Rising food prices - How Do They Affect the World? - “Thoughts for Food”

October 3rd, 2008 � No Comments

Food crisis and its impact on poorer nations

How do the credit crunch and rising food prices affect the world and especially poorer nations and developing countries?

Leading experts have come together to share their views at the headquarters of the European Bank for Reconstruction and Development (EBRD).

This is my live reporting from the event, which was organised by the EBRD and the Centre for Economic Policy Research. As this is a live summary it captures points that I found interesting, and does not aim to summarise the entire event. Clever points belong to the speakers, errors of fact or reporting would be all down to me.

SPEAKERS (biographies)
Chair: Erik Berglöf - EBRD chief economist (chair)
Michael Kremer - Harvard University
Nora Lustig - George Washington University,
Peter Timmer - Stanford University
Gilles Mettetal - EBRD’s Director for Agribusiness

Peter Timmer
-Was active professionally through the early 70’s food crisis, and sees the two crises as very different in their nature.
- Rice prices have come down off their peaks in May-July, and for other commodities as well, but are still relatively high.
- We’ve been caught off guard professionally, we don’t have an understanding of how commodities are interlinked.
- Price for food commodities was usually flat for over thirty years. In 2004 a gradual increase started, and the sector saw about 10% price increases per annum. Then, in 2007 prices suddenly started to spike dramatically. Even though they have since begun to come down, they are still high.
- Even though India and China are not the cause of the price changes, their significant growth is affecting the world economy, and commodity prices were moving up thus changing the mentality regarding food commodity price rises.
- For investors looking for hedges against a rising US Dollar, commodities seemed like a good place to put their money. Speculation spilled into commodities markets (though in itself it can’t change the commodity pricing fundamentals longer-term).
- Ethanol and bio-diesel - big debate whether the mandates that congress has established have been a major factor in causing the food price rise (e.g. maize prices re production of ethanol).
Key things we don’t know:
- We know surprisingly little about long-term supply and demand trends/cycles.
- Stockholding behaviour - not enough knowledge about how this works. For some of these commodities stocks are held out of sight, and it is difficult to model pricing.
- Short-run pricing linkages. Links between commodity pricing in short run connections. We identify linkages but know little about why they occur.
- Approach to trade, self-sufficiency, buffer stocks (safety nets) are little researched and modelled. We need to find new models to reflect this area to be able to plan better for buffering and food trade management.

Nora Lustig
- Although the price of food is not as high as it was in the early 70’s… There are two areas that may well be the causes of the rises in food commodity prices:
–The reason for the sudden rise in food prices in 2004-05 and then the dramatic further rise in 2007 are due to the rise in the use of bio-fuels. Fuel prices in the US have risen dramatically, and a clear correlation can be seen with the use of bio-fuels.
– Macro economic causes (interest rates for example) seem to link macro-economics to commodity prices - needs more research, and we need to have multilateral systems to deal with this on a global level.
- Targeted measures to contain food prices should be researched and implemented by governments.
- High food prices hurt some of the world’s poor and helps others (because their produce yields more income), but overall research shows that it hurts more than it helps. The problem isn’t usually scarcity but purchasing power. Helping purchasers can be done by providing social protection policies, and cash transfers - again, more research is needed in this area. Countries are not properly prepared to deal with the situation.

Michael Kremer
- Populations would continue to increase, incomes will increase in India and China and there will be an increase in demand for bio fuels.
- Thus there needs to be some creative thinking about agriculture research and development (R&D).
- There is less of an incentive for R&D development in poor countries because there are fewer government incentives, and less incentive for return on investment from new products. In areas of agriculture and health this is particularly difficult, as the example of AIDS drugs distribution (or lack thereof) in poor countries shows clearly.
- Despite the above it is worthwhile to move on from the above two (important) points, and try to find models that do work.
- One approach is that sometimes used in medicine, whereby the public funding guarantees an investment in a product if it is successfully developed. This rewards companies who are innovative and supports them in producing successful new solutions.
- R&D for agriculture is challenging because the environments and climates in different areas varies and creates problems for developing solutions that would work cross-countries.
- An example of a technology that could bypass the above issue would be the likes of pest resistant seeds, a technology that can work across world regions.
- Other than cross-environmental solutions there should be new models for “reward triggers” to encourage new solutions to “credibly commit to reward appropriate innovations…”.

Short term goals: new technologies to increase agricultural production in poor countries.
Longer term: experiment with alternative mechanisms to reward innovation in the field.

Credit Crunch: Food Crisis and Rising Food Prices