You Asked: What's Going on With Food Prices?

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Photo: © Michael Morris / World Bank

When the World Bank’s Food Price Watch reported last week that severe drought pushed prices of staples such as maize and soybean to an all-time high this summer, people everywhere took notice. What will it mean for the poor in regions most affected by rising prices? What will it mean for us? 

Economist José Cuesta, who authors the Bank’s quarterly Food Price Watch, asked readers of our last blog entry to submit their own questions about food prices. Here are his answers to a few of them.

Aline from Belgium asked: “I would be interested in your opinion on GMOs [genetically modified foods] and the possible role they could play in food crises [to boost] more resistant crops, agricultural diversification, yields?”

Jose Cuesta: Improving the productivity of agriculture is critical to ensure that the world meets the increasing demand for food from a growing population. There is a heated debate on the effects of GMOs towards that goal, however, and this issue is far from settled. There is growing evidence that non-modified, drought-resistant biotechnology – for example, plant breeding – can improve yields significantly in extreme weather contexts. To the extent that these crops are more resilient to such disasters, they clearly contribute to food security.

Ariel asked: “You said that [vulnerable nations] ‘need to invest in agriculture and improve their yields, and make sure there’s open trade so they can go to the international markets to smooth these shocks.’ It seems to me that this is not correct. If the price volatility is coming from abroad (say from droughts and a negative shock to the World supply), connection to the international market will transfer these high prices to the local market.

“That being said, in the long run farmers might benefit from greater integration to world markets in general, to acquire cheaper inputs and things they can’t produce cheaply. I wonder what your thoughts are on this.”

Jose Cuesta: Thank you for sharing your views, Ariel. You are totally right in separating the two different sources of volatility – one coming from internationally traded food commodities and the other from domestic situations.

The current increase in United States maize and soybeans prices will have impacts on domestic prices. The severity of the impact will depend on how much countries rely on grain imports, but also on the policy choices they make to mitigate the transmission of international prices to local markets. Large exposure to those shocks and bad policies are a recipe for disaster.

But price volatility observed in the prices of food in a given country may also be caused by domestic factors, such as bad crops, bad weather, conflict, humanitarian disasters, high prices of energy and transportation, and so on. In such situations, access to international food markets may alleviate the effect of those domestic shocks and circumstances.

In fact, evidence points to domestic factors having a larger role than international factors in explaining the volatility of food prices across developing countries, as we showed in a previous issue of our report.

Marcos Méndez Sanguos asked: “Why have the domestic prices soared so sharply in Mozambique (113 percent for maize) and Sudan (180 percent for sorghum)?”

Jose Cuesta: Just to clarify, Marcos, these prices are not national prices but the prices of specific markets in Mozambique and Sudan. In fact, national food price trends in Mozambique are currently much more subdued. In our latest Food Price Watch, we report a number of factors associated with these sharp increases, such as localized poor harvests – in addition to seasonal patterns in Mozambique and social conflict in Sudan.

Anonymous asked: “Should the US and other developed countries stop using [and] processing biofuels to force crop prices down? Also, with news that banks are betting on and making money from the food crisis, is there anything we can do to stop a run on food?”

Jose Cuesta: These are tough questions and, as you probably know, there’s a heated debate about the effects of biofuels. Making biofuel from maize that could otherwise be used for food or feeding purposes has an effect on food prices. But biofuel also provides an alternative to increasing energy prices from fossil fuels, whose increasing costs also affect food prices.

As far as addressing price spikes, I can tell you that there are ongoing efforts by the international community to improve the transparency of the international food system, and to gather more and more reliable statistical information on markets and food stocks. Efforts are also under way to better protect farmers, food producers and consumers in developing countries through more effective and transparent risk management products and stronger safety nets.

And increasing investments to boost agricultural productivity is a critical long-term strategy to fight high and volatile food prices. In all these lines of action, the alignment of efforts by the international community and countries is essential.

Related Links:
Food Price Watch