Latin America: should global food price fever give us the shivers?

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As food prices creep up again for the third time in five years, concerns about global food security are also on the rise. Right off the bat, three questions come to mind:  Why this is happening? How does this affect Latin America and the Caribbean? What should we do about it?

But first, let's try to get to the bottom of what's causing these high prices and how they're impacting food security.

The ongoing drought in the U.S is the worst for over 50 years. The U.S. Department of Agriculture (USDA) stated in July that just 31 percent of the corn crop was in good to excellent shape. And soybeans face similar fate with current weather forecasts providing little confidence that the situation will be reversed. Furthermore, wheat production conditions in Europe --especially Russia and Kazakhstan-- are also becoming a concern.

As a result, the price of grain futures has been increasing steadily and the market is becoming yet more volatile. Corn prices have passed and consistently remained above US$8/bushel while wheat prices have reached US$9.50/bushel. Since 2005, the world has experienced a dramatic surge in the price of many staple food commodities --the variability in international grain prices has doubled in relation to pre-2005 prices. At the same time, spot prices have not risen as quickly.

Since many countries affected by drought are important players in the global grain markets, the effects have been strongly felt across the world, nowhere more so than in importing countries. Poor consumers in import-dependent countries are likely to be hardest hit, especially if governments have limited capacity to expand safety nets.

This is the third such crisis in five years, and while its origins may change, the increased frequency cannot be ignored.  Supply of grains across several globally important producing areas is becoming more volatile. Worst of all, supply is not keeping up with a spike in demand --the result of increased consumption of animal proteins produced with feed grains (dairy, poultry, eggs, pork, beef), as well as demand for bio-fuels. Stocks are at a historic low and every disruption in supply conditions creates major ripples in the global cereal market.

In brief, we are facing a structural -not incidental- disconnect between the supply and demand growth.

What can we do about it?

Hopefully, we can all agree that it isn't wise to wait until the long term structural issues are resolved.  As Keynes famously noted; "in the long run we are all dead."

So here is what we propose:

In the short term we need detailed monitoring to understand how prices will develop. This should not only concern prices on the main international markets, but also look at the impact on poor consumers and producers. There may be considerable differences between the price a farmer gets or a consumer pays, and international prices, especially in developing countries, due to of all kinds of market imperfections (deficient infrastructure, incomplete competition, poor price transmission etc.). Better understanding the crisis is key to successfully protecting the most vulnerable --particularly in urban areas-- from these substantial price swings.

Data from Brazil, for example, shows a 10 percent increase in agricultural commodity prices generally causes the Consumer Price Index to go up by 0.8 percent. And as usual it is poor people, who spend most of their budget on food, who are the hardest hit.

The silver lining in all this is that today Latin America's social protection system provides a much better base to safeguard the most vulnerable than before.  But a few things must be done to make those safety nets more efficient.

It is urgent to assess food price volatility and measure the social and poverty impacts of these crises in real time. Also, the financial situation of several countries in the region is less favorable than it was a few years ago, which means they would need to fine tune their social targeting.

But what is most important is not always the most urgent.

If we are not able to increase our food production capacity, these crises will become more and more frequent, putting people at risk and draining fiscal resources. The world needs to make serious investments, and soon, to increase its production potential and to reduce the vulnerability of production, while at the same time maintaining trade flows.  The good news is that Latin America has a key role to play.

This can be approached in several ways.

1. Recultivating fallow land wherever possible.
2. Careful intensification of production (e.g., fertilizer use) may also boost harvests.
3. Expanding irrigated agriculture.
4. Improved technologies can be rolled out more quickly to increase average yields.
5. Boosting research in productivity enhancing technology.

Not all regions are able to contribute equally to increasing global production levels. In South and East Asia, for example, land and water are limited. But Latin America, and especially the Southern Cone (but also countries in Central America such as Nicaragua) have considerable potential.

To back this up, let us quote our regional food price study. "Latin America has a high potential for scaling up production as a result of its natural endowments... of the approximately 445.6 million hectares of land worldwide that could be suitable for sustainable expansion of cultivated area, about 123.3 million hectares (28 percent) is in Latin America, more than in any other region except Africa, which has 45 percent. With about one third of the 42,000 cubic km in renewable water resources worldwide, the region is also well endowed in this resource." 

The trend towards higher food prices also makes this a more attractive option than five years ago. Countries should seriously start considering how to increase their production levels through environmentally sustainable investments in production capacity and technology.

In other words: implementing "green" growth in agriculture, as a recent report points out. It's the only way we can get this price fever under control.