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IATRC Symposium “Confronting Food Price Inflation: Implications for Agricultural Trade and Policies” Seattle, June 22, 2009
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Confronting the Food Price
Challenge
Joachim von Braun
International Food Policy Research Institute
IATRC Symposium “Confronting Food Price Inflation: Implications for
Agricultural Trade and Policies”
Seattle, June 22, 2009
Joachim von Braun, IFPRI, June 2009
Overview
1. Food price developments
2. Prices, policy dynamics, and feedback
3. Prices and the poor
4. New institutional arrangements
Joachim von Braun, IFPRI, June 2009
Are we living in unusual times?
Sources: J. von Braun, based on data from NBER Macrohistory database,
BLS CPI database, Godo 2001, OECD 2005, and FAO 2008;
Population data from U.S. Census Bureau Int’l database and UN1999.
1872-2008 prices and population
Joachim von Braun, IFPRI, June 2009
Globalization of agriculture and food
systems
Global integration—across national borders—of production, processing, marketing, retailing,
and consumption of agriculture and food items
Source: von Braun and Diaz-Bonilla 2008.
Joachim von Braun, IFPRI, June 2009
Trade globalization?
Agriculture trade in percent of production
Export/Production 1960s 1970s 1980s 1990s 2000-05
Latin America and the Caribbean 22.7 23.0 22.2 25.0 31.2
Sub-Saharan Africa a 23.3 17.0 12.8 12.2 10.9
Asia Developing 5.3 6.1 6.4 6.4 6.1
All Three Regions 11.6 11.3 10.5 10.7 11.2
Import/Production 1960s 1970s 1980s 1990s 2000–05
Latin America and the Caribbean 6.3 8.4 10.9 13.6 14.9
Sub-Saharan Africa a 8.7 6.3 8.1 8.6 11.1
Asia Developing 6.5 6.2 5.6 6.1 5.6
All Three Regions 6.8 6.7 7.0 7.8 7.8
a Does not include South Africa.
Source: Data from FAOSTAT 2009/
Joachim von Braun, IFPRI, June 2009
High-value products in developing
countries on the rise
Domestic consumption Exports
Source: WDR 2008 with data from FAOSTAT.
Joachim von Braun, IFPRI, June 2009
Widening gap in trade costs
Trade costs in processed foods in 2000:
- North: 73%
- South: 134%
Geography + history
matter more than
Infrastructure + institutions
(?)
Source: Olper and Raimondi 2009.
Joachim von Braun, IFPRI, June 2009
Commodity price spike, 2007-08
0
25
50
75
100
125
0
200
400
600
800
US
$/b
arre
lU
S$
/to
n
Corn
Wheat
Rice
Oil (right scale)
Price spike
Source: Data from FAO 2009 and IMF 2009.
Closer linkages between commodity markets and
economic performance
Joachim von Braun, IFPRI, June 2009
Food prices in developing countries
stay high
78%
43%
17%
0
20
40
60
80
> 12 months earlier > 3 months earlier Highest on record
(%)
Latest food price as of April 2009 (790 domestic price quotations in 58 developing countries)
Source: FAO 2009.
Joachim von Braun, IFPRI, June 2009
Domestic prices of key staples remain high:
Wheat
Source: FAO 2009.
Joachim von Braun, IFPRI, June 2009
Domestic prices of key staples remain high:
Maize
Source: FAO 2009.
Joachim von Braun, IFPRI, June 2009
Domestic prices of key staples remain high:
Rice
Source: FAO 2009.
