food prices

(Available in Chinese)

Food prices have received a lot of attention recently. Understandably, much of the attention is on recent developments and short term prospects. But in this blog post I try to look back at some longer term trends, in order to look further ahead.

Since the early 2000s, food related prices have trended up (Figure 1). The deflator of agricultural value added has risen 8% per year on average since 2000, after falling during the second half of the 1990s. Producer Price Index (PPI) food prices (factory gate) have risen much less because prices of other inputs into the food processing industry have gone up less and rapid productivity growth in food processing has dampened the transmission of higher raw food prices.

Remember the food and fuel crisis that preceded the global economic and financial meltdown? Many in the advanced economies have long forgotten it; people in developing countries have very vivid memories. Are we about to relive the crisis? 

As a refresher, the introduction of biofuels mandates in the U.S. and Europe earlier this decade sparked a surge in demand for maize, vegetable oil and sugar cane to be converted to alternative fuels. In fact, most of the increase in global maize production during 2004-07 went for biofuels, as did a third of the increase in vegetable oil production. At the same time, growth in emerging and advanced economies was among the fastest on record, boosting global demand for energy, notably petroleum—which, in turn, made biofuels production more attractive. The third piece of the puzzle consisted of the growing concerns about the U.S. current account deficit and the housing market in the U.S.—which peaked in June 2006—that led to a sustained and unrelenting weakening of the U.S. dollar. 

Where do these three crucial components of the past global food and fuel crisis—biofuel mandates, rapid growth in emerging economies and global demand for energy, and the dollar—stand these days? The biofuels mandates are still there—and in the U.S. alone, the use of biofuels has to treble by 2022. Growth in most emerging economies has recovered to pre-crisis levels, and demand for energy is as insatiable as ever. And after a period of strength during the darkest moments of the global economic and financial crisis, the U.S. dollar has weakened anew.

A little more than a month ago, the UN's Food and Agriculture Organization (FAO) introduced a database tool and a press release highlighting a rather disconcerting trend. As the global economic crisis worsened, food prices have fallen at an international level. But, surprisingly, the cost of food has not dropped at the same rate, or at all, in poor developing countries, according the FAO.

The new online tool allows for anyone to easily keep track of food prices in 55 developing countries, comparing the data on both domestic and international levels and tracking change over time. In East Asia, the tool includes data from China, Mongolia, Philippines, Thailand and Vietnam.

I am struck that the release of this data seems to be the first time I’ve heard of this trend. And apparently, even the experts aren't sure what is causing food prices to stay high for those who can least afford it. On his blog, Oxfam’s Duncan Green quoted FAO's Henri Josserand:

"The reasons for this 'stickiness' are not fully understood at this time. We hypothesize that there are several factors, possibly interacting in complex way. So far, we have not found any set of explanatory variables that apply to the whole sample. Actually, we are pretty sure that understanding the reasons will require in-depth analysis at the national or regional levels."

FAO says it hopes the database will provide information for "policy and decision-makers in agricultural production and trade, development and also humanitarian work." Hopefully, this database will help bring attention to high prices and food shortages in the places that can least afford them.

A rice seller in one of Cambodia's markets. The price of rice, a staple food for Cambodians, has doubled between July 2007 and July 2008.

Last week, I attended a very interesting seminar by the Cambodia Development Research Institute (CDRI). They presented the result of their recent study on the impact of high food prices (which the World Bank and several others financed). I found the results, presented by CDRI’s Chan Sophal, very interesting, showing the complexity of the question.

The simple reaction is that higher price of food is bad for the poor. CDRI is able to confirm some of this by tracking prices (the price of rice doubled between July 2007 and July 2008) and reminding us that food accounts for two thirds of consumption for a poor family. And there will be little substitution effect to other goods (even within food, most of the caloric intake comes from rice, also very difficult to replace–although CDRI shows that Cambodians in part shifted to lower quality rice to make up for the higher price).