The State of Agricultural Commodity Markets 2009 - FAO.org

2009The State ofAgricultural Commodity MarketsHigh food prices and the food crisis –experiences and lessons learned

Key messages1In June 2008, the prices of basic foods on international markets reached theirhighest levels for 30 years, threatening the food security of the poor worldwide. In2007 and 2008, mainly because of high food prices, an additional 115 millionpeople were pushed into chronic hunger.2Since then, prices have declined, driven lower by the financial crisis, emergingworld recession, falling oil prices and an appreciating US dollar. However, theyare still high by recent historical standards and the structural problems underlyingthe vulnerability of developing countries to international price increases remain.3Many factors contributed to the dramatic increase in world food prices, but newbiofuel demands and record oil prices were the major drivers, leading someanalysts to ask whether new linkages between food and energy markets havebroken the long-run downward trend in real agricultural commodity prices.4High product prices did not prove to be an opportunity for farmers in developingcountries. They did not seize that opportunity to invest and raise their productionand productivity because the high prices did not filter through to them, theiraccess to affordable inputs was limited, their available technology was weak,necessary infrastructure and institutions were lacking and some policy responses(such as price controls and tariff reductions) actually reduced incentives.5The need to protect consumers from higher food prices must be balanced againstmaintaining incentives for productivity-raising investment and supply response.Policy measures need to be targeted, non-distortionary and positive towardsagricultural investment.6Many developing countries need international support to overcome budgetaryconstraints and to identify and implement appropriate policies. Developedcountries also need to consider the impacts of their agriculture, trade and energypolicies on international food prices and availability.

2009The State ofAgricultural Commodity MarketsHigh food prices and the food crisis –experiences and lessons learned

Produced by theElectronic Publishing Policy and Support BranchKnowledge and Communication DepartmentFAOThe designations employed and the presentation ofmaterial in this information product do not imply theexpression of any opinion whatsoever on the part ofthe Food and Agriculture Organization of the UnitedNations (FAO) concerning the legal or developmentstatus of any country, territory, city or area or ofits authorities, or concerning the delimitation of itsfrontiers or boundaries. The mention of specificcompanies or products of manufacturers, whether ornot these have been patented, does not imply thatthese have been endorsed or recommended by FAOin preference to others of a similar nature that are notmentioned.ISBN 978-92-5-106280-7All rights reserved. Reproduction and disseminationof material in this information product for educationalor other non-commercial purposes are authorizedwithout any prior written permission from the copyrightholders provided the source is fully acknowledged.Reproduction of material in this information productfor resale or other commercial purposes is prohibitedwithout written permission of the copyright holders.Applications for such permission should be addressedto the Chief, Electronic Publishing Policy and SupportBranch, Communication Division, FAO, Viale delleTerme di Caracalla, 00153 Rome, Italy or by e-mail tocopyright@fao.orgAcknowledgementsThe State of Agricultural Commodity Markets 2009was written by a team of staff from the Trade andMarkets Division of FAO, led by David Hallam.The report was prepared under the overall guidanceof Hafez Ghanem, Assistant Director General of FAO’sEconomic and Social Development Department, andAlexander Sarris, Director of the Trade and MarketsDivision.Acknowledgement is given to the overallcontribution of Pedro Arias and to the particularcontributions of Adam Prakash on trends and volatilityin agricultural commodity prices, Abdolreza Abbassianon cereal prices, Josef Schmidhuber on biofuels,Hansdeep Khaira on speculation, Merritt Cluff andHolger Matthey on the outlook for commodity prices,George Rapsomanikis on price transmission,Jamie Morrison on supply-side constraints and supplyresponse, Liliana Balbi, Ramesh Sharma andManitra Rakotoarisoa on policy responses andAlexander Sarris on financing arrangements for foodimports.The report benefited from detailed review andcomment by colleagues throughout the FAO Economicand Social Development Department. Special mentionshould be made of the contributions of Hafez Ghanem,Alexander Sarris, Marcela Villarreal, Keith Wiebe,Josef Schmidhuber, Jelle Bruinsma, Kostas Stamoulis,David Marshall, Hiek Som, Henri Josserand andAbdolreza Abbassian.© FAO 2009Copies of FAO publications can be requested from:Sales and Marketing GroupCommunication DivisionFood and Agriculture Organizationof the United NationsE-mail: publications-sales@fao.orgFax: (+39) 06 57053360Web site: www.fao.org/icatalog/inter-e.htmNote:Unless otherwise stated, data for China alsoinclude those for Taiwan Province of China,Hong Kong Special Administrative Region andMacao Special Administrative Region.Cover photos (from top to bottom):© FAO/Roberto Faidutti© FAO/Giuseppe Bizzarri© FAO/KCII© FAO/Giuseppe Bizzarri© FAO/Giulio Napolitano

Contents4 About this report6 Foreword8 Part 1. What happened to world food prices and why?9 World food price inflation in 2007–0815 Why did food prices increase so much?26 The impacts of high food prices30 Part 2. Why were high food pricesnot an opportunity for poor farmers?31 Do world price increases reach developing country producers?35 Prices increased but so did costs36 Supply-side constraints38 Part 3. What should the policy response be?39 What are the policy problems?40 How have developing countries responded?42 What policy measures should be taken?47 The need for international action54 Annex54 Table 1. Policy responses to rising commodity prices in selected countries58 Table 2. Trends in real commodity prices59 Table 3. Monthly commodity prices, nominal terms61 Further reading and information62 FAO Trade and Markets Division publications, 2006–08The State of Agricultural Commodity Markets 2009 3

