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Understanding the Global Food Situation and Possible Policy Options Robert W. Herdt Cornell-India Food and Agribusiness Management Program June 25, 2009 Rising global food grain prices Sep 2005 to Mar 2008 Monthly world price of commodities Source of raw data: The Pinksheet, World Bank

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understanding the global food situation and possible policy options

Understanding the Global Food Situation and Possible Policy Options

Robert W. Herdt

Cornell-India Food and Agribusiness Management Program

June 25, 2009

slide3

Rising global food grain prices Sep 2005 to Mar 2008

Monthly world price of commodities

Source of raw data: The Pinksheet, World Bank

RW Herdt June 2009

why is was there a crisis
Why is/was there a crisis?
  • Long Run Trends set the stage
    • Abundant production, falling prices
    • Results:
      • Declining Investments
      • Declining research
      • Declining aid to agriculture
      • All reduced growth rate of production capacity
    • Changing Structure of Demand
  • Short run shocks led to tipping point
    • Declining stocks => Hoarding
    • Weather
    • Inappropriate policies

RW Herdt June 2009

slide5

Long-run factors

  • Demand factors
    • Population – growing but slowing
    • Income – slowing and accelerating
    • Preferences – changing
  • Supply trends
    • 1965-2000: Sufficient supply => Falling prices
    • => Declining R&D, Declining Ag investment
    • Competition for water, land

RW Herdt June 2009

global population is growing
Global Population is Growing

RW Herdt June 2009

http://www.prb.org/template.cfm?Section=Educators

slide7
The rate of population growth is slowing, but there is no certain way to know how large the World’s population will eventually get

http://www.prb.org/template.cfm?Section=Educators

RW Herdt June 2009

slide8

World per capita income 1600-2003: Grew slowly for centuries, recently accelerated (1990 international dollars, Brad DeLong & Angus Maddison)

RW Herdt June 2009

slide9

…but not at the same rate everywhere

(1820-2003; 1990 international dollars)

RW Herdt June 2009

slide10

World food production grew faster than demand

and drove down prices (here, rice) 1961-2000

World Production

Real price of milled rice (2008) US$/ton)

Production of unmilled rice (million MT)

Real price

Source: Production: USDA, 14April2008

Rice Price: 2008 is average of Jan-March 2008. Relate to Thai rice 5%-broken deflated by G-5 MUV Index deflator (adjusted based on February 27, 2008 data update)

Source: www.,WorldBank.org

RW Herdt June 2009

slide11

All food commodities prices fell 1960-2001 (international prices,, constant 1990 US$)

RW Herdt June 2009

slide12

2.5

2.0

1.5

1.0

0.5

0

1960

1990

1965

1970

1975

1985

1995

2005

2000

1980

LR Response 1.

Investment in Irrigation

World Bank lending (billions of 1990 US dollars)

Source: R. Barker

RW Herdt June 2009

slide13

LR Response 2: Public agricultural R&D

D. Byerlee et al., www.worldbank.org/WDR2008

Dobermann, 2008

RW Herdt June 2009

lr response 3 aid to ag sub sectors oecd 5 year moving average million deflated
LR Response 3: Aid to ag sub-sectorsOECD 5-year moving average, million $, deflated

RW Herdt June 2009

Source: Compiled from OECD

lr response 3 us aid to agriculture
LR Response 3: US aid to Agriculture

$ million

RW Herdt June 2009

slide16

LR Response 4: Food Demand

Source:

As per capita incomes rise, calorie intake rises at a decreasing rate

(105 countries in 1990 and 2000) Source: Lotz-Campen et. al. Agricultural Economics 2008

RW Herdt June 2009

lr response 4 income growth is driving demand for high resource requiring foods
LR Response 4. Income growth is driving demand for high resource-requiring foods

