians who couldn’t afford anything else. Haiti is one of the poorest countries on Earth, but its hungry were not alone in their misery. Food riots broke out in Africa, Asia, the Middle East and Latin America and the Caribbean.

International crop prices of crop started falling in 2012. The OECD-FAO Agricultural Outlook 2016-2025 projects that over the next ten years, real prices of most agricultural products will decline slightly, but remain higher than they were prior to the 2007-08 price spike. Fundamentally, supply growth is expected to keep pace with demand growth, as population growth slows and the per capita demand for food staples becomes increasingly saturated in many emerging economies.

These projections assume continuing low oil prices and a sluggish recovery of the global economy, with abundant global food stocks to keep markets relatively stable. But merely a repetition of historic variability in oil prices, economic growth, and yields may well lead to another price spike within ten years. In addition, the uncertainties associated with climate change are starting to mount.

A major question is whether lower prices are to be welcomed, in particular whether they will benefit the world’s poor and hungry. Even before the food price crisis, when real food prices were lower than ever before, about 900 million people were not getting enough to eat (FAO). The 2007-2008 crisis was projected to add significantly to these numbers, given that the poor spend a relatively large share of their budgets on food, while the poorest farmers in the world are typically net buyers of food.

Fortunately, the worst fears were not realised and the total number of undernourished has continued to decline, to below 800 million in 2015. The impact of international price shocks was cushioned by three factors. First, domestic food markets in the poorest countries are often only partially integrated with international markets because they don’t have the ports, roads, storage facilities and other infrastructure required. This ultimately impedes development, but provides some isolation from international shocks. Second, many countries implemented policies to protect the incomes of the poor. The use of cash transfers seems to have been particularly effective at sheltering the worst off from the impact of price rises. Third, the recession of 2008-09 resulted in only mild slowdowns in most developing countries, and many of the poor could still afford to buy food.

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There is an argument that while poor consumers suffer from food price rises in the short term, in the longer term farmer need higher prices for it to be profitable for them to engage with markets, while increased output generates further benefits in terms of increased employment and higher wages.  However, this line or argument misrepresents the development process by failing to take account of the pressures imposed by market competition.

In developed countries, farmers who can continually reduce their costs, essentially thanks to technology such as adopting new crop varieties or exploiting economies of scale, will make profits. These profits will persist until other farmers catch up and prices fall from the cumulative impact on supply. Farmers who cannot adapt will of course be unprofitable at lower prices. This is no more than the competitive dynamic that we see in other sectors.

In developing countries, competitive pressures are mild or non-existent for subsistence farmers who are only weakly integrated with markets, but they kick in as infrastructure and local markets become more developed. Of course, few would suggest that the best way of helping developing country farmers is by failing to build rural roads, yet tariff walls and price protection can have just the same effect.

As farmers become more integrated with markets, higher long term prices reflect little more than the costs of productive factors (land, labour and capital), which means that the opportunities for profit are still confined to innovative farmers.

For farmers in both developed and developing countries, prices are therefore not the real issue. What matters is productivity. Higher rates of productivity growth lower prices in a way that is simultaneously good for consumers and beneficial for those farmers who are driving the productivity gains. “Laggards”, as Willard Cochrane termed them in 1958, face the choice of either improving their competitiveness or shifting into other economic activities.

Focusing on prices as the route towards higher incomes is in fact distracting because prices ultimately need to reflect the scarcity of natural resources. In many countries, for example, there is no pricing of water. That keeps costs low and contributes to lower prices, but also fosters unsustainable farming practices that will harm both producer and consumers in the longer run.

Lower prices are welcome to the extent that they derive from sustainable productivity growth. But from the standpoint of farmers, and the sector as a whole, prices are the wrong variable to focus on. As Paul Krugman put it: “Productivity isn’t everything, but in the long run it is almost everything”.

Useful links

Food Security and the Sustainable Development Goals Jonathan Brooks on OECD Insights

Malthus wrong again says OECD

Agriculture Outlook 2014-2023Even if you know nothing about the French Revolution, you’ve probably heard of Marie-Antoinette’s reaction on being told the people had no bread: “Let them eat cake”. In fact, the infamous catch phrase was probably invented by Jean-Jacques Rousseau, who attributes it to an unnamed princess in his Confessions, written before the 14 year-old Austrian princess even married the future Louis XVI. As far as the course of events went, it doesn’t matter whether she said it or not, since the people believed that it was the kind of thing she would say. The doomed monarchs could have learned a few lessons in the art of good government from the founder of the Bourbon dynasty. One goal of the reforms instigated by Henri IV, King of France from 1589 to 1610, was a chicken in every pot, on a Sunday at least. This slogan was to reappear in the United States in the 20th century, with “a car in every garage” tacked on to some versions.

