Soaring Food Prices

16 Pages·2008·0.54 MB·English

About the Asian Development Bank
ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing
member countries substantially reduce poverty and improve the quality of life of their people.
Despite the region’s many successes, it remains home to two thirds of the world’s poor.
Nearly 1.7 billion people in the region live on $2 or less a day. ADB is committed to reducing Soaring Food Prices
poverty through inclusive economic growth, environmentally sustainable growth, and regional
integration.
Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main Response to the Crisis
instruments for helping its developing member countries are policy dialogue, loans, equity
investments, guarantees, grants, and technical assistance. In 2007, it approved $10.1 billion of
loans, $673 million of grant projects, and technical assistance amounting to $243 million.
Asian Development Bank
6 ADB Avenue, Mandaluyong City
1550 Metro Manila, Philippines
www.adb.org
Publication Stock No. 041908 Printed in the Philippines
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Soaring Food Prices
Response to the Crisis
This paper was prepared by an interdepartmental task force chaired by S. Hafeez Rahman, Deputy Director
General, South Asia Department, and composed of the following: Akm Mahfuzuddin Ahmed, Armin Bauer,
Indu Bhushan, Bruno Carrasco, Shiladitya Chatterjee, Robert L. T. Dawson, Brian Fawcett, Abid Hussain,
William E. James, Kunhamboo Kannan, Tun Lin, Sabyasachi Mitra, Allan Olega, Raymond Z. H. Renfro,
Frederick C. Roche, Samjhana Shrestha, Akmal Siddiq, Radhakrishnan Srinivasan, Shahid N. Zahid, Juzhong
Zhuang, Eugenue G. Zhukov, and Mohiuddin Alamgir.
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Soaring Food Prices Response to the Crisis
CONTENTS
(e) Bio-security to protect biodiversity, to (g) Regional and international cooperation
promote environmental sustainability, and to facilitate the elimination of barriers to
enhance food safety and biosafety. agricultural trade has become an urgent
imperative in the wake of the food crisis.
(f) Information. Although information Measures such as the establishment
technology has seen great progress, of regional and subregional commodity
farmers have largely been left out. The exchanges, and clearinghouses need to
timely flow of market information is be considered.
The Spike In Global Prices 4
still lacking, which makes it difficult
for farmers to adjust their production
The Underlying Causes of High Food Prices 6
decisions to respond to changing market
conditions;
Cyclical Factors 6
Structural Factors 7
Impacts 10
Poverty Impact 10
Macroeconomic Impact 10
ADB’s Response 12
Short-Term Assistance 12
Medium-to-Longer-Term Assistance 12
Conclusion 15
14 3
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THE SPIKE IN GLOBAL FOOD PRICES
Figure 2. Food Grain Prices Have Surged
Soaring food grain prices in recent months have production decisions based on distorted produce, and improving returns to
(March 2007–March 2008)
caused serious concern around the world. In Asia prices and are unable to benefit from the agriculture. Therefore, investments
150
the estimated 1.2 billion poor people who spend 130% higher prices in international markets. in rehabilitation, maintenance,
on average 60% of their income on food have The distortions need to be corrected and development of existing and
98%
been hit hard. Food price inflation severely 100 and divergence between economic and new farm-to-market roads need to
stresses the most vulnerable groups. High financial returns narrowed. Otherwise be a priority area for public sector
and rising food prices are threatening to reverse farmers will continue to operate intervention.
the gains in poverty reduction in the Asia and 50 38% suboptimally and return on investment
Pacific region, undermining the global fight against will continue to be low in the sector. • Rehabilitation and upgrade of
poverty. If high food prices persist, the Millennium postharvest processing facilities.
0
Development Goal of halving poverty by 2015 Wheat Rice Corn (b) Infrastructure. Low levels of investments In most Asian countries, postharvest
could be jeopardized. in the sector have led to poor upkeep losses are high—up to 30%—because
Source: FAO. April 2008. Crop Prospects and Food Situation. Rome. and maintenance of existing agricultural of poor handling and processing
Although world food grain prices declined during structures and facilities, and insufficient facilities. Some countries such
the 1990s, a reversal occurred in 2000; since development of new structures and as Cambodia export unprocessed
then the prices have been rising with a sharp facilities. In particular, investments are commodities thus losing the value
upturn since mid-2007 (Figure 1). During the Table 1. Increase in Domestic Food Prices: needed to ensure efficient and reliable added and employment in processing.