Per capita income growth %/yr

Per capita consumption kg/yr

It takes 3-5 kg grain to produce 1 kg milk or meat

RW Herdt June 2009

Sources: World Bank and FAOSTAT

lr response 4 food demand
LR Response 4: Food Demand
  • Tastes and habits are strong, but they DO change
  • Quantity consumed and tastes change as incomes change
  • The higher their income, the less people respond to food prices
  • With high incomes comes reduced demand for grain, increased demand for meat, milk, fruits

RW Herdt June 2009

why is there a crisis now
Why is there a crisis now?
  • Long Run Trends set the stage, but have been slowly changing over decades and hence cannot account for the sudden sharp upswing in 2008
    • Abundant production, falling prices
    • Results:
      • Declining Investments
      • Declining research
      • Declining aid to agriculture
      • All reduced growth rate of production capacity
    • Changing Structure of Demand
  • Short run shocks led to tipping point
    • Sudden changes in demand
      • Declining stocks => Hoarding
      • Financial speculators
    • Sudden change in supply
      • Weather
      • Export “bans” or Import incentives

RW Herdt June 2009

slide20

Short run factors

  • Demand for agricultural output
    • Burning food as fuel – a new demand factor
    • Upsurge in oil price: reinforces above
    • Financial speculators
    • Panic hording
  • Supply of agricultural output
    • Weather
    • Trade restrictions

RW Herdt June 2009

usa corn and ethanol production
USA Corn and Ethanol Production

percent

Source: Renewable Fuels Association and USDA

RW Herdt June 2009

sr factor 1 ethanol
SR factor 1:Ethanol

Drivers of ethanol demand in US

  • Energy Independence and Security Act of 2007 (EISA) mandates renewable fuels production level until 2022.
  • EISA requires the production of
    • 13 billion gallons of renewable fuels by 2010
    • 36 billion gallons by 2022 – 21 bil “advanced” biofuels
      • Corn based ethanol capped at 15 billion gallons.

Source: Andrew Muhammad and Ellene Kebede, Choices 2009

RW Herdt June 2009

are oil prices driving food prices
Are oil prices driving food prices?
  • Oil is priced in dollars;
    • when the dollar depreciates against the Euro, Yen, Pound, etc.,
    • oil sellers demand more dollars per bb
    • to receive the same Euro buying power
  • Oil at >$critical price/bbl means high-priced gasoline and make crop-based biofuel cost-competitive
  • Oil <$critical price/bbl means no more than current corn use for ethanol – cannot make a ROI
  • The “actual” critical price is unknown, maybe $100-$150
  • Oil and oil-based fertilizer are important agricultural inputs, so food production costs depend on oil prices in the input-intensive countries

RW Herdt June 2009

sr factor 1 ethanol food demand
SR factor 1: Ethanol & Food Demand
  • Tastes and habits are strong, but they DO change
  • The higher their income, the less people respond to food prices
  • Tastes change as incomes change
  • With high incomes comes reduced demand for grain, increased demand for meat, milk, fruits
  • Biofuel is a “new” demand for grain and biomass, with characteristics unlike food demand

RW Herdt June 2009

sr factor 2 weather e g wheat tracked by usda available on www
SR factor 2:Weathere.g. wheat (tracked by USDA; available on www)

U.S. wheat supplies for 2009/10 are lowered 10 mil bu this month

Soft red winter wheat, forecast down 7 million bushels;

Hard red winter wheat forecast 4 million bushels lower;

Small increase in white winter wheat;

Use is 20 million bushels lower based on higher projected prices;

Ending stocks projected 10 million bushels higher.

The 2009/10 average farm price projected $4.90 to $5.90 per bushel

Global wheat supplies 2009/10 projected lower 1.6 mil tons this month

EU-27 production is lowered 2.3 million tons from lower expected yields in Hungary, Romania, and Spain where dryness has reduced crop prospects.

Increases for France and Denmark are partly offsetting.

Production for Canada is lowered 1.0 million tons on dryness in Alberta and western Saskatchewan and on unseasonably cool temperatures

Ukraine production is reduced 1.0 million tons, persistent April and May dryness

Russia production is raised 1.0 million tons on higher area and abundant moisture

China is raised 0.5 million tons on higher area

North Africa and Syria reflect higher expected yields.