Joachim von Braun, IFPRI, June 2009
Transmission from int’l to domestic prices
varies by country and by product
international price
in regression
ln_wheat_int ln_sweet_bread 0 ln_bread 1 ln_bread 1 ln_bread_loaf 0 ln_bread 1
ln_white_bread 0 ln_pasta 2 ln_macaroni 2 ln_spaghetti 1 ln_bread_loaf 1
ln_bread_decaja 1 ln_pastry 1 ln_bread_sweet 1 ln_wheat_flour 1 ln_bread_loaf_sliced 1
ln_cookies 0 ln_crackers 2 ln_crackers 2 ln_spaghettis 2
ln_other_cookies 0 ln_bread_semitas 1 ln_wheat_flour 1
ln_wheat_flour 0 ln_cookies 2
ln_pastry 0 ln_crackers 1
ln_candy_polvoron 1
ln_corn_int ln_corn 0 ln_corn 1 ln_corn 2 ln_corn 0 ln_corn 0
ln_tortillas 0 ln_tortillas 0 ln_tortillas 2 ln_tortillas 0 ln_tortillas 0
ln_corn_flour 0 ln_corn_flour 1 ln_corn_flour 0 ln_corn_flour 1
ln_corn_milling 0 ln_cornflakes 0 ln_cornflakes 1
ln_rice_int ln_rice 1 ln_rice 2 ln_rice 2 ln_rice 0 ln_rice 2
We report “.” when the null is rejected for maximum rank equal to 1,2,…,N-1
international price
in VECM
ln_wheat_int ln_bread 1 ln_bread 0 ln_bread1 1 dln_bread 1 ln_bread_cereals 2
ln_bread_square 0 ln_flour 1 ln_bread2 1 dln_bread_baguette 2
ln_bread_sweet 2 ln_pasta 2 ln_spaghetti 1 dln_flour 2
ln_cookies 0 ln_crackers 1 ln_pasta 1 dln_cookies 0
ln_crackers 2 ln_cereals 0 dln_pasta 0
ln_wheat_flour 2 dln_spaghetti 0
ln_corn_int ln_tortillas 0 ln_cereals 0 dln_corn 2 ln_bread_cereals 1
ln_corn_flour 0
ln_rice_int ln_rice 1 ln_rice 0 ln_rice 0 dln_rice 1 ln_bread_cereals 1
ln_rice_selected 0
ln_rice_premium 0
Mexico Guatemala Honduras Nicaragua
Peru
El Salvador
Costa Rica Panama Dominican Republic Ecuador
Items with positive statistical significant coefficients with respect to the international prices in t (month) and t-4
Source: Robles and Torero 2009 (forthcoming in Economica).
Joachim von Braun, IFPRI, June 2009
No lag One-month
lag
Three-
month lag
Maize 0.672 0.524 0.312
Rice 0.875 0.734 0.500
Food Commodity
Index
0.779 0.755 0.707
Source: Benson, Mugarura, and Wanda 2008.
Correlation of global and Ugandan price and food index
series, Jan 2000–July 2008
Price transmission, Uganda
Joachim von Braun, IFPRI, June 2009
Reasons for the change in price trends
1. Income and population growth
2. Energy and biofuels
3. Slow agricultural growth
4. Speculation and financial crisis
Joachim von Braun, IFPRI, June 2009
1. Income and population growth
• Annual income growth high in 2005-07- 10% in developing Asia, 6% in Africa
- 3% in industrialized countries
…but slowed down in 2008-09- 6% in developing Asia, 4% in Africa
- -1% in industrialized countries
• Population grew by 78 million per year in
2005-09, reaching 6.8 billion in 2009
- Expected to reach 9.1 billion by 2050
Sources: IMF 2009 and UN 2009.
Joachim von Braun, IFPRI, June 2009
2. Energy and biofuels
• Energy prices now affect not just agric. input
prices, but also output prices strongly via
biofuel-land competition
• IMPACT Model: Increased biofuel demand in
2000-07 contributed to 30% of weighted
average increase of grain prices
Joachim von Braun, IFPRI, June 2009
3. Slow agricultural growth
%
East Asia 2.7
South Asia 1.0
East Africa 0.4
West Africa 1.6
Southern Africa 1.3
Latin America 2.7
North Africa & West Asia 1.4
All regions 2.1
Annual total factor productivity growth, 1992-2003
Source: von Braun et al. 2008.
Joachim von Braun, IFPRI, June 2009 Source: Chicago Board of Trade 2008.
4. SpeculationN
um
be
r o
f c
on
tra
cts
Grain and oilseed futures and options - Ave. daily volume
And closure of commodity exchanges (India, China, etc.)
Joachim von Braun, IFPRI, June 2009
Speculation and prices:
Evidence of causality
Source: von Braun, Robles, Torero 2008.
Indicator of speculation activity Wheat Corn Soybeans Rice
1. Monthly volume (futures contracts CBOT)
2. Monthly open interest (futures contracts CBOT)+ +
(Apr/05 -
Oct/07)
(Dec/04 -
Jun/07)
+
(Sep/05-
Mar/08 )
+ +
(Jan/05-
Jul/07)
(Aug/05-
Feb/08)
+
(Jan/06 –
May/08)
- “+”: evidence of causality
- Starting period of evidence of causality in parenthesis
- * It combines futures and options positions, data available since January 2006.
5. Ratio non-commercial positions to total reportable positions (short)
6. Index traders net positions (long – short positions)* N/A
Commodity
3. Ratio volume to open interest (1)/(2) (futures contracts)
4. Ratio non-commercial positions to total reportable positions (long)
Joachim von Braun, IFPRI, June 2009
4. And financial crisis
Food crisis Financial crisis
Source: von Braun 2008.