Food riots are thing of the past in most OECD countries, but in 2007-08, various places around the world would see people taking to the streets as food prices rose suddenly in response to the interactions among a number of factors, including high oil prices forcing up production costs, drought in major producing areas, diversion of land to biofuels, and a very low level of stocks.

The food price crisis in 2008, the renewed price hikes in 2010, and depressingly regular reports since of people facing famine (the latest in South Sudan) have raised questions about whether agri-food markets could be relied on in future to deliver sufficient quantities of food at affordable prices. And not just in sensationalist media with their love of explosions in food prices and population growth. In 2009, Sir John Beddington, the UK’s chief scientist, warned of “Food, energy, water and the climate: a perfect storm of global events?

As we pointed out in this article, there have been predictions that the world will face mass starvation ever since Malthus published his famous essays on demography. As Malthus himself put it in An Essay on the principle of population: “The power of population is so superior to the power of the earth to produce subsistence for man, that premature death must in some shape or other visit the human race.”

And yet it hasn’t happened. The UK’s population for example doubled over 1750-1800 (the year in which Malthus published The present high price of provisions), and tripled over the next century. This demographic surge couldn’t have happened without the interaction of a number of elements. We often talk about the agricultural “revolution”, suggesting sudden overthrow of the old systems. But even in Britain, the initial changes to agricultural techniques and practices such as enclosing common land and introducing crop rotation were spread over centuries, and what accelerated the pace of change was interaction with the industrial revolution. Improved communications and storage and preservation techniques allowed producers to serve markets far from home. A well-functioning financial system provided capital. And a feedback loop was created whereby improved food supplies supported a bigger population that in turn provided labour for emerging industries and markets for farmers.

Likewise, when looking at the prospects for food production and consumption today, we have to look at the whole picture. The OECD-FAO Agricultural Outlook 2014-2023 doesn’t expect a Malthusian crisis to materialise. The report argues that the world’s farmers and fishers will be able to satisfy demand over the next 10 years. Rising incomes, urbanisation and new eating habits will reinforce the transition to diets richer in protein, fats and sugar. . In real terms, prices are expected to fall (slightly) but remain higher than the historical lows seen in the early 2000s.

This year’s report has a special focus on India, the world’s second most populous country with the largest number of farmers and also the largest number of “food-insecure” people. The Outlook proposes a relatively optimistic scenario for India, with the expansion in the production and consumption of food both projected to continue, led in particular by higher value added sectors, even for staples, for instance consumers preferring basmati rice rather than inferior varieties.

At least two major issues still need to be addressed though.

First, any rise in food prices can affect the food security of the poor. An OECD working paper shows that developing countries with very different levels of economic development, population size and geographical location have succeeded in reducing poverty and improving nutrition. Despite the significant differences among them, they share some characteristics. During the period when they had the greatest success in reducing poverty, the macroeconomic context became progressively more favourable. Their own governments were lowering export taxes, reducing overvalued exchange rates and dismantling inefficient state interventions in agricultural markets. Meanwhile, the governments of rich country trading partners were reducing the kinds of support to their farmers that distorted production and trade the most.

Second, as argued by the OECD in Climate Change, Water and Agriculture that we featured last month, climate change poses challenges on a different scale from the variations that can affect crops and livestock during the course of a season or even a year or two. Future changes in the climate could have significant impacts on land use, commodity production, and where different activities are viable; and the implications of expanding food production for the natural resource base and climate change.

Useful links

OECD work on agriculture and fisheries

Immediate action and long-term approaches for food security and food price volatility

Click to see the OECD-FAO Outlook

This post is contributed by OECD Secretary-General Angel Gurría, following his address to the agriculture ministers of the G20 countries meeting in Paris on June 22.   

The OECD-FAO Agricultural Outlook to 2020 published this week expects commodity prices for cereals to be 20% higher over the coming decade compared with the 2000s, and meat 30% higher. That’s good news for farmers the world over, but for the one in seven of the world’s population who goes to bed hungry, it could spell disaster.

Moreover, price volatility could make matters worse.

So what should we do?

The immediate priority is to address the severe consequences of hunger and malnutrition, whose root cause is poverty. Undernourishment rapidly leads to underweight babies and prevents young children from developing properly, both physically and cognitively. The related problems generally last for life.

In a report including contributions from 10 international organisations OECD coordinated with FAO, we make a number of recommendations to deal with the consequences of high and volatile prices on the most vulnerable.

Working closely with the UN World Food Programme, we propose setting up small strategic food reserves for rapid deployment through safety net programmes in situations where countries find it impossible to procure supplies for themselves.

We also outline a number of market-based financial instruments to assist vulnerable countries and households, including measures designed to help farmers manage unavoidable risks.

In brief, we propose a wide range of safety nets that can come to the aid of the most vulnerable, quickly.

The long term priority – the sustainable solution to price volatility and food insecurity – is to improve the productivity and resilience of global agriculture. Doing so requires action on a number of fronts.

