Food Price Trends and Volatility Some Stylized Facts

1. Food Price Trends and VolatilitySome Stylized Facts SaileshTiwari Hassan Zaman Poverty Reduction and Equity (PREM) April 22, 2011

2. Food prices have increased

3. Comparing price changes

4. Causes of price increases • Severe weather events in key grain exporters since June 2010 with export restrictions • Higher corn prices knock-on impacts on other products (animal feed and meat) • Passthroughbetween higher oil prices, agriculture costs and bio-fuels. • Financial market speculation ? • Amidst medium run context of depleted and increasing demand

5. The importance of stocks

6. Historical perspective

7. How are the current food shocks different from the past? Some drivers of the food price crisis in the mid-70s: 1. Weather shocks: “..in 1972, a series of bad weather events transpired to afflict crops across the globe..” 2. Growing demand: “.. apparent inability, or unwillingness, of poor, food insecure countries to restrain population growth rates embittered many policy-makers and economists, who were forewarning that their profligacy would undermine progress in the green revolution..” 3. Fuel price shock: “.. The quadrupling of the market price of petroleum posed a real threat to the green revolution, since the success of the hybrids was heavily dependent on pesticides, herbicides and nitrogen-based fertiliser applications, all of which are derived from petroleum..” • Protectionist trade policies. “….the United States, Canada, the former Soviet Union and much of Asia gathered poor crops in that year as a result of bad weather. At the end of the year, world cereal reserves had reached a 22-year low, equal to about 26 days supply, compared with a 95-day supply in 1961. To make matters worse, the United States government banned the exportation of 10 million tons of grain…”

8. Potential threats? • Diversion of food items into industrial uses, particularly bio-fuels. • Energy price volatility. • Growing incidence of extreme weather events.

9. Reported incidence of droughts, floods and extreme temperature events

10. Food-fuel linkages

11. Global vs. domestic price differences

12. Large and varying price changes in domestic prices

13. Heterogeneities within country

14. Food price increases feeding into food inflation

15. Europe and Central Asia – Food Inflation

16. Poorer countries hit harder

17. Food share of the budget of the poor

18. Impacts • Deepening poverty: The increase in food prices since mid-June 2010 has led to an estimated 44 million net addition to the number of the global poor • In Mexico, an index measuring the share of people who cannot afford the minimum consumption basket with their labor income increased by about 5% between the second and fourth quarter of 2010. • The poor have a lower ability to cope with such shocks and resort to eating less and consuming poorer diets, which can have long-term nutritional consequences. • Significant differences in price movements within countries and therefore vulnerability to localized food insecurity.

19. Policy implications Immediate • Targeting social assistance and nutritional programs to the poorest. • Countervailing macro/monetary-policy measures to curb food inflation driving core inflation. • External financing needs assessment of net commodity importers (both food and fuel). Medium term • Income growth and general poverty reduction. • Investments to improve agricultural productivity, supply chain, logistical dimensions. • Relaxing bio-fuel mandates when food prices exceed a threshold level to reduce demand for food crops. • Code of conduct on export restrictions.

20. Thank you. For more information visit: http://www.worldbank.org/poverty