But Who drives Whom?
Food- and financial crises linkages
Joachim von Braun, IFPRI, June 2009
Any lessons from history?Financial and Food Price Crises 1900 - 2008
Ba
nk
ing
, c
urr
en
cy,
so
ve
reig
n d
efa
ult
, a
nd
in
fla
tio
n c
ris
es
ind
ex
(w
eig
hte
d b
y s
ha
re o
f in
co
me
)
Wh
ea
t p
ric
e
(20
00
US
$/m
etr
ic t
on
, 3
-ye
ar
ave
rag
es
)
Panic of 1907
Sources: The wheat price are compiled and interpolated from data from BLS 2008, Godo 2001, NBER 2008, OECD 2005,
U.S. Census Bureau 2008, and United Nations 1999.
The BCDI Index is a composite index of banking, currency, sovereign default, and, inflation crises. It was developed by
C. Reinhart and K. Rogoff, and presented at Brookings Institution in April, 2009.
Pre World War:
CORR (1900 – 1950) = - 0.16
Joachim von Braun, IFPRI, June 2009
Commodity prices, inflation,
and monetary policy in the USA
Oil p
rice p
er b
arre
l, PP
I –co
mm
od
ities
Co
re in
flati
on
, eff
ecti
ve f
ed
era
l fu
nd
s r
ate
Source: Data from US Bureau of Labor Statistics.
End-2004: oil price spill to other commodities, effect on core inflation
2004-07: Tight monetary policy triggered recession (from housing
market defaults to decreased consumption and incomes)
Joachim von Braun, IFPRI, June 2009
Overview
1. Food price developments
2. Prices, policy dynamics, and feedback
3. Prices and the poor
4. New institutional arrangements
Joachim von Braun, IFPRI, June 2009
Decreased market distortions ?
India Indonesia
-40
-30
-20
-10
0
10
20
30
1985 1987 1989 1991 1993 1995 1997 1999 2001
Perc
en
t
%PSEc %PSE
-80
-60
-40
-20
0
20
40
60
80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Perc
en
t
%PSEc %PSE
China Vietnam
-40
-30
-20
-10
0
10
20
30
1995 1996 1997 1998 1999 2000 2001
Per
cent
%PSEc %PSE
-80
-60
-40
-20
0
20
40
60
80
1985 1987 1989 1991 1993 1995 1997 1999 2001
Perc
en
t
%PSEc %PSE
Source: Orden et. al 2007.
Producer support estimates
Global Trade Restriction Index: 1985-89=23%, 2000-04=12%(Lloyd, Croser and Anderson 2007)
OECD producer support: 1986-88=37%, 2005-07=26% (OECD 2009)
Joachim von Braun, IFPRI, June 2009
But now a new wave of
trade protectionism with high prices?
Export restrictions in 2008 were serious!
• Tariff increases do not explain trade decline
• Trade financing an issue in the recession
Potential costs of rising protectionism are high!
• Failed Doha round: up to -11.5% in world
trade (volume) if tariffs increase to their
current WTO limits (bound level)
Source: Laborde, Torero 2009, IFPRI.
Joachim von Braun, IFPRI, June 2009
…And reversal in grain stock policy
149
25.8
44.4
206.9
39.4
54.5
0
50
100
150
200
China India EU
Mil
lio
n t
on
nes
2006
2009
Source: Based on data from FAO 2009.
Cereal stocks
Joachim von Braun, IFPRI, June 2009
Creation of cartels?
• 2008, Vietnam, Thailand, and Burma
attempted to form a rice cartel
• June 2009, Russia, Ukraine, Kazakhstan to
form a 'grain pool’ to:
- manage stocks and prices
- improve infrastructure incl. rail and port
capacity
Joachim von Braun, IFPRI, June 2009
Result: Accumulation of market
inefficiencies
From “hypothesis”
to “fact”
to “myth”?
(Justin Fox, 2009)
Market efficiency:
Joachim von Braun, IFPRI, June 2009
Rise in food protests
0
5
10
15
20
25
0
100
200
300
400
500
600
700
800Jul-
07
Aug
-07
Sep
-07
Oct-
07
Nov-0
7
Dec-0
7
Jan
-08
Feb
-08
Mar-
08
Ap
r-08
May-0
8
Jun
-08
Jul-
08
Aug
-08
Sep
-08
Oct-
08
# o
f riotsU
S$/t
on
Maize
Wheat
Rice
Riots (right)
Source: J. von Braun based on data from FAO 2009 and news reports.