OECD and FAO have a joint proposal for a new Agricultural Market Information System (AMIS). Associated with AMIS is a proposal for a Rapid Response Forum to improve international coordination of government responses to food emergencies, preferably before a situation becomes a widespread crisis.

Better information and transparency on financial markets is also important, as is consistency between regulatory regimes. This would help reduce opportunity for market manipulation and ensure that the farm and food sector has instruments at its disposal to help smooth price fluctuations and to manage risk.

Agricultural trade will be even more important in the years to come. Food has to flow more easily from surplus to deficit areas and humanitarian food purchases and shipments must not be caught up in export restrictions or be taxed. Most of the future growth of supply – and demand – will come from developing countries, but supply growth will be stalled if competitive suppliers around the world are not able to access regional and global markets.

Even if WTO trade negotiations are currently in great difficulty, we must reduce the import and export barriers to trade in food, feed and fuel that add to price volatility and constrain global food security.

We have also made tough recommendations on biofuel policies that subsidize production, mandate blends, and restrict trade.

Let’s be very clear about this. We support the development of a wide variety of renewable fuels, including biofuels. But our analysis has shown that there are higher costs and lower benefits than anticipated, as well as unintended negative impacts, from current biofuel policies.

Finally – and arguably most importantly – in our report, the international organisations make a strong case for various actions to improve farm productivity. This is an essential ingredient in a sustainable and long-term solution to the challenge of increasing food production between 70% and 100% by 2050.

For many developing countries, greater use of existing technologies offers immediate and significant opportunities. For all countries, new science and technology offers further promise.

Returns to investment in agricultural research are enormous: generally over 20% and as high as 80 % a year. But the lead times are very long – often 20 years or more. The investment that will bring those long-term benefits has to start now.

Required investments are way beyond what can be achieved with public funds or development aid, although both are important. National governments have to create an enabling environment that encourages private and public-private investments to flow.

OECD will focus more on this, drawing upon its agriculture, science and development communities to highlight best policy practices for increased innovation in agriculture.

Can the global food and agriculture system meet the challenges of the coming decades? I’m optimistic. Throughout history, farmers have demonstrated again and again their capacity to adapt to new circumstances, adopt new methods and technologies, and supply safe and nutritious food for growing populations.

Since 1960, cereal production world-wide has doubled, and fruit and vegetable production has tripled. The increases in meat production have been even more dramatic – pork production has more than tripled and poultry has increased sevenfold.

The G20 is giving agriculture the importance it deserves. And acting now will position the sector well for a profitable future in the service of us all.

Useful links

OECD work on agriculture

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!”.

The trillion dollar grocery bill

Click to see the report

Farming is an industry, but there are limits to how closely you can compare it to other sectors. Livestock production is fairly predictable, but farmers can never be certain of how well their crops will grow. It’s as if you started an auto production line without knowing for sure how many cars would roll off the end, or what size they’d be. And with a fair chance that floods or fire would destroy the whole factory.

This unpredictability is one of the reasons food commodity prices have been so volatile over the past year. For instance, the latest FAO Food Outlook expects world cereal production to contract by 2% although only a few months ago the FAO predicted a 1.2% increase.

As a result, world cereals stocks are expected to shrink by 7%, with barley plunging 35%, maize 12% and wheat 10%. Prices will rise, with the global bill for food imports topping a trillion dollars, a level not seen since prices peaked in 2008.

That may be good news for producers, but food import bills for the world’s poorest countries are predicted to rise by 11% in 2010 and by 20% percent for low-income countries with food deficits.   

The weather is partly to blame, with droughts and fires hitting Russia and other important growing zones this year, but there are other reasons too. An OECD contribution to last month’s meeting of the Committee on World Food Security looks at a number of factors affecting food price spikes.

This year, export restrictions and exchange rate fluctuations had a big impact. This kind of influence can be reversed quickly, but increased use of agricultural feedstocks for biofuels and the growing demand for food and animal feed from emerging economies put more permanent pressure on prices.

The impacts of other factors are uncertain, for instance climate change or water scarcity. Declining investment in research could prove costly too. Moreover, lack of infrastructure means that a lot of food is destroyed before it can be eaten, as Indians discovered during last summer’s monsoons, with CNN reporting that a third of the country’s reserves were rotting in the open.

The most controversial issue is speculation. An OECD working paper rules out financial market speculation as the cause of the price bubble in agricultural futures markets in 2007-08. However, at the meeting of agriculture ministers at the OECD earlier this year, different views were expressed about the role of speculation.

At the end of this month, the OECD Global Forum on Agriculture will bring together government representatives, along with agricultural experts from intergovernmental organisations, NGOs, producer groups and agribusiness, as well as researchers toidentify ways governments can accelerate agricultural development and tackle the twin problems of poverty and food insecurity.

Useful links

OECD work on agriculture

FAO Initiative on Soaring Food Prices