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Reacting to food price spikes: Commodity of errors

Csilla Lakatos's picture
Agricultural and food prices are expected to rise only moderately in 2019. However, risks of extreme weather, an escalation of trade tensions, or a jump in energy prices could trigger higher prices.

Despite the best of intentions, governments have a history of interventions during food price spikes. Trade policies aimed at insulating domestic food markets appear to have a track record of actually increasing the volatility of world food prices and may have accounted for 40 percent of the increase in the world price of wheat and one-quarter of the increase in the world price of maize during the 2010-11 food price surge.

As a result, compounded by distortions produced by government policy responses, the 2010-11 food price spike increased global poverty by almost 1 percent or 8.3 million people.
 
A country that has a high share of agriculture and food in total output, consumption, employment, trade, and government revenues is particularly vulnerable to volatility in international food prices. Low-income countries (LICs) are particularly susceptible, as agriculture in these countries accounts for close to one-third of value added and two-thirds of total employment, nearly three times as much as in non-LIC emerging market and developing economies. A high share of net food buyers among the poorest segments of society heightens the adverse effects of food price spikes on poverty and income distribution. In low-income economies, most households are net buyers of food which spend on average close to 60 percent of their income on food, more than one-third more than in non-LIC emerging market and developing economies.
 
Share of food in total consumption expenditure
(EMDES=emerging market and developing economies; LICs=low-income countries.)

Governments often intervene to dampen the transmission of changes in world prices into domestic markets and lessen the burden on vulnerable population groups. The combined intervention of many countries tends to exacerbate the volatility and the increase in world prices. Insulating policies introduced during the 2010-11 food price spike had just such an effect on global wheat and maize prices.
 
Increase in world prices, 2010-11
 
The 2010-11 food price spike raised poverty in most countries, despite widespread government intervention. The number of extreme poor increased by 8.3 million, or almost 1 percent. Combined with government intervention, the increase in world food prices was most strongly felt in countries where the extreme poor tend to be net food buyers whose real incomes declined.

Global poverty impact of the 2010-11 food price spike

 
Targeted safety net interventions such as cash transfers, food and in-kind transfers can mitigate the negative impact of food price shocks while reducing the economy-wide distortionary impacts of trade policies. Additional measures such crop and weather insurance, warehouse receipt systems, commodity exchanges and futures markets could also be used to manage risk.

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