Joachim von Braun, IFPRI, June 2009
Looking for land: Overseas land investments to secure food supplies, 2006–09
Source: von Braun and Meinzen-Dick 2009,
with data compiled from media reports.
Joachim von Braun, IFPRI, June 2009
Overview
1. Food price developments
2. Prices, policy dynamics, and feedback
3. Prices and the poor
4. New institutional arrangements
Joachim von Braun, IFPRI, June 2009
Rising number of hungry people in the
developing world
Data source: FAO 2006, 2008, 2009.
(in
mil
lio
n)
>1 bil.
WFS target
Joachim von Braun, IFPRI, June 2009
1.4 billion people remain poor in the
developing world
0
20
40
60
80
1981 1987 1993 1999 2005
% o
f p
op
ula
tio
n
East Asia and Pacific
South Asia
Sub-Saharan Africa
Poverty at $1/day, 2005 PPP
Source: Chen and Ravallion 2008.
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1981 1987 1993 1999 2005
Bil
lio
ns
East Asia and Pacific
South Asia
Sub-Saharan Africa
Joachim von Braun, IFPRI, June 2009
High food prices reach the poor
• Poor countries fully participate in food
price shocks
• Poor households are reached by high
prices (Dorosh, Dradri, Haggblade 2009)
- Coping strategies vary, and include
switching to non-traded food items
Joachim von Braun, IFPRI, June 2009
Maize and sweet potato prices
Zambezia, Mozambique 2006-2008
0
2
4
6
8
10
12
mzpkg
wspkg
Source: R. Labardo, A. de Brauw HarvestPlus, 2008.
Joachim von Braun, IFPRI, June 2009
People in low-income countries are very
sensitive to changes in food prices
High
estimate
Low
estimate
North
Small farm -0.92 -0.52
Rural nonfarm -1.04 -0.59
Middle and urban rich -0.61 -0.45
Urban poor -0.53 -0.39
South
Small farm -0.60 -0.33
Rural nonfarm -0.58 -0.33
Middle and urban rich -0.16 -0.12
Urban poor -0.24 -0.18
National aggregate -0.64 -0.43
Price elasticities of maize in Zambia
Source: Dorosh, Dradri and Haggblade 2009.
Joachim von Braun, IFPRI, June 2009
Human costs of volatile prices are high
Price stocks and malnutrition in Kordofan children, Jan 1981-Dec 1986
Teklu, von Braun, Zaki 1991.
And must be included in sound econ. analysis of price volatility
Joachim von Braun, IFPRI, June 2009
Overview
1. Food price developments
2. Prices, policy dynamics, and feedback
3. Prices and the poor
4. New institutional arrangements
Joachim von Braun, IFPRI, June 2009
Strategic agenda
1. Promote pro-poor agriculture growth with
technology and institutional innovations
2. Facilitate open trade and reduce market
volatility
3. Expand social protection and child
nutrition action
Joachim von Braun, IFPRI, June 2009
For long-term agric. growth:Double public agric. R&D to impact poverty
CGIAR investment to rise from US$0.5 to US$1.0 billion
as part of this expansion
Source: von Braun, Shenggen Fan, et al. 2008.
R&D allocation
(mil. 2005 $)
in # of
poor (mil.)
2008-2020
+ Agr. output
growth (% pts.)
2008-20202008* 2013
SSA 608 2,913 -143.8 2.8
S Asia 908 3,111 -124.6 2.4
Devel.ing
World 4,975 9,951 -282.1 1.1
Joachim von Braun, IFPRI, June 2009
What to do about volatility?
1. Keep trade open at times of global and
regional food shortage is a must
2. Regulation of food commodity markets? (only
as part of financial markets)
3. Establish grain reserves policy at global level
(emergency reserve, shared physical
reserves, and a virtual reserve > a new
institution at global level needed)
Joachim von Braun, IFPRI, June 2009
Institutional design behind virtual reserves
Country
commitment to
supplying funds
Intelligence unit• Model
fundamentals
• Model dynamic
price band
• Trigger alarm
High level technical
commission
• Approve intervention
Appoint
Futures market
Joachim von Braun, IFPRI, June 2009
Support pro-poor food and nutrition
interventions
Protective actions e.g.:
• Cash transfers
• Employment-based food security programs
Preventive actions e.g.:
• School feeding
• Early childhood nutrition programs
Focus on children, women, and poorest
Joachim von Braun, IFPRI, June 2009
www.ifpri.org