March 2007–March 2008
1 year period ending in March 2008, wheat irrigation water supplies and connectivity Improvement in postharvest handling
export prices increased by 130%, rice by 98%, Rice Wheat Meat to markets. and processing capacity would
and maize by 38% (Figure 2). In the last month, Afghanistan 70 16 30 enhance food security by limiting
rice prices have doubled. Therefore, the price • Investments in irrigation systems will wastage, and increase income, supply,
Bangladesh 100 74 60
impacts have been most pronounced in import- improve efficiencies and reliability and employment.
Cambodia 100 45
dependent countries. During the past year, of irrigation water supplies, which
domestic rice prices doubled in Bangladesh and China, People’s Republic of 6 7.2 will in turn raise crop productivities, (c) Rural Finance. In the context of financial
Cambodia and increased by 70% in Afghanistan, India 9.3 (2.5) expand irrigated areas, and reduce the sector reform, financial institutions
55% in Sri Lanka, and 40% in the Philippines. Indonesia 8.7 incidence of crop failures. The priority including microfinance institutions need
Domestic wheat prices increased by 36–100% in should be to improve the efficiency to expand operations rapidly to improve
Kyrgyz Republic 100
Bangladesh, Mongolia, Pakistan, Kyrgyz Republic, and reliability of existing irrigation access of farmers and rural poor to credit.
Mongolia 40
systems rather than to develop new
Nepal 20
systems. Most countries in Asia are (d) Institutions. Productivity growth in
Pakistan 60 38 either already water-stressed or are agriculture will require significant
Figure 1. FAO Food Price Index
Philippines 40 30 nearing such a point, and there may increase in investment in adaptive
Sri Lanka 55 36 not be much scope for development research and technology dissemination.
0) 300 of new irrigation systems. Irrigation New high-yielding and pest-resistant
10 250 Tajikistan 100 50
= system development needs to be varieties are needed to reverse the
0
00 200 Viet Nam 17 combined with investments in flood stagnation in yields. Institutions engaged
2
98– 150 Sources: Country data; ADB’s resident mission submissions. control and drainage structures. In in agriculture research and technology
9
x (1 100 this context, additional investments dissemination in most Asian countries
de 50 will be required for soil and water have weakened. Their capacity building
n
I 0 Tajikistan, and Sri Lanka (Table 1). Strong political conservation. will require sustained investment.
2000 2001 2002 2003 2004 2005 2006 2007 2007 2008
and economic factors are at play in the food policy Policies to attract private investment and
March March
of most developing Asian countries, so that the • Improvements in connectivity to participation of civil society institutions
Cereals
Food Price Index effect of sharply higher international prices has the markets will help in lowering will also be important.
Meat not been fully transmitted to domestic prices. production and marketing costs,
Despite this, food price inflation throughout reducing wastage of inputs and
Source: FAO. April 2008. Crop Prospects and Food Situation. Rome. developing Asia and the Pacific has ratcheted
4 13
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ADB’S RESPONSE
The strategic framework for ADB response support for food for work and food stamp up the consumer price index in 2007. 1 In the wheat, edible oils and meat—and the attendant
to the food crisis is based on Strategy 2020: programs. current year, food price inflation has continued to rise in overall food prices in developing Asia.
The Long-Term Strategic Framework of the accelerate in developing Asia. 2 Part III then evaluates the potential impact on
Asian Development Bank (ADB 2008). The (b) Policy Advice. Policies such as export developing Asia by examining the consequences
development agenda calls for ADB to support restrictions, price controls, price The spike in world prices of cereals, particularly for poverty and inequality and for macroeconomic
the alleviation of poverty through a strategy of supports, optional food grain reserves, for rice and wheat is eliciting policy responses stability. In part IV the strategic framework for
inclusive growth that places emphasis on (i) and input subsidies need to be revisited that exacerbate rather than cushion price volatility inclusive growth of the Asian Development Bank
improvement in social protection and social safety in light of the higher food prices which as governments rush to restrict exports, control (ADB) provides the context for the operational
nets, (ii) improvement in access to opportunities, could persist. Hence, policy dialogue domestic prices, and attempt to rebuild stocks in response to the food price crisis. It outlines ADB’s
and (iii) more equal access to improved with member countries is critical to the face of the price increases. short-term and medium-to-long-term operational
opportunities. With this framework in mind, this consider effective options to address responses to the problem.
section explores short- or near-term responses and the immediate impacts of the crisis and This report provides in part II a brief discussion of
medium-to-long-term responses. to restore food price stability. Prudent the underlying causes of the dramatic increase in
macroeconomic management to contain the world prices of staple foods—such as rice and
ADB’s short-term response will include targeted inflation is also critical in the mix of
interventions to protect the food entitlements available policy options.
of the most vulnerable groups and income and
livelihood programs for the poor to mitigate the (c) Input Availability. Although the
immediate impacts of the crisis. ADB will also availability of inputs has improved
consider budget support to hardest-hit countries to in most Asian countries, further
alleviate the fiscal pressures and assist imports of improvements are needed to ensure
food grains and agricultural inputs. that farmers have easy, reliable, and
affordable access to seed, fertilizers,
In the medium to long term, ADB’s assistance pesticides, and credit. Moreover, the
to the agriculture and natural resources sector rapid hikes in the prices of key inputs
would seek to (i) enhance productivity growth; such as fertilizers, pesticides, and fuel
(ii) promote bio-security; (iii) improve access to have created additional hurdles for
information and communication technology; (iv) farmers, which could limit their supply
improve market access and income diversification; response.
(v) encourage better risk management; (vi)
continue the dialogue to deepen and widen policy
mEDIUm-TO-LONGER-TERm ASSISTANCE
reform; and (vii) strengthen institutions, enhance
capacity and skills, and promote good governance.
Such assistance would be considered in the (a) Incentives. Investments in agriculture
broader framework of agriculture’s linkages to the may still not generate the envisaged
rural and wider national economy. returns unless these are accompanied by
reforms, pricing, trade, and other policies.
Since the mid- to the late 1990s, most
SHORT-TERm ASSISTANCE
Asian countries have initiated reforms
aimed to remove distortions arising from
(a) Strengthening safety net programs for interventionist price and trade policies;
food-stressed populations including however, progress has been mixed and
targeted food subsidies and emergency most countries have faltered on the
food security reserves system. The reforms. As a result, farmers in most 1 ADB. 2008. Asian Development Outlook 2008. Manila.
targeted assistance would include Asian countries still make their
2 ADB. 2008. Food Prices and Inflation in Developing
Asia: Is Poverty Reduction Coming to an End? Manila.
12 5
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THE UNDERLYING CAUSES OF HIGH FOOD PRICES
CYCLICAL FACTORS
A number of underlying causes of the recent in reduced aggregate demand and may lead to over 50% leads to a decline in real GDP growth in
surge in global food prices—some cyclical and further economic slowdown. 2008 of 1.05% in the region. The second scenario,
some structural—can be seen most prominently Among the cyclical factors that have been at work a combined food and oil price shock of over 60%,
in the international prices of cereals, particularly are random adverse weather conditions that have The Oxford Economics Global Model is applied results in a GDP growth decline of 1.41% in 2008.
for the two most important staple food grains reduced harvests in key producing countries. to simulate the macroeconomic effects of a food The experiment with the model indicates that
produced and consumed in Asia—rice and wheat. World wheat production declined in 2006 because price shock and then a combined food and oil price GDP growth will continue to abate in 2009 under
The cyclical factors are short-term phenomena of a 60% reduction of output in drought-hit shock in several Asian countries (ERD 2008). The both scenarios. These results are amplified when
that will ease over the year but the structural Australia. Flooding in parts of South Asia and pest results are not to be taken as projections but simply monetary policies are tightened to avoid an inflation
factors are medium to long term and indicate that infestation and cold weather in Viet Nam reduced as experiments using a rigorous economic model. spiral—a necessary cost to these economies if they
the problem of high cereal and food prices will harvests as well in 2007, particularly for rice. The first scenario of a food price shock of wish to return to long-term trend growth.
continue into the foreseeable future. Cyclical and
structural factors may impact the price by raising Declining stocks are likely to have triggered the
demand or by reducing supply. initial spur of speculative demand in recent years
along with the turmoil in global financial markets
World cereal stocks have been falling over the past that has reduced expected returns on bonds,
few years, indicating that growth in consumption equities, and other financial assets relative to
of grains for all purposes has been in excess of commodities. The flow of funds into commodities
growth of production. The current stocks of rice, has also been exacerbated by the weakness in
wheat, and corn are estimated to have fallen by property and housing markets in several industrial
over 40% between 2002 and 2007 (Figure 3). economies.
This decline in stocks is a result of both cyclical
and structural factors and has been an acute Depreciation of the United States (US) dollar
source of volatility in world market prices of rice against currencies of major Asian rice exporters
and wheat. has had the effect of raising dollar prices. The
steep decline of the US dollar against all major
currencies in the past year and its declining to
record lows in recent months have contributed
Figure 3. World Stock of Cereals (end season)
to increase in the prices of “soft” commodities
2005/06–2007/08 (million tons)
including wheat, whose prices are denominated in
US dollars.
200
Precautionary demand for food stocks in many
150
countries is contributing to food grain price
increases. Public food grain agencies and private
100
traders in many countries are replenishing their
depleted stocks in the wake of the surge in
50
international prices of rice and wheat. There
0 have been many instances of raids on private
2005/06 2006/07 2007/08
traders who are accused of hoarding food grains
Coarse grains Wheat Rice (milled) to push up prices and create opportunities for
making windfall profits in the domestic markets.
Source: FAO. April 2008. Crop Prospects and Food Situation. Rome. Such options to contain price hikes are difficult
to implement and have increased prices in the
domestic market of many countries including that
of Bangladesh and the Philippines. Sustained
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ImPACTS
POvERTY ImPACT
Pakistan, a low-income country, the head count procurement by these countries in international real terms (ADO 2008). Agriculture has become
rises by 7.05 million, 14.67 million, and 21.96 markets is also contributing to upward price more energy intensive in the past decade. Both
High food prices are undermining the gains million, respectively. pressures in the global markets. irrigation and fertilizers are critical inputs to
of poverty reduction efforts in Asia in the past the production of high-yielding varieties of food
decade and will make the achievement of the Policy responses (export bans, price floors) of key grains, and these are energy intensive. Energy
mACROECONOmIC ImPACT
Millennium Development Goals difficult. Food rice-exporting countries including the People’s prices rising sharply over the past year and to
expenditures comprise a large share of the Republic of China (PRC), Pakistan, Viet Nam, all-time highs in the past 6 months have fed into
poor’s total expenditures (60%) in Asia. Their As governments move to cushion the impact of and India have increased price volatility and production cost and, hence, food grain prices.
expenditures on food and energy comprise over higher food prices, direct and indirect subsidies uncertainty in the international rice market. Increase in energy costs have translated into high
75% of total consumption expenditures. Millions are likely to increase recurrent public expenditures, Export bans and price controls imposed by input and labor costs. Despite large subsidies
of people in Asia—perhaps as many as 1.2 thus worsening fiscal deficits. Other social safety some countries (PRC, India, Viet Nam, and in Asian countries, domestic energy prices have
billion—are vulnerable to soaring food grain net measures will require effective targeting of Pakistan) have reduced supplies in the world increased 20–50% while fertilizer, irrigation, and
prices. Food price inflation may have seriously assistance; otherwise, these may add to further rice markets and increased uncertainty about transport costs have increased 30–50%. The
eroded their purchasing power, increasing the fiscal pressure. The problem would be more severe future rice supplies, contributing significantly hikes in fuel and energy prices are structural in
severity of food deprivation and malnutrition. in countries with large fiscal deficits like Sri Lanka, to the surge in rice price especially since the nature because they reflect a long-term imbalance
These effects will worsen if the food price Pakistan, India, and Bangladesh. Food subsidies in end of 2007. Although Kazakhstan, Ukraine, between rising incremental oil demand (estimated
surge persists. An important dimension of the Bangladesh are estimated to double in the current and Uzbekistan also imposed bans on wheat at 1.7 million barrels of oil equivalent a day in
present food crisis is that a large segment of fiscal year and reach well above $1.5 billion. exports, the latter two have withdrawn the bans 2008 over 2007) and stagnating production
Asia’s population not only in urban areas but Many Asian countries will experience tightening recently. Nonetheless, this contributed to wheat and supply (with non-OPEC [Organization of
also in rural areas comprises net buyers, a of fiscal space because of larger food subsidies in price volatility. Lack of efficient logistics systems Petroleum Exporting Countries] production having
majority of whom are poor or near-poor. Soaring addition to energy subsidies. and infrastructure for food grain marketing and peaked and OPEC unwilling for political reasons
prices therefore hit them the hardest. Higher distribution in several countries tightened the to expand output).
expenditures on food caused by higher prices Higher food prices will mean higher inflation. market further as experienced by Afghanistan,
also reduce expenditures on health and education Given the large weight of food prices in the Bangladesh, Nepal, Philippines, and Tajikistan. The diversion of cereal use from food to produce
and “squeezes” expenditures that are critically consumer price index basket, inflation rates will Policy options—such as export restrictions and alternative fuel (biofuel) is increasing as oil prices
needed in agricultural inputs—such as fertilizers, rise as a result of a persistent food price increase. minimum export prices—intended to protect become higher. Biofuel demand has contributed to
fuels, and power—to expand food production in If wages also rise as a consequence, inflation domestic consumers reduce incentives to the food crisis in several ways. Since 2000, cereal
response to higher prices. could spiral, causing inflationary expectations to producers and increase uncertainty thereby use for food and feed increased by 4% and 7%,
become embedded in economies, with the general weakening the supply response. Lower-than- respectively, while cereal demand for industrial
Using household expenditure survey data, the level of prices rising further. The prospects of this expected production during a food crisis like the purposes like biofuels jumped by more than 25%
impacts of food price inflation on poverty and happening will be proportionately greater in those present one could keep supplies tight and prolong (FAO 2007). Annually 100 million tons of food
inequality have been analyzed in the cases of countries facing high inflation such as Viet Nam, the crisis. Farmers need to produce more, not grains (corn) are being converted into biofuel. In
the Philippines and Pakistan (ERD 2008). Three Kazakhstan, Tajikistan, and Sri Lanka. less, in the short run and short-term government the US, ethanol subsidies have increased the use
different scenarios are evaluated where alternative policies should target this objective. of corn for biofuel production from 6% of total crop
increases in domestic food prices of 10%, 20%, Higher food prices may dampen economic activity. production to 23% in the past 3 years. Production
and 30% are assumed to occur. The effects Inflation will reduce real income consumption, of biofuel feedstock may also result in substitution
STRUCTURAL FACTORS
estimated are purely price effects that take place saving, and investment, all of which may combine of sugar, palm oil, and soybeans for wheat and
under the assumption of constant per capita to slow down aggregate demand. Should interest rice crops. Thus, while part of the total food grain
expenditure. The results indicate that poverty will rates rise in order to contain inflationary pressures, Rising energy prices and energy intensity of supply is being diverted away from use for human
be worsened in terms of the number of absolutely aggregate demand may be further constrained. the agricultural sector have increased the cost consumption, part of the incremental land used for
poor as measured by the national poverty line. With a strong uptrend in inflation in India, the of critical inputs like fertilizer, fuel, and power. biofuels and feedstocks production is also being
In the Philippines, a middle-income country, the Reserve Bank of India tightened monetary policy, World energy prices have increased rapidly in diverted from production of food grain for human
head count rises by 2.72 million, 5.65 million, resulting in higher interest rates. If interest rates recent years, with per barrel oil prices rising by an consumption. This has tightened wheat, corn, and
and 8.85 million under the three scenarios of are raised as standard policy response to control average of about $10 per year between 2002 and other grain supplies and contributed to the soaring
10%, 20% and 30% increases in food prices. In inflation, the eventual effect would result 2007 in nominal terms and by slightly less in food prices.
10 7
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Soaring Food Prices Response to the Crisis The Underlying Causes of High Food Prices
Land is also being diverted to urban/industrial Wheat yields, for example, grew at an average of Revolution era in India, are now suffering from demand for meat, milk, eggs, and other livestock
uses and competition for scarce freshwater 3.8% a year between 1961 and 1989 but slowed severe soil degradation, groundwater depletion products has increased dramatically. This
resources between agriculture and industry and to 2% a year. In rice, the yield growth fell by more and contamination, and declining yields. translates into indirect food grain (mainly wheat
residential uses also has adversely impacted than half, from 2.3% to 1.1%. In most countries and corn) consumption through animal feed in the
the supply growth that is structural as societies the yield gap between actual and potential is Weather events are likely to increase in intensity livestock industry that is more grain intensive than
undergo urbanization and industrialization. An high and cropping intensity is low. A major cause and frequency because of global warming and is obtaining the same amount of human caloric
ADB study 31shows that the water available for of low food grains productivity is the low rate of climate change. Storms and floods, changes in consumption directly. Meat prices have doubled
agriculture has already declined sharply over capital accumulation in agriculture. rainfall patterns, and rises in sea level are likely since 2000 and butter and milk prices have
the past several decades, particularly in Asia. to increase risks to rice culture and production in tripled. The PRC consumed about 250% more
Water scarcity will be increasingly challenging Productivity growth in agriculture has been many parts of Asia. Although a long-term, structural meat in 2007 than in 1990. India consumed 20%
for the PRC and India, where irrigation water constrained by the pace of development of high- concern, global climate change is likely to adversely more meat, fish, and eggs than in 1990.
consumption as a share of total consumption yielding and pest-resistant varieties. National, impact agricultural output, and cause supply
is projected to decrease by 5–10% by 2050 regional, and international agricultural research disruptions both in the short and longer term. Rice prices are expected to moderate somewhat
compared with 2000. institutions have lacked the resources needed to later in the year due to the supply response.
carry out basic research for varietal development Rising incomes in Asia have driven up food However, overall we regard structural factors to be
Productivity levels are low and food grain yields and follow-up adaptive research and technology consumption significantly over the past decade. dominant over those that are cyclical. Hence the
have stagnated. Yield growth has slowed down dissemination under diverse agroecological Asia’s rising prosperity has steadily increased trend in high food prices will likely persist over the
since the 1990s (Figure 4). In the three decades conditions. At the same time, the capacity of demand for food grains for consumption, animal next few years, if not longer. The era of cheap food
ending in 1989, rising yields accounted for about institutions has remained weak. Enhanced feeds, and industrial use. The demand for food prices and sanguinity about food security may thus
70% of the increase in crop production in the support for agricultural research, technology grain consumption of poor and low-income be over. In the following section, we turn to the
developing countries. However, since the 1990s development, and dissemination is needed quintiles of the population increases more than impacts of high food prices on poverty and living
the growth of yields has slowed significantly. to unleash a “second” Green Revolution. The the growth of incomes. This trend is projected to standards and on the macroeconomic stability in
research and extension systems in most countries continue in the foreseeable future. developing Asia.
cannot cope with the emerging challenges
Figure 4. Cereal Yields in Selected Countries (kg/hectare) including that of ensuring adequate food supply Food grain demand has increased because of
for the growing population without significant greater meat-based consumption in Asia. As
8000 external assistance. incomes and urbanization increase in Asia, the
7000
6000 Policy inadequacies and weak institutions
undermine incentives for agricultural production.
5000
Policy interventions such as food grain support
4000
prices, input subsidies, involvement of public
3000
agencies in food grain imports, marketing,
2000
and distribution tend be ineffective over the
1000
medium term and inhibit supply increases.
0
Examples of such policies, which also constrain
2000 2001 2002 2003 2004 2005 2006
private investment in agriculture, abound in
Argentina India the agriculture sector of many countries. Food
China Philippines
subsidies currently amount to $1 billion in
Australia United States
Bangladesh and $16 billion in India. Such
Indonesia World
subsidies have also contributed to wasteful use
Source: World Development Indicators. 2008. of water resources, degradation of land, and
imbalances in fertilizer use. In fact, the Indian
states of Punjab, Haryana, and Western Uttar
3 ADB and IFPRI. 2008. Reducing Poverty and Hunger in
Asia: The Role of Agricultural and Rural Development. Pradesh, the main success “stories” of the Green
8 9
1st proof_soaring food crisis.indd, Spread 8 of 8 - Pages (8, 9) 5/1/08 12:54 AM
Soaring Food Prices Response to the Crisis The Underlying Causes of High Food Prices
Land is also being diverted to urban/industrial Wheat yields, for example, grew at an average of Revolution era in India, are now suffering from demand for meat, milk, eggs, and other livestock
uses and competition for scarce freshwater 3.8% a year between 1961 and 1989 but slowed severe soil degradation, groundwater depletion products has increased dramatically. This
resources between agriculture and industry and to 2% a year. In rice, the yield growth fell by more and contamination, and declining yields. translates into indirect food grain (mainly wheat
residential uses also has adversely impacted than half, from 2.3% to 1.1%. In most countries and corn) consumption through animal feed in the
the supply growth that is structural as societies the yield gap between actual and potential is Weather events are likely to increase in intensity livestock industry that is more grain intensive than
undergo urbanization and industrialization. An high and cropping intensity is low. A major cause and frequency because of global warming and is obtaining the same amount of human caloric
ADB study 31shows that the water available for of low food grains productivity is the low rate of climate change. Storms and floods, changes in consumption directly. Meat prices have doubled
agriculture has already declined sharply over capital accumulation in agriculture. rainfall patterns, and rises in sea level are likely since 2000 and butter and milk prices have
the past several decades, particularly in Asia. to increase risks to rice culture and production in tripled. The PRC consumed about 250% more
Water scarcity will be increasingly challenging Productivity growth in agriculture has been many parts of Asia. Although a long-term, structural meat in 2007 than in 1990. India consumed 20%
for the PRC and India, where irrigation water constrained by the pace of development of high- concern, global climate change is likely to adversely more meat, fish, and eggs than in 1990.
consumption as a share of total consumption yielding and pest-resistant varieties. National, impact agricultural output, and cause supply
is projected to decrease by 5–10% by 2050 regional, and international agricultural research disruptions both in the short and longer term. Rice prices are expected to moderate somewhat
compared with 2000. institutions have lacked the resources needed to later in the year due to the supply response.
carry out basic research for varietal development Rising incomes in Asia have driven up food However, overall we regard structural factors to be
Productivity levels are low and food grain yields and follow-up adaptive research and technology consumption significantly over the past decade. dominant over those that are cyclical. Hence the
have stagnated. Yield growth has slowed down dissemination under diverse agroecological Asia’s rising prosperity has steadily increased trend in high food prices will likely persist over the
since the 1990s (Figure 4). In the three decades conditions. At the same time, the capacity of demand for food grains for consumption, animal next few years, if not longer. The era of cheap food
ending in 1989, rising yields accounted for about institutions has remained weak. Enhanced feeds, and industrial use. The demand for food prices and sanguinity about food security may thus
70% of the increase in crop production in the support for agricultural research, technology grain consumption of poor and low-income be over. In the following section, we turn to the
developing countries. However, since the 1990s development, and dissemination is needed quintiles of the population increases more than impacts of high food prices on poverty and living
the growth of yields has slowed significantly. to unleash a “second” Green Revolution. The the growth of incomes. This trend is projected to standards and on the macroeconomic stability in
research and extension systems in most countries continue in the foreseeable future. developing Asia.
cannot cope with the emerging challenges
Figure 4. Cereal Yields in Selected Countries (kg/hectare) including that of ensuring adequate food supply Food grain demand has increased because of
for the growing population without significant greater meat-based consumption in Asia. As
8000 external assistance. incomes and urbanization increase in Asia, the
7000
6000 Policy inadequacies and weak institutions
undermine incentives for agricultural production.
5000
Policy interventions such as food grain support
4000
prices, input subsidies, involvement of public
3000
agencies in food grain imports, marketing,
2000
and distribution tend be ineffective over the
1000
medium term and inhibit supply increases.
0
Examples of such policies, which also constrain
2000 2001 2002 2003 2004 2005 2006
private investment in agriculture, abound in
Argentina India the agriculture sector of many countries. Food
China Philippines
subsidies currently amount to $1 billion in
Australia United States
Bangladesh and $16 billion in India. Such
Indonesia World
subsidies have also contributed to wasteful use
Source: World Development Indicators. 2008. of water resources, degradation of land, and
imbalances in fertilizer use. In fact, the Indian
states of Punjab, Haryana, and Western Uttar
3 ADB and IFPRI. 2008. Reducing Poverty and Hunger in
Asia: The Role of Agricultural and Rural Development. Pradesh, the main success “stories” of the Green
8 9
1st proof_soaring food crisis.indd, Spread 7 of 8 - Pages (10, 7) 5/1/08 12:54 AM
ImPACTS
POvERTY ImPACT
Pakistan, a low-income country, the head count procurement by these countries in international real terms (ADO 2008). Agriculture has become
rises by 7.05 million, 14.67 million, and 21.96 markets is also contributing to upward price more energy intensive in the past decade. Both
High food prices are undermining the gains million, respectively. pressures in the global markets. irrigation and fertilizers are critical inputs to
of poverty reduction efforts in Asia in the past the production of high-yielding varieties of food
decade and will make the achievement of the Policy responses (export bans, price floors) of key grains, and these are energy intensive. Energy
mACROECONOmIC ImPACT
Millennium Development Goals difficult. Food rice-exporting countries including the People’s prices rising sharply over the past year and to
expenditures comprise a large share of the Republic of China (PRC), Pakistan, Viet Nam, all-time highs in the past 6 months have fed into
poor’s total expenditures (60%) in Asia. Their As governments move to cushion the impact of and India have increased price volatility and production cost and, hence, food grain prices.
expenditures on food and energy comprise over higher food prices, direct and indirect subsidies uncertainty in the international rice market. Increase in energy costs have translated into high
75% of total consumption expenditures. Millions are likely to increase recurrent public expenditures, Export bans and price controls imposed by input and labor costs. Despite large subsidies
of people in Asia—perhaps as many as 1.2 thus worsening fiscal deficits. Other social safety some countries (PRC, India, Viet Nam, and in Asian countries, domestic energy prices have
billion—are vulnerable to soaring food grain net measures will require effective targeting of Pakistan) have reduced supplies in the world increased 20–50% while fertilizer, irrigation, and
prices. Food price inflation may have seriously assistance; otherwise, these may add to further rice markets and increased uncertainty about transport costs have increased 30–50%. The
eroded their purchasing power, increasing the fiscal pressure. The problem would be more severe future rice supplies, contributing significantly hikes in fuel and energy prices are structural in
severity of food deprivation and malnutrition. in countries with large fiscal deficits like Sri Lanka, to the surge in rice price especially since the nature because they reflect a long-term imbalance
These effects will worsen if the food price Pakistan, India, and Bangladesh. Food subsidies in end of 2007. Although Kazakhstan, Ukraine, between rising incremental oil demand (estimated
surge persists. An important dimension of the Bangladesh are estimated to double in the current and Uzbekistan also imposed bans on wheat at 1.7 million barrels of oil equivalent a day in
present food crisis is that a large segment of fiscal year and reach well above $1.5 billion. exports, the latter two have withdrawn the bans 2008 over 2007) and stagnating production
Asia’s population not only in urban areas but Many Asian countries will experience tightening recently. Nonetheless, this contributed to wheat and supply (with non-OPEC [Organization of
also in rural areas comprises net buyers, a of fiscal space because of larger food subsidies in price volatility. Lack of efficient logistics systems Petroleum Exporting Countries] production having
majority of whom are poor or near-poor. Soaring addition to energy subsidies. and infrastructure for food grain marketing and peaked and OPEC unwilling for political reasons
prices therefore hit them the hardest. Higher distribution in several countries tightened the to expand output).
expenditures on food caused by higher prices Higher food prices will mean higher inflation. market further as experienced by Afghanistan,
also reduce expenditures on health and education Given the large weight of food prices in the Bangladesh, Nepal, Philippines, and Tajikistan. The diversion of cereal use from food to produce
and “squeezes” expenditures that are critically consumer price index basket, inflation rates will Policy options—such as export restrictions and alternative fuel (biofuel) is increasing as oil prices
needed in agricultural inputs—such as fertilizers, rise as a result of a persistent food price increase. minimum export prices—intended to protect become higher. Biofuel demand has contributed to
fuels, and power—to expand food production in If wages also rise as a consequence, inflation domestic consumers reduce incentives to the food crisis in several ways. Since 2000, cereal
response to higher prices. could spiral, causing inflationary expectations to producers and increase uncertainty thereby use for food and feed increased by 4% and 7%,
become embedded in economies, with the general weakening the supply response. Lower-than- respectively, while cereal demand for industrial
Using household expenditure survey data, the level of prices rising further. The prospects of this expected production during a food crisis like the purposes like biofuels jumped by more than 25%
impacts of food price inflation on poverty and happening will be proportionately greater in those present one could keep supplies tight and prolong (FAO 2007). Annually 100 million tons of food
inequality have been analyzed in the cases of countries facing high inflation such as Viet Nam, the crisis. Farmers need to produce more, not grains (corn) are being converted into biofuel. In
the Philippines and Pakistan (ERD 2008). Three Kazakhstan, Tajikistan, and Sri Lanka. less, in the short run and short-term government the US, ethanol subsidies have increased the use
different scenarios are evaluated where alternative policies should target this objective. of corn for biofuel production from 6% of total crop
increases in domestic food prices of 10%, 20%, Higher food prices may dampen economic activity. production to 23% in the past 3 years. Production
and 30% are assumed to occur. The effects Inflation will reduce real income consumption, of biofuel feedstock may also result in substitution
STRUCTURAL FACTORS
estimated are purely price effects that take place saving, and investment, all of which may combine of sugar, palm oil, and soybeans for wheat and
under the assumption of constant per capita to slow down aggregate demand. Should interest rice crops. Thus, while part of the total food grain
expenditure. The results indicate that poverty will rates rise in order to contain inflationary pressures, Rising energy prices and energy intensity of supply is being diverted away from use for human
be worsened in terms of the number of absolutely aggregate demand may be further constrained. the agricultural sector have increased the cost consumption, part of the incremental land used for
poor as measured by the national poverty line. With a strong uptrend in inflation in India, the of critical inputs like fertilizer, fuel, and power. biofuels and feedstocks production is also being
In the Philippines, a middle-income country, the Reserve Bank of India tightened monetary policy, World energy prices have increased rapidly in diverted from production of food grain for human
head count rises by 2.72 million, 5.65 million, resulting in higher interest rates. If interest rates recent years, with per barrel oil prices rising by an consumption. This has tightened wheat, corn, and
and 8.85 million under the three scenarios of are raised as standard policy response to control average of about $10 per year between 2002 and other grain supplies and contributed to the soaring
10%, 20% and 30% increases in food prices. In inflation, the eventual effect would result 2007 in nominal terms and by slightly less in food prices.
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