Etc… projected use, stocks

RW Herdt June 2009

slide27

World production and stock data revised monthly;

Available on the web

RW Herdt June 2009

slide28

Grains, cotton, oilseeds

USA and World

June-Dec

(and two earlier years)

RW Herdt June 2009

slide30

Recent reports in Science by visitors indicate

rice production in Burma has recovered.

RW Herdt June 2009

slide32

SR impact 3:Declining rice stocks

2000s

1990s

Source of raw data: PSD Online (www.fas.usda.gov/psdonline/psdhome.aspx), USDA, 2008

RW Herdt June 2009

sr impact 3 global stocks
SR Impact 3: Global stocks

Source: USDA

RW Herdt June 2009

sr impact 4 trade speculation
SR Impact 4: Trade, speculation?
  • Export restrictions (as of April 2008) imposed by:
    • India, Pakistan, China, Vietnam
    • Argentina, Bangladesh, Bolivia, Cambodia, Egypt, Ethiopia, Kazakhstan, Malaysia, Russia, Tanzania, Zambia
  • Reduced import barriers
    • A move to open trade, added upward pressure on prices.
      • Morocco cut tariffs on wheat imports from 130 to 2.5%;
      • Nigeria slashed duties on rice imports from 100 to 2.7%;
      • Peru removed import taxes on wheat and maize; and
      • Senegal waived duties on cereal imports.
  • Statistical tests to determine the role of speculative activity in commodity prices. See next slide:

Source: Von Braun and Torero; Choices 2009

RW Herdt June 2009

slide35

SR Impact 4: Speculation in commodity trading markets? Evidence

Source: Von Braun and Torero, Choices 2009

RW Herdt June 2009

sr impact 4 trade speculation36
SR Impact 4: Trade, speculation?
  • Export restrictions (as of April 2008) imposed by:
    • Argentina, Bangladesh, Bolivia, Cambodia, China, Egypt, Ethiopia, India, Kazakhstan, Malaysia, Pakistan, Russia, Tanzania, Vietnam, and Zambia – some are major exporters
  • Reduced import barriers
    • A move to open trade, added upward pressure on prices.
      • Morocco cut tariffs on wheat imports from 130 to 2.5%;
      • Nigeria slashed duties on rice imports from 100 to 2.7%;
      • Peru removed import taxes on wheat and maize; and
      • Senegal waived duties on cereal imports.
  • Statistical tests to determine the role of speculative activity in commodity prices. See next slide:
  • 6 of 24 statistical tests suggest that speculation might have been influential – 18 of 24 do not support the suggestion

Source: Von Braun and Torero; Choices 2009

RW Herdt June 2009

sr impact 5 policy irrationality one of many slayton and timmer 2008
SR Impact 5: Policy irrationality (one of many!)(Slayton and Timmer, 2008)
  • Japan imports US rice under WTO pressure
    • Japanese consumers don’t like US rice
    • Japanese government doesn’t want them to become accustomed to US rice
    • Japanese government stores rice until it is OK only for livestock feed
  • Hence, Japan has stock it could export, but, under WTO rules:
    • Japan must have US “permission” to re-export rice, even in time of “crisis”

RW Herdt June 2009

slide38

Markets react sharply to SR factors (rice prices)

Monthly export price of Thai rice 5% brokens, 1990-2008

(January 1990 to March 2008)

1990s

2000s

Source of raw data: The Pinksheet, World Bank

RW Herdt June 2009

slide39

Why does all this matter so much?

The New York Times: Editorial

RW Herdt June 2009

slide40

Fortunately, entire world price increase is not passed through to domestic markets:Percent of 2003-06 world rice price increase passed through

RW Herdt June 2009

Source: Dawe, FAO ESA Working Paper 08-03

impact of 50 price increase of staples on high and low income consumers
Impact of 50% price increase of staples on high and low income consumers

Source: Trostle 2008

RW Herdt June 2009

impact of 50 price increase of staples on high and low income consumers42
Impact of 50% price increase of staples on high and low income consumers

RW Herdt June 2009

Source: Trostle, 2008

but high global prices increase food aid costs and hurt hungry people
But, high global prices increase food aid costs and hurt hungry people

Source: FAO State of Food and Agriculture and State of Food Insecurity

RW Herdt June 2009

slide44

LR and SR factors led to sharply moving prices 2007-2009

World Bank’s reported monthly world price of commodities

Crude Oil

RW Herdt June 2009

Source of dada: http://siteresources.worldbank.org/INTDAILYPROSPECTS/Resources/Pnk_0709.xls and later

slide45

Have grain prices permanently increased?

Nominal monthly farm price of corn in Illinois,

January 1947 – January 2009 and projected future range

Source: Choices; Scott H.Irwin and Darrel L.Good, 2009

RW Herdt June 2009

have grain prices permanently increased quantitative analysis conclusions
Have grain prices permanently increased? Quantitative analysis conclusions
  • First: Likely that there has been a permanent shift in the level of corn, soybean, and wheat prices.
    • Size?
  • Second: Peak prices since December 2006 were well above average prices projected; even higher prices might occur.
  • Third: Prices might still move to “low” levels and might stay there for considerable periods.
  • Fourth: A new era of crop price levels and volatility has begun.

Source: Irwin & Good, Choices, 2009

RW Herdt June 2009

slide47

Monday, July 2

A Rice Crisis Is Boiling

Rice is life

itself in Southeast Asia, and this year, there is not enough to go around. Last year’s bad weather has turned the region’s usual bare sufficiency into severe shortage.

The result: smuggling, hoarding, soaring prices and hungry people.

RW Herdt June 2009

slide48

A Rice Crisis Is Boiling

Monday, July 02, 1973

Rice is life

itself in Southeast Asia, and this year, there is not enough to go around. Last year’s bad weather has turned the region’s usual bare sufficiency into severe shortage.

The result: smuggling, hoarding, soaring prices and hungry people.

Thanks to

Randy Barker!

RW Herdt June 2009

slide49

World Rice Market: A Special Case?

RW Herdt June 2009

Source: USDA

policy responses
Policy responses?
  • Eliminate artificial trade barriers
  • Provide emergency food assistance
  • Allow price signals to do their “work”
  • Reduce subsidies to ethanol
  • Eliminate mandated blending of ethanol
  • Reinvigorate global agricultural research
  • Build infrastructure and institutions in SS Africa
  • Direct agricultural research aid to SS Africa

RW Herdt June 2009

policy advice can have an effect sometimes
Policy advice can have an effect (sometimes)
  • Japan imports US rice under WTO pressure but:
    • Japanese consumers don’t like US rice
    • Japanese government doesn’t want them to become accustomed to US rice
    • Japanese government stores rice until it is OK only for livestock feed
    • Japan must have US “permission” to re-export rice, even in time of “crisis”
  • 5/9 Under pressure from economists at the Center for Global Development, Congress presses USTR office to give permission to Japan; that happens
  • 5/19 World rice prices fall back from ultra-high levels

RW Herdt June 2009

conclusions
Conclusions
  • 2008 crisis results from both trends and shocks
  • Population grows in a rather steady trend
  • Income trends are less predictable. They have accelerated in Asia and are beginning to in Africa
  • Rising incomes increases food demand in fairly predictable ways, reduces sensitivity to prices
  • Long time falling food prices undermined investments in supply; biofuel conversion added demand
  • Shocks from weather, oil price increases, and export bans caused prices to shoot up
  • In the 1970s sharp increases were short-lived as research-generated technology drove productivity
  • Short run-impact on vulnerable people should be the focus of urgent policy attention; don’t neglect long-term
  • Food Price increases will moderate by 2010
  • Renewed downward price trends will require investments

RW Herdt June 2009

thank you
Thank You !

RW Herdt June 2009