About this reportIn the second half of 2006, worldprices of most major foodcommodities began to climb. By thefirst half of 2008, international US dollarprices of cereals had reached theirhighest levels in almost 30 years,threatening the food security of the poorworldwide and provoking widespreadinternational concern over anapparent world food crisis. While thesecond half of 2008 saw a rapid fall ininternational food prices as oil pricestumbled and the financial crisis andglobal recession reduced demand,prices are well above the levels seen inrecent years and are expected to remainso. Many poor consumers still face highor rising food prices. Furthermore, whileinternational food prices may havefallen, many of the adverse supply andmarket conditions remain unchanged.The fall in prices was not caused by anywidespread expansion in foodavailability. In most developingcountries, there was no positive supplyresponse to high food prices.Therefore, it is timely to review whathappened and why, and to consider whatlessons (especially for policy) might belearned.While the broad facts of the “soaringfood prices” episode may be well known,questions remain concerning therelative importance of the various factorssuggested as being responsible, whethernew developments have led to afundamental change in marketbehaviour, and whether high pricesmight be expected to be the norm fromnow on. How governments and theinternational community should responddepends on the answers to thesequestions. Furthermore, while thedramatic price increases and the plightof poor consumers dominated theworld’s media, the impact on pooragricultural producers attracted far lessattention. Following years of lowagricultural product prices, high pricesshould have been an opportunity forpoor producers to improve their incomesand an incentive to increase their outputfor the benefit of all. Why was thisapparently not so?The State of Agricultural CommodityMarkets 2009 begins by reviewing thenature of price increases on worldmarkets and how these become higherfood prices for individual consumers andagricultural producers. Agriculturalcommodity prices have always beenhighly variable, but around a long-rundownward trend. However, somecommentators and analysts havesuggested that there are now new factorsat work, especially the expansion ofbiofuel production, that mean that foodprices will not return to their historicaltrend. As yet, the available evidence isnot conclusive, although some marketfundamentals could indeed suggest theend of so-called “cheap food”. Whatthose features are and how they haveinfluenced food prices are looked at insome detail.Particular attention is focused on theextent to which the different explanations –biofuel demand, record oil prices andincreasing food demand arising fromrapid economic growth in China andIndia – can account for the sudden foodprice inflation witnessed around theworld and on what the role was of thetraditional market drivers such as lowstock levels or weather-related supplyshortfalls. The questions of whether thesituation was exacerbated by inflows ofspeculative funds or policy measuresintroduced by governments are alsodiscussed. In practice, while biofueldemand and high oil prices arguably hadthe major impact, all of these factorsplayed some role and interacted toproduce the jump in food prices. Severalof these factors are likely to have apersistent effect, so a return of foodprices to their previous levels is unlikelyin the short term.The State of Agricultural CommodityMarkets 2009 assembles the evidence onThe State of Agricultural Commodity Markets 2009 4

the impacts of high food prices. Thenegative food security impact of higherfood prices is greatest on developingcountry poor consumers, who includemany of the rural poor. Many developingand least-developed countries are foodimporters and have seen their annualfood import bills more than double since2000. Where they are also dependent onimported oil (which was also at recordprices) and have existing high levels ofundernourishment, their situation hasbeen especially precarious. On thepositive side, higher food prices shouldenable producers to invest in raisingproductivity and production. However,as The State of Agricultural CommodityMarkets 2009 explains, whether highfood prices can be turned into anopportunity for producers in developingcountries depends on their ability torespond. This is far from guaranteed.The prices of key inputs such as energyand fertilizer increased along withproduct prices – sometimes faster – sothe incentive to produce more actuallyweakened. Furthermore, the capacity toproduce more is limited for developingcountry smallholders with weaktechnology and limited access to inputs.High food prices do not appear to haveled to any significant supply responsefrom the vast majority of developingcountry producers.How to help producers to producemore is one policy problem facinggovernments in developing countries.How to ensure consumers have accessto food at affordable prices is a moreimmediate one. In most cases,understandably in view of the socialunrest that high food prices provoked,the policy measures introduced focusedon the immediate short-term foodsecurity problems by attempting to slowprice increases and increase foodavailability. The medium- and long-termneeds to support producers wereneglected, and some of the short-termmeasures – notably trade measures –were likely to have a negative impact.The State of Agricultural CommodityMarkets 2009 concludes with a review ofthe policy options available togovernments and an appraisal of howdeveloping countries have responded tothe high food prices. It calls forcomplementarity and consistencybetween targeted measures introducedto address immediate emergencies andlonger-term measures to address thestrategic need for long-run food security.However, it recognizes the difficultiessome developing countries face inmaking the right policy choices and inputting effective policies into practice.They simply cannot afford to ensure foodsupplies for the poor, meet higher foodimport bills and reverse, overnight, yearsof neglect of their agriculture sectors.The international support that has beenbuilding is urgently needed to providetechnical and policy assistance and, asthe “right” policies tend to cost more,additional budgetary resources.The State of Agricultural CommodityMarkets 2009 aims to bring to a widerpublic an accessible discussion ofagricultural commodity market issuesand related policy matters. Although thefindings and conclusions presented relyon recent technical analyses by FAOspecialists in commodity and tradeissues, this is not an overly technicalreport. Rather, it seeks to provide anobjective and straightforward treatmentof what are at times complicatedeconomic issues for policy-makers,commodity market observers and allthose interested in agriculturalcommodity market developments andtheir impact on developing countries.The State of Agricultural Commodity Markets 2009 5

ForewordIn the first half of 2008, the world wasfacing the highest food price levelsin 30 years and a global foodinsecurity crisis. Food prices were up asmuch as 40 percent from their 2007 leveland 76 percent from 2006. The sharpnessof the price increases and theirpersistence, which left many developingcountries struggling to cope with theconsequences, make this episodedifferent from past events of food priceincreases.Social and political stability waschallenged around the world as rising foodprices and falling purchasing powersparked riots and civil disturbance. Oneshould imagine the impact on the poor indeveloping countries who were alreadyspending, in some cases, up to 80 percentof their meagre incomes on food. FAOestimates that soaring food prices pushedanother 115 million people into chronichunger in 2007 and 2008. This means thattoday the world has nearly one billionhungry people. Malnutrition worsenswhen the poor are unable to afford higherqualityfoods. They eat less in quantityand less well in terms of quality. Lowincomefood-importing countries areespecially vulnerable owing to a highincidence of chronic hunger and poverty.The food import bill of these countries wasestimated at about US$170 billion for2008 – 40 percent more than in 2007.The impact is most severe in Africa, wheremany countries are highly dependent onimported cereals (in some cases for up to80 percent of their dietary energysupplies) and undernourishment isalready rife.International food prices have fallenback towards their 2007 levels as thefinancial crisis and world recession havetaken hold. However, prices are stillsignificantly above the levels we haveseen in recent years and are likely toremain high by historical standards. Inmany developing countries, food pricesare still at unprecedented high levels. Infact, high food prices have not gone away,nor have the underlying causes of the foodcrisis they created. Soaring food pricesand the food crisis highlighted the threatsto global food security and the urgent needto strengthen the international foodsystem.The negative impact of high food priceson the food security of poor consumersaround the world is clear. However, onewould have expected the impact onproducers to be positive and to encouragethem to invest more and increaseproduction. This did not happen. Years oflow agricultural prices understandablygave farmers little incentive to invest inmeans of production, but why did thehighest food prices in 30 years fail toprovide that incentive? In principle, highfood prices represent an opportunity toreverse that decades-long decline ininvestment in agriculture and secure asustainable future for world food supplies.“In principle” because high food pricesalone are not sufficient. Some of theincentive to produce more has beeneroded by increasing input costs –fertilizer prices have risen much fasterthan producer prices. Smallholders indeveloping countries need to overcomemany “supply-side” constraints if asignificant supply response in themedium to longer term is to materialize.Lack of rural infrastructure, limitedaccess to modern inputs and irrigation,poor roads and storage facilities,rudimentary technology, limitedknowledge of modern farming techniquesand limited access to credit all led to lowproductivity, limited participation inmarkets and lack of investment. Theseconstraints need to be overcome to allowa significant supply response, and properpolicy interventions are needed to breakout of this vicious circle that has trappedsmall producers in poverty and left manydeveloping countries heavily dependenton imported food and more vulnerable toprice hikes.As early as July 2007, FAO warned ofthe impending crisis, and in DecemberThe State of Agricultural Commodity Markets 2009 6

2007 it launched an Initiative on SoaringFood Prices, known as the ISFP, initiallyfunded from FAO’s own resources toboost food production quickly byfacilitating small farmers’ access to seeds,fertilizers, animal feed and other farmingtools and supplies. This initiative shouldcatalyze support from donors, financialinstitutions and national governments toimprove the provision of inputs on a muchlarger scale. Countries most affected bythe crisis, especially in sub-SaharanAfrica, need at least US$1.7 billion now torevive agriculture that has been neglectedfor decades.Soaring food prices and the consequentfood crisis are matters of internationalconcern that require international action.They were the main focus of attention atthe FAO High-Level Conference (HLC) onWorld Food Security held in Rome in June2008, which brought togethergovernments, international organizations,donors, non-governmental organizations,the private sector and civil society todiscuss what should be done. The HLCsaw the participation of 181 countries,including 43 Heads of State orGovernment and more than 100 Ministers.The declaration adopted unanimously bythe HLC has clearly indicated the need toincrease production in the developingcountries and boost investment in theagriculture sector.Furthermore, and as expressedrecently in several fora, including the HLC,the G8 Summit in Japan in July 2008and the Special Session of the FAOConference last November, there is anurgent need to strengthen the governanceof world food security. An improvedsystem is needed to prevent internationalfood crises and help develop andimplement the required policies atnational, regional and international levels.In addition, rules and mechanisms need tobe devised to ensure not only free but alsofair trade in agricultural products –a system that offers farmers in bothdeveloped and developing countries themeans of earning a decent income that iscomparable with their fellow citizens in thesecondary and tertiary sectors.The technical knowledge of how toeradicate hunger from the world and todouble world food production by 2050 tofeed a population of nine billion isavailable. The time to move from talk toaction has come. We urgently need toforge an international consensus on therapid and final eradication of hunger and aplan of action.The twin-track approach advanced byFAO in its Anti-Hunger Programmeremains valid – making food accessible tothe most vulnerable, and simultaneouslyhelping small producers to raise theiroutput and increase their income.Affordable food supplies need to be madeavailable for poor consumers to avoidincreasing the incidence of malnutrition.Some countries already have safety netmechanisms in place, others need toestablish them and may needinternational assistance to do so. Theexperience of high food prices resulted inthe widespread recognition that thestructural solution to the problem of foodinsecurity in the world lies in increasingproduction and productivity in thedeveloping world, notably in low-incomeand food-deficit countries. Investmentsneed to be boosted significantly andsustainably for improved productivity andincreased food production. Supply-sideconstraints need to be overcome acrossthe board and appropriate policies andinstitutions need to provide a conduciveenvironment for a supply response toexist. Without these in place, investmentsin agriculture will not be forthcoming.In addition to its direct support throughthe ISFP, FAO is also playing its part inhelping countries define and implementappropriate policy responses. All theseactivities are underpinned and guided bythorough and up-to-date economicanalyses of food price movements, theirimpacts on consumers and producers andthe alternative policy responses. Much ofthis work is presented in this new edition ofThe State of Agricultural CommodityMarkets. It provides a comprehensivereview based on research by FAOspecialists of the issues surrounding thesoaring food prices and theirconsequences. It explains why food pricesincreased and what steps developingcountries and the internationalcommunity need to take in order to ensurethat high food prices are turned into anopportunity for developing countryfarmers to help safeguard world foodsupplies at affordable prices.Jacques DioufFAO Director-GeneralThe State of Agricultural Commodity Markets 2009 7

Part 1What happenedto world food pricesand why?The State of Agricultural Commodity Markets 2009 8

World food price inflation in 2007–08The upturn in international food pricesthat began in 2006 escalated into asurge of food price inflation aroundthe world, increasing food insecurity, leadingto violent protests and even raising fearsabout international security. Africa wasperhaps hardest hit, but the problem wasglobal. Reports of the impact of high foodprices on the poor across many developingcountries led to calls for international actionto reverse the slide towards increasedpoverty and malnutrition. Food aid agenciessuch as the World Food Programme (WFP)encountered difficulties in meeting thehigher costs of purchasing food fordistribution and appealed for additional funds.The FAO food price index 1 rose by7 percent in 2006 and 27 percent in 2007,and that increase persisted andaccelerated in the first half of 2008. Sincethen, prices have fallen steadily butremain above their longer-term trendlevels. For 2008, the FAO food price indexstill averaged 24 percent above 2007 and57 percent above 2006.Looking at prices in real terms (deflatedby the World Bank’s Manufactures UnitValue Index [MUV]), the increases are stillsignificant. Real prices have shown asteady long-run downward trendpunctuated by typically short-lived pricespikes. There is some suggestion of aflattening out since the late 1980s with agradual recovery beginning in 2000before the sharp increase in 2006 – theaverage annual growth rate of 1.3 percentfor the period 2000–05 has jumped to15 percent since 2006.Evolution of FAO food price indicesIndex (1998–2000 = 100)2502001501005001961196519701975FAO extended real food price indexFAO extended food price index1980198519901995FAO food price index adjusted for changes in exchange ratesIndex (1998–2000 = 100)2502001501005001961 1965 1970 1975 1980 1985 1990 1995FAO food price indexFAO food price index adjusted for changes in US$–SDR exchange ratesFAO food price index adjusted for changes in US$–CFA franc exchange rates200020002005 2008Source: FAO.2005 2008Note: the Special Drawing Right (SDR) is a basket of major currencies (euro, sterling, yen and the US dollar) definedby the International Monetary Fund (IMF); the CFA franc is the currency used in 14 African economies and whosevalue is tied to the euro.Sources: FAO and IMF.What differencedo exchange rates make?A proportion of these price increases canbe attributed to the depreciation of the1 The FAO food price index is a trade weightedLaspeyres index of international quotationsexpressed in US dollar prices for 55 food commodities(see www.fao.org/worldfoodsituation/FoodPricesIndex).US dollar, in which international pricestend to be denominated. Expressed inother currencies, the increases are lessdramatic and within the range of historicalvariation, but they are still substantial.The relationship between the currencyand commodity prices is a complicatingfactor in assessing agriculturalcommodity price increases. It also hasimplications for how different countriesare affected by the changes. The extent towhich international price increasestranslated to domestic consumer andproducer price increases in differentcountries depended on their US dollarexchange rate as well as a variety ofother factors, such as import tariffs,infrastructure and market structures,that determine the degree of pricetransmission. Because most commodityThe State of Agricultural Commodity Markets 2009 9

What happened toworld food prices and why?Evolution of monthly FAO price indices for basic food commodity groupsIndex (2002–04 = 100)3002502001501005019901992199419961998SugarMeat2000Evolution of prices for tropical export cropsCerealsDairy20022004Oils20062008Source: FAO.Price800RiceWheatCoffeeCocoa60040020001990 1992 1994 1996 1998 2000 2002 2004Note: Rice and wheat prices in US$/tonne; cocoa and coffee prices in US cents/pound.20062008Source: FAO.prices are commonly expressed inUS dollars, depreciation in the value of theUS dollar reduces the cost of commoditiesfor countries whose currencies arestronger than the US dollar, resulting in acushioning of food price increases to agreater or lesser extent. However, forcountries whose local currencies arepegged to or are weaker than theUS dollar, depreciation in the US dollarincreases the cost of procuring food. Morethan 30 developing countries peg theircurrency to the US dollar.Did the prices ofall agricultural commoditiesincrease in the same way?While almost all agricultural productprices increased at least in nominal terms,the rate of increase varied significantlyfrom one commodity to another. Inparticular, international prices of basicfoods, such as cereals, oilseeds and dairyproducts, increased far more dramaticallythan the prices of tropical products, suchas coffee and cocoa, and raw materials,such as cotton or rubber. Therefore,developing countries dependent onexports of these latter products found thatwhile their export earnings might havebeen increasing this was at a slower ratethan the cost of their food imports. Asmany developing countries are net foodimporters, this imposed a serious balanceof payments problem.What was different about the2007–08 food price increases?The leap in food prices was in sharpcontrast to the secular downward trendThe State of Agricultural Commodity Markets 2009 10

What happened toworld food prices and why?Agricultural commodity price spikesA price spike is a pronounced sharpincrease in price above the trend value. Forpractical purposes, a price spike can beidentified as an annual percentage changethat is more than two standard deviationsof the price in the five years preceding theyear that the percentage change iscalculated from. Using this definition, it ispossible to identify the years in which highpriceevents for basic food commodities(using the FAO food price index) occurredduring the 1961–2008 period. Checkingeach year’s percentage change againsttwice the standard deviation calculated as:four distinct periods can be identifiedwhere prices exhibited significantincreases: 1972–74, 1988, 1995 and thecurrent period. The only price events inconsecutive years are those that occurredin the first and the last periods: three yearsin a row in the first (1972, 1973 and 1974);and two years in the last (2007 and 2008).However, when the same methodology isapplied to the prices expressed in realterms, only four years appear to have beensignificant price event years: 1973, 1974,2007 and 2008.and crude oil price shocks resulted incontractions in food production in thewake of rising food demand brought aboutby rapid population growth in developingcountries. Even export restrictionsfeatured, in the same vein as this time, asmeasures to contain domestic inflation.However, one big difference is that whilethe 1970s crisis was caused by supplysideshocks, demand factors (notablybiofuel demand) were key to the 2007–08episode and may have longer-lastingeffects.At the peak of the 1970s crisis,international quotations of rice and wheatrose to US$542 and US$180 per tonne,respectively. It would be tempting toconclude that, as prices in early 2008 farexceeded those witnessed in the 1970s,the world was facing a similar crisis.However, the purchasing power of theUS dollar today is fundamentally differentfrom what it was in the 1970s. Looking atprices in real terms, a drastically differentpicture is revealed. At 2000 prices andexchange rates, for example, the cost ofone tonne of rice in 1974 stood at wellover four times the average over the firstfour months of 2008.The end of “cheap food”?Soaring food prices came as a shockpartly because consumers throughout theworld had become accustomed to thenotion of so-called “cheap food”. Up until2006, the real cost of the global foodbasket had fallen by almost one-halfin the previous 30 years, with prices ofmany foodstuffs falling on average by2–3 percent per year in real terms.Technological advances greatly reducedthe cost of producing foodstuffs and this,together with widespread subsidies incountries of the Organisation forEconomic Co-operation andDevelopment (OECD) that rendered moreefficient and cheaper productionelsewhere unprofitable, entrenched therole of a few countries in supplying theworld with food. This supply-drivenagricultural paradigm sent real pricesspiralling downward on a trend lasting fordecades. Added to this, changes in themarket and policy setting have beeninstrumental in reducing stock levels andhave led to far more planned dependenceon imports to meet food needs. Puttogether, these developments haveresulted in a significant role for majorexporting countries to supply internationalmarkets as needed. Therefore, it is notsurprising that when production shortagesoccur in such countries, particularly inconsecutive years, global supplies arestretched and the ensuing markettightness is manifest in both higher pricesand higher volatility. This was preciselythe case in the run-up to the recent pricesurge. Against this backdrop, the world’sgrowing demand for agriculturalcommodities, driven by rising globalincomes and population and thenexpansion in biofuel production, left majorexporters with little opportunity toreplenish stocks.Extreme price volatility for severalcommodities was another factorprompting fears of a wide-scale crisis. In aperiod of rising and protracted priceThe State of Agricultural Commodity Markets 2009 12

Annual food prices, in nominal and real US$ terms, 1957–2008Bulk commoditiesNOMINAL PRICESREAL PRICESUS$600US$1 5004001 00020050005770809000080577080900008Wheat Maize Rice SoybeansVegetable oilsUS$1 500US$2 5001 0002 0001 5005001 00050005770809000080577080900008Soybean oil Palm oil Rapeseed oilLivestock commoditiesUS$200US$300150200100501000057 70 80 90 00 085770 80 90 00 08Poultry Pig meat Beef ButterSugar and beveragesUS$800US$2 0006001 5004001 00020050005770809000080577080900008Cocoa Coffee Tea SugarNote: Real prices refer to nominal prices adjusted for changes in US Producer Price Index (2000 = 100).Sources: Cocoa (ICCO); coffee (ICO); cotton (COTLOOK A Index 1–3/32”); maize (US No. 2, yellow, US Gulf); rice (white rice, Thai 100% B second grade, f.o.b. Bangkok);soybeans (US No. 1, yellow, US Gulf); sugar (ISA); tea (total tea, Mombasa auction prices); Wheat (US No. 2, soft red winter wheat, US Gulf); beef (Argentina, frozen beef cuts,export unit value); butter (Oceania, indicative export prices, f.o.b.); pig meat (USA, pork, frozen product, export unit value); poultry meat (USA, broiler cuts, export unit value);rape oil (Dutch, f.o.b. ex-mill); Soya oil (f.o.b. ex-mill).The State of Agricultural Commodity Markets 2009 13

What happened toworld food prices and why?How are agricultural commodity prices determined?Agricultural commodity prices aredetermined by a combination of theso-called market fundamentals ofdemand and supply and exogenousshocks related to factors such as theweather. In spite of intense research,there are still differences of opinionabout the nature of price trends andvariability, and it is not straightforward,except in hindsight, to distinguishbetween normal variability and a changein trend.It is important to delineate thosefactors driving demand and supply thatproduce the underlying trends in pricesand those that cause variability aroundthose trends. Long-run changes in fooddemand are primarily the result ofpopulation and income growth, but theyare also influenced by relative pricechanges and the evolution of dietarypatterns. Demand for agricultural rawmaterials such as rubber is related toeconomic growth more generally. Longrunexpansion in supply is primarilydriven by technological progress, whichreduces costs. In the past, technologicalprogress reduced costs and inducedsupply expansion at a faster rate thanpopulation and income growthexpanded demand, leading to a longrunrelative decline in agriculturalcommodity prices. Recentcircumstances may have been differentin that demand growth, as a result ofincome growth in emerging economiesand biofuel demand, may run ahead ofsupply expansion, so leading to priceincreases. Supply expansion may beconstrained in the short term by the costand availability of key inputs and othersupply-side problems, and in the longerterm by the availability of land and waterresources, labour and climate change.Volatility in prices stems from supplyand demand shocks. In the short run,supply and demand for agriculturalproducts are inelastic and do notrespond much to price changes, sosupply and demand shocks canproduce wide swings in prices. Supplyshocks are perhaps most importantbecause of the dependence ofagricultural production on the weather,although demand shocks can beimportant too, especially for certain rawmaterials. The impact of shocks indemand and supply on prices can becushioned by the possibility of runningdown or adding to stocks. Therefore,the level of stocks in relation to demandis an important factor in commodityprices. If the “stock-to-use” ratio is lowbecause stocks are low or demand ishigh or both, there will be upwardpressure on prices. Markets and pricesfor agricultural commodities do notadjust immediately to supply or demandshocks. The effects of shocks tend to beless persistent when they are supplyFactors affecting agricultural commodity pricesInitial stocksDomestic productionPrice formationin exporting countryPQExports+Domestic demandexporting countryHumanconsumptionFeedIndustrial useFinal stocksPopulationIncomeTastePrices ofcomplementary productsPrices ofcompetitive productsDemand for meatPrices of other feedsOil pricesDomestic policies... etc.Input costsDomestic policiesWeatherPricesUtilization in previous year... etc.Worldexport supplyWorldprice formationWorldimport demand* SPS/NTBs: Agreement on the Application ofSanitary and Phytosanitary Measures/non-tariff barriers.PDutiesExchange ratesSPS/NTBs*Demand for meatPrices of other feeds... etc.Qshocks – owing to bad weather forexample – and more persistent in thecase of demand shocks.Prices of different commodities arelinked through possible substitution orcomplementarity in consumption orproduction. These lead to “cross”effects of price changes from onecommodity to another. For example,higher prices for maize will leadproducers to grow more maize at theexpense of other crops, reducing theirsupply and raising their prices; orincreasing demand for livestockproducts will lead to increased feeddemand and prices for cereals andoilseeds.DutiesExchange ratesPopulationIncomeTastePrices ofcomplementary productsPrices ofcompetitive products... etc.Oil pricesPoliciesTechnology... etc.Initial stocksDomestic production+Price formationin importing countryPInput costsPoliciesWeatherTechnologyCommodity pricesUtilizationprevious yearImportsQDomestic demandimporting countryHumanconsumptionFeedIndustrial useFinal stocksSource: FAO.The State of Agricultural Commodity Markets 2009 16

A critical initial trigger for the recent pricehikes was the decline in the production ofcereals in major exporting countriesbeginning in 2005 and continuing in 2006.Cereal production declined by 4 and7 percent, respectively, in those two years.However, there was a significant increasein cereal output in 2007, especially inmaize in the United States of America,responding to the higher prices. The quicksupply response for cereals in 2007 cameat the expense of reducing productiveresources allocated to oilseeds, especiallysoybeans, resulting in a decline in oilseedproduction.Stocks play a key role in equilibratingmarkets and smoothing price variations.If stocks are low relative to use, marketsare less able to cope with supply anddemand shocks and supply shortfalls ordemand increases will lead to biggerprice increases. This ratio fell sharplyfrom 2006 onwards, reaching a historiclow in 2008.The level of stocks, mainly of cereals,has been falling since the mid-1990s.Indeed, since the previous high-priceevent in 1995, global stock levels have onaverage declined by 3.4 percent per year.There have been a number of changes inthe policy environment since the UruguayRound Agreements that have beeninstrumental in reducing stock levels inmajor exporting countries: the size ofreserves held by public institutions; thehigh cost of storing perishable products;the development of other less costlyinstruments of risk management;increases in the number of countries ableto export; and improvements ininformation and transportationtechnologies. When production shortagesoccur in consecutive years in majorexporting countries under suchcircumstances, international markets tendto become tighter and price volatility andthe magnitude of price changes becomemagnified when unexpected events occur.Indeed, there is a statistically significantnegative relationship between marketingseason beginning stocks (expressed as apercentage of expected utilization in theensuing season) and the cereal pricesformed during the same season. Thismeans that tight markets at the globallevel at the beginning of the marketingseason tend to put upward pressure onprices. This was one of the main reasonswhy international cereal prices spiked soEnergy and food price indicesIndex (2002–04 = 100)5504503502501505019901992199419961998Reuters-CRB energy index20002002Relationship between cereals stock ratios and pricesIndex (1989–1990 = 100)300200100089/9091/9293/9495/9697/982004FAO food price index20062008Source: FAO and Reuters-CRB.FAO cereal price indexGlobal stock-to-use ratioGlobal stock-to-use ratio, excl. ChinaMajor exporters’ stock-to-disappearance ratio99/0001/0203/0405/0607/08Notes:Correlation coefficients: price with global stock-to-use ratio: r = –0.65; price with global stock-to-use ratio,excluding China: r = –0.49; price with major exporters’ stock-to-disappearance ratio: r = –0.47.Data for China refer to mainland China.Source: FAO.sharply in 2006. Continuing low stocklevels is one reason why relatively highprices could be expected to persist forsome time. By the close of the seasonsending in 2008, world cereal stocks hadincreased by only 1.5 percent from theiralready reduced level at the start of theseason and reached their lowest levels in25 years. In 2007/08, the stock-to-useratio for world cereals stood at19.6 percent, well below the five-yearaverage of 24 percent and even smallerthan the previous low of 20 percent in2006/07. The stock situation for oils/fatsand meals/cakes began to deteriorate inmid-2007 after the spillover effects fromdevelopments in the cereals markets,especially of wheat and coarse grains,with the stock-to-use ratio falling fromOcean freight rates for grainsfrom United States Gulf portsto selected countriesUS$/tonne100806040BangladeshEgyptEuropean UnionCIS*20O N D J F M A M J J A S O2006 2007* CIS: Commonwealth of Independent States.Source: International Grains Council.The State of Agricultural Commodity Markets 2009 17

What happened toworld food prices and why?World cereal food and feedutilizationMillion tonnes1 050950850750Food useFeed use65097/98 99/00 01/02 03/04 05/06 07/08Source: FAO.Cereals used for food in Chinaplus India and the rest of theworldMillion tonnes700600Rest of the worldCereal utilization in China plusIndia and the rest of the worldMillion tonnes2 0001 5001 000500Rest of the worldChina plus India080 85 90 95 00 05 07Notes: Data for China refer to mainland China.Utilization is the sum of food, animal feed,seed use, industrial use and waste.Source: FAO.Net imports of cereals byChina and IndiaMillion tonnes2010China5004000India300China plus India-1020080 85 90 95 00 05 07Note: Data for China refer to mainland China.Source: FAO.-2080 85 90 95 00 05 07Note: Data for China refer to mainland China.Source: FAO.Cereal utilization and net tradein ChinaCereal utilization and net tradein IndiaMillion tonnes20Million tonnes400Million tonnes15Million tonnes2501530012200Netexports105200100Netexports96150100Netimports0-597/98 99/00 01/02 03/04 05/06 07/08Net trade(left axis)Utilization(right axis)Note: Data for China refer to mainland China.Source: FAO.0Netimports30-3Net trade(left axis)97/98 99/00 01/02 03/04 05/06 07/08Utilization(right axis)500Source: FAO.The State of Agricultural Commodity Markets 2009 18

13 to 11 percent for oils/fats and from17 to 11 percent for meals/cakes by theend of the 2007/08 season.Putting food and feed inperspective – China and IndiaThe increase in world population requireshigher food production if consumptionrequirements are to be met. Increasingincomes generally also lead to changes indiets, often reflected in stronger demandfor higher-value foods (such as livestockproducts) as opposed to starchy staples(such as wheat). Because these changesare gradual, it is not correct to considerthem as an underlying cause for anysudden price increase such as the oneexperienced recently. Therefore, thewidely accepted notion that rising demandin countries such as China and India, thetwo most populous countries with rapidpopulation and income growth, is a reasonfor soaring food prices warrantsre-examination.The importance of growth in demandfrom China and India as a shaper of worldfood markets and prices has beenhighlighted in a recent study by theMaize utilization and exports inthe United States of AmericaMillion tonnes400300200100003/04Feed useOther uses04/05 05/06 06/07 07/08Ethanol useExportsSource: FAO.International Food Policy ResearchInstitute (IFPRI, 2008). This argues thatrapid economic growth in certaindeveloping economies has pushed upmiddle-class consumers’ purchasingpower and this has increased demand forlivestock products such as meat and milkand, hence, demand for feedgrains.Emerging economies, particularlyChina and India, are certainly playing animportant role in global agriculturalcommodity demand and supply.However, the high commodity prices of2007 and 2008 do not seem to haveoriginated in these emerging markets.Cereal use in China and India has in factbeen growing more slowly than in the restof the world.Cereal imports by China and India havebeen trending downwards since 1980, byabout 4 percent per year, from an annualaverage of about 14 million tonnes in theearly 1980s to roughly 6 million tonnes inthe past three years.This means that the growth in cerealfeed demand in these two countries, atleast until recently, has been met mainlyfrom domestic sources. Moreover, whileChina has become a major importer ofoilseeds, vegetable oils and livestockproducts, the country’s overall agriculturaltrade balance has remained largelypositive in most years since the mid-1990s. The long-term development in thetrade position of India also goes contraryto the belief that it is one of the drivers ofincreasing food prices in world markets.India has been a major exporter of food. Inmost years between 1995 and 2007, itexported more wheat, rice and meat thanit imported. Even India’s relatively largeimports of vegetable oils need to beconsidered in the context of equally largeexports of oilcakes. In fact, in the case ofboth China and India, there is no evidenceof a sudden increase in imports ofoilseeds, meals and oils to indicate thatthey have contributed to their price hike,which began in mid-2007 after the spikein the prices of grains (maize in particular)a year earlier. China and India have notbeen the cause of the sudden price spikein the oils complex, but this does notdownplay their role nor that of changingconsumption patterns in general ondevelopments in food markets both in thepast and in the future.What about biofuels?Demand for certain agriculturalcommodities as feedstocks for biofuelscan mean fewer productive resourcesused in the production of food crops.Biofuel production may reduce theavailability of food commodities on themarket because “effective” demand forgrains, sugar or oils and other basic foodstaples as feedstock for fuel productioncould outbid that for food where the pricesof oil and feedstocks favour biofuelproduction. This new source of demandhas been playing an important role ininfluencing prices. Among all major foodand feed commodities, additional demandfor maize (a feedstock for the productionof ethanol) and rapeseed (a feedstock forthe production of biodiesel) have had thestrongest impact on prices. For example,out of the increase of nearly 40 milliontonnes in total world maize use in 2007,almost 30 million tonnes were absorbedby ethanol plants alone. Most of thisexpansion occurred in the United States ofAmerica, the world’s largest producer andexporter of maize. In the United States ofAmerica, maize utilized to produceethanol represented around 30 percentof its total domestic use. This contributedto the steep rise in international maizeprices observed since the beginning of2007. The intensity of the price reactionwas also related to the fast pace (mostlywithin 2–3 years) at which this newdemand materialized and to itsconcentration in the United States ofAmerica (more than 90 percent), a majorexporter of maize. Globally, some12 percent of total world maize utilizationwas used for ethanol in 2007, comparedThe State of Agricultural Commodity Markets 2009 19

What happened toworld food prices and why?with 60 percent for animal feed. In the EU,the biodiesel sector is estimated to haveabsorbed about 60 percent of memberstates’ rapeseed oil output in 2007,amounting to about 25 percent of globalproduction and 70 percent of global tradein the commodity in that year.The issue is not limited to how much ofeach crop may be used for biofuels ratherthan for food and feed, but how much ofplanting area could be diverted fromproducing other crops to those used asfeedstock for the production of biofuels.Already, high maize prices since mid-2006 encouraged farmers in the UnitedStates of America to plant more maize in2007. Maize plantings increased by nearly18 percent. This increase was only madepossible by the reduction in soybean andwheat areas. The expansion in maizeplantings combined with favourableweather resulted in a bumper maizeharvest in 2007, enabling the UnitedStates of America to meet both domesticdemand, including that from its growingethanol sector, as well as to export.However, this apparent success in maizedisguised another important development –reduced wheat and soybean plantingsand, therefore, their production. This wasone reason for their sharp price increases.However, had production in Australia notsuffered from another year of drought andoutputs in the EU and Ukraine not beenhampered by the unfavourable weather, itis conceivable to assume that grain priceswould not have increased by as much asthey did.This chain reaction somewhat repeateditself in 2008, but this time in reverseorder. Farmers in the United States ofAmerica cut back on their maize plantingsin favour of soybeans because of theirhigher relative prices. Strong soybeanprices gave rise to a substantial increasein soybean planted area in the UnitedStates of America for the 2008/09marketing season. This trend is confirmedby the soybean–maize price ratio in thefutures market. From a historicalperspective, whenever the ratioapproaches two, as a rule of thumbsoybeans are favoured over maize,resulting in a shift of planting area frommaize to soybeans. As this ratio fell in2006/07, farmers drastically increasedmaize plantings. However, with the ratiowell above two in the 2007/08 season,farmers expanded soybean plantingsinstead. Increases in soybean plantingswere a positive development for thesoybean market but left the maize marketprecariously balanced. In view of the newUnited States Energy Bill, the demand formaize by the ethanol sector is expected tocontinue to rise. If production of maizewere to decline in 2009, it would bedifficult to picture how the United States ofAmerica could meet all demand (food,feed, fuel and exports) without asignificant drawdown on its own maizestocks during the 2009/10 season. Themarket will be closely watched forindications of this eventuality. In theseperiods of market tightness, maize pricescould firm, with a strong possibility ofspillover to other major food and feedcrops.With the exception of ethanolproduction from sugar cane in Brazil,production of biofuels is currently noteconomically viable without subsidies orother forms of policy support. Theproduction costs per litre of biofuel are byfar the lowest for Brazilian sugar-caneethanol, which is the only biofuel that isconsistently priced below its fossil-fuelequivalent. Brazilian biodiesel fromsoybeans and United States ethanol frommaize have the next lowest net productioncosts, but in both cases costs exceed themarket price of fossil fuels. Europeanbiodiesel production costs are more thandouble those for Brazilian ethanol,reflecting higher feedstock and processingcosts. According to the Global SubsidiesInitiative, the United States of Americaspent US$5.8 billion on biofuel subsidiesin 2006 while the EU spent US$4.7 billion.These policy interventions encouragedthe rush to liquid biofuels and, hence,increased demand for certain agriculturalproducts as feedstocks. One motivationfor such support – the claimedenvironmental benefits of biofuels overfossil fuels – is now being questioned asevidence emerges that reductions ingreenhouse gas emissions are less thanoriginally assumed for certain types ofbiofuels. However, while support forbiofuels remains in place, the additionaldemand for the agricultural productsinvolved will continue to shore up theirprices, with spillover effects on prices inother agricultural markets.Much depends on oil prices. The higherthat oil prices are, the more economicallyviable biofuel production becomes andThe State of Agricultural Commodity Markets 2009 20

the more agricultural products aredemanded as feedstocks. When oil pricesreach a level where biofuels becomecompetitive, demand by the energymarket for agricultural products asfeedstocks increases and this newdemand pushes up agricultural prices.Thus, agricultural and energy marketsbecome linked in a new way. As energymarkets are huge relative to agriculturalmarkets, demand from the biofuel sectorcould in principle absorb any additionalproduction of crops usable as feedstocksso the energy market would effectively seta floor price for the agricultural products. Itwould also set a ceiling on agriculturalproduct prices at the point where theyhave risen so much that biofuel productionis no longer competitive. It would beenergy demands rather than fooddemands that would set agriculturalproduct prices and agricultural productprices would be tied to energy prices.Clearly, this would be a major departurefrom how agricultural product prices havebeen determined in the past.What is the role of speculation?Recent discussions of high food priceshave included a growing interest in thepossible effects of speculators andinstitutional investors – “non-commercialtraders” – buying into agriculturalcommodities on futures markets asreturns on other assets have become lessattractive. There has been some concernthat speculation has contributed toincreasing food prices. The downturn inthe global properties and securitiesmarkets resulted in an inflow of funds intoagricultural commodity futures marketslooking for profits, both from traditionalinstitutions such as hedge funds andpension funds and from newercommodity-linked and exchange-tradedfunds. Global trading activity in futuresand options combined has more thandoubled in the last five years. In the firstnine months of 2007, this activity grew by30 percent over the previous year.Notably, the share of non-commercialtraders taking long positions in thecommodity markets has been rising,indicating increased interest on their partin buying futures contracts. Between 2005and 2008, non-commercial tradersalmost doubled their share of openinterests in the maize, wheat and soybeanfutures markets although their share in thesugar futures market remained largelyunchanged. Investments by institutionalinvestors can be large. However, thevolume of these investments inagricultural commodities has not been assignificant as in other commodities suchas metals.Speculation on agricultural commodity marketsTypically, commodity exchange marketsprovide risk management tools such asfutures and options to enable marketparticipants like farmers, processors,producers or traders – “commercialtraders” – to hedge against the risk of pricefluctuations in the future. These markets alsoassist in the discovery of prices and thusprovide a measure of predictability inascertaining future prices. Another marketactivity is speculation, undertaken mainly byspeculators or investors – “non-commercialtraders”. This involves making profits byspeculating on future movements in the priceof an asset or a commodity.Speculation is important for the efficientfunctioning of markets because it bringsliquidity into the market and helps farmersand other participants to offset theirexposure to future price fluctuations in thephysical commodity markets. However,speculation can sometimes play a perverserole in markets. For example, excessivelevels of speculation can lead to sudden orunreasonable fluctuations or unwarrantedchanges (in one particular direction) inShare of commercial andnon-commercial tradersin futures marketsPercentage10080604020005 08 05 08 05 08 05 08Maize Wheat Soybean SugarCommercial tradersNon-commercial tradersSource: OECD.commodity prices. This may occur when anincreasing share of open interests (number ofoutstanding futures contracts) is held byinvestors interested in gaining from futureprice movements with little regard to thefundamentals of commodity demand andsupply. Thus, the impact of excessivespeculation is counterproductive to futuresmarkets because the risk of price volatility isa fundamental condition that these marketsattempt to address. In addition, excessivespeculation in agricultural commoditymarkets may transmit inappropriate marketsignals to agricultural producers, leading toinefficient allocation of resources.The level of speculative activity could becontrolled by regulating commodity markets.One way is through limiting the number offutures contracts that one participant, otherthan a participant eligible for hedgeexemption, can hold, thereby limiting theability of a single participant to influence themarket. However, this is risky as excessiveregulation may drive speculators out of themarket, depriving it of liquidity.The State of Agricultural Commodity Markets 2009 21

What happened toworld food prices and why?The increase in the shares of noncommercialtraders in maize, wheat andsoybean markets coincided with theincrease in prices of these commodities inthe physical markets. This high level ofspeculative activity in agriculturalcommodity markets in the last few yearshas led some analysts to connect theincreases in food prices with increasedspeculation. However, it is not clearwhether speculation on agriculturalcommodities was driving prices higher orwas attracted by prices that wereincreasing anyway. A recent study by theInternational Monetary Fund (IMF)concluded that in general it was the highprices that were encouraging inflows ofinvestment funds into futures markets foragricultural commodities. This question ofcausality requires further research. Largeinflows of funds could provide a furtherexplanation at least for the persistence ofhigh food prices and their apparentlyincreased volatility. Again, furtherresearch is needed. In the meantime, therole, if any, of financial investors ininfluencing food prices is a matter ofconcern to the extent that some countrieshave even considered additionalregulation.No single explanation forsoaring food pricesThe sharp jump in the US dollar prices offood, which peaked in the first half of2008, can be characterized as the mostsignificant spike since the 1970s. Thereason for this development was supplyand demand imbalances in many of themajor commodity markets, notablycereals and oilseeds. It is primarily on thedemand side that plausible explanationsfor the food price hike can be found. Theprincipal drivers of increasing prices onthe supply side tend to be short-lived andare related to production shortfalls and topolicy measures such as restrictive exportpolicies by major traders. On the demandside, factors contributing to the recent risein world food prices are few. Unlike withsupply, changes on the demand side are ingeneral neither rapid nor unexpected. Thisis because, aside from the emergingbiofuel factor, the main drivers of demandin food markets are population andincome growth. In most cases, these twofundamental variables manifest a gradual(and expected) upward demandprogression and, in this way, allow forsupply to adjust. The situation during therecent high-price period does not departfrom this trend in that neither food nor feeddemand exhibited any sudden orunexpected increase that would havemerited the kind of price rises witnessedby markets. Speculation and inflows ofinvestment funds are more likely to havefollowed the increasing prices than to havecaused them. Only the rapid expansion indemand for biofuel feedstocks marks amajor departure from past experience.However, biofuel demand alone cannotexplain the extent of the price increases in2007 and early 2008. Record oil priceshave increased interest in biofueldevelopment but have also had a majorimpact in their own right by driving upproduction and transport costs. Upwardpressure on prices has been reinforcedalso from the demand side by fears thatprices might go even higher and byincreased demand for stocks. The sharpincrease in food prices on world marketscannot be attributed to any one singlefactor. Each one of those causescommonly cited cannot of itself explainthe pattern and extent of recent pricemovements. It is their coincidence andcombination that accounts for thedramatic changes. While disentanglingtheir separate effects is problematic, theevidence does point to biofuel demandand oil prices as the principal drivers.Some broad indication of the relativeimpacts on food prices of the variousfactors can be gleaned from simulationswith the OECD–FAO Aglink-Cosimomodel of world agricultural markets. Thismodel is used to generate marketprojections over the medium term on thebasis of assumptions concerning thefuture values of key variables affectingmarkets and prices. 3 Varying theseassumptions and comparing the resulting3 Aglink-Cosimo is a partial equilibrium model, a jointproject of FAO and the OECD. These scenarios aredescribed in more detail in OECD–FAO AgriculturalOutlook 2008–2017 (OECD–FAO, 2008). Aglink-Cosimo provides a comprehensive dynamic economicand policy-specific representation of 58 of the world’smajor producing and trading countries and regions forthe main temperate-zone commodities as well as rice,sugar and palm oil. Ethanol and biodiesel are also nowincluded. As most models of this type, the model isdriven by elasticities, technical parameters and policyvariables.The State of Agricultural Commodity Markets 2009 22

Sensitivity of projected world prices to changes in five key assumptions,percentage difference from baseline values, 2017Cereal production in 2007and 2008Percentage0Million tonnes1 400-101 2000.9%-201 00011.0%-30-40-50WheatMaizeVegetable oilScenario 1: Biofuel production constant at 2007 levelScenario 2: Scenario 1 and oil price constant at 2007 level (US$72)Scenario 3: Scenario 2 and lower income growth in EE5* countries (half annual growth rate)Scenario 4: Scenario 3 and exchange rate over inflation held constant at 2005 levelScenario 5: Scenario 4 and yields for wheat, oilseeds and coarse grains 5% higher than over theprojection period* EE5: Brazil, China, India, Indonesia and South Africa.Sources: FAO and OECD.800600400DevelopedcountriesDevelopