In January 2011, the international food price index surpassed levels reached during the 2007-08 food crisis. According to a new UNICEF working paper (see reference), extreme price movements of agricultural commodities not only threaten the food security of millions of people but also the economic recovery and social stability of developing countries. Isabel Ortiz, Jingqing Chai and Matthew Cummins present the main findings of their paper.
Fig. 1: Price Indices (Jan 2007=100)
The paper: (i) briefly reviews possible causes of the food price spike that began in mid-2010 (see Figure 1); (ii) examines recent local food price movements in 58 developing countries during 2010; (iii) discusses the adverse impacts of food price increases on households; (iv) presents a rapid desk review of international and domestic policy responses in 98 developing countries under a three-pillar policy framework – supporting consumption, boosting production and regulating/managing food markets; and (v) calls for urgent and coordinated policy actions by national governments and the international community.
Financial speculation, food prices and the case for enhanced regulation
There has been a significant increase of financial flows into commodities over the past five years. Between 2005-10, the number of futures and options traded globally on commodity exchanges nearly quadrupled reaching more than 66 million contracts in late 2010 - not including OTC trades - of which trading in food commodities accounts for a small but fast-growing share (Figure 2). Unregulated OTC activities also exploded during this period, reaching a nominal outstanding amount of $12 trillion in non-gold commodity contracts in 2008 (Bank for International Settlements 2010). Excess liquidity in financial markets played a significant role in this rapid increase, as major institutional investors, which were generally unconcerned with agricultural market fundamentals but rather in gaining short-term returns, moved into commodity derivatives markets, generating a commodity bubble.
Commodity futures are instruments that, in principle, should be useful to producers and consumers as they "hedge" against price risks. However, only 2% of futures contracts end in the actual delivery of the physical commodity, while 98% are traded before their expiration date by investors who are purely seeking speculative gains (FAO 2010e). Such activities have contributed to excessive fluctuations in food commodity futures prices and distorted signals for expected prices (Figure 3). By doing so, speculation impedes practical hedging strategies and imposes significant unanticipated costs and undue burden on food farmers, processors and distributors, potentially contributing to unwarranted changes in local food costs (United States Senate 2009).
Given that speculative activity can potentially yield life and death consequences for millions of people across the developing world, the UN and the G20 have called for urgent regulatory actions to improve the functioning and transparency of financial commodity markets to address excessive commodity price volatility (United Nations 2009, UNCTAD 2009a-b, G20 Summits Leaders Statement 2009 and 2010).
Fig. 2 (left): Outstanding Contracts on Commodity Exchanges (in millions of futures and option) - Fig. 3 (right): Price Volatility of Selected Staple Foods (in %)
After outlining the possible causes of soaring global food prices, including weather shocks, exchange rate fluctuations and financial speculation, the paper analyzes local food price trends in 58 developing countries using data from the Food and Agriculture Organization’s (FAO) Global Information and Early Warning System (GIEWS).
* More than two-thirds of developing countries suffer
The paper finds local food price increases in more than two-thirds of developing countries in our sample during the latter half of 2010, closely trailing those in global food markets, at a slower but still substantial rate of increase. More importantly, on the aggregate domestic food price levels have remained alarmingly high compared to pre-2007-08 crisis levels (about 55 percent higher, on average, in November 2010 compared to May 2007), implying that poor and vulnerable populations in many developing countries have been relentlessly coping with high food costs.
Since 2008, poor households have exhausted coping strategies, such as eating fewer meals, cutting health expenditures, increasing debt and working longer hours in the informal sector, and their capacity for resilience is very limited in 2011. In the recent uptick, the CEE/CIS, Latin America and South Asia regions appear to be those hardest hit.
* Fiscal consolidation aggravates the problem
In light of the danger that unabated increases in food prices pose to the right to food, the MDGs and social stability, the paper presents a rapid desk review of national policy responses in 98 developing countries to draw insights on what is needed to tackle the renewed food price threat. This requires a twin-track approach of short and long-term interventions, supporting consumers and poverty reduction, boosting agricultural production and regulating markets. We further propose a child lens as a guiding principle for designing policy responses to food price increases and achieving food security.
Moreover, as many developing country governments are undergoing fiscal consolidation and cutting social protection services and food subsidies in the process, we call for a turn from austerity-based fiscal policies to inclusive responses in developing countries that are threatened by rising food prices. Urgent policy actions are needed both at national and international levels to ensure a “Recovery for All” that will eradicate hunger and malnutrition among children and poor households.
Reference: * Isabel Ortiz/Jingquing Chai/Matthew Cummins, Escalating Food Prices: The threat to poor households and policies to safeguard a Recovery for All, 47 pp, UNICEF: New York, February 2011. Available at: www.unicef.org
Isabel Ortiz is Associate Director, Jingqing Chai is Senior Advisor and Matthew Cummins is Staff Consultant at UNICEF.
Posted: 20 Feb 2011
Recommended citation: Ortiz, Isabel/Jingquing Chai/Matthew Cummins (2011) 'The recent escalation of food prices. How local people in the South are affected', World Economy & Development In Brief, 20 Feb 2011, Luxembourg (www.wdev.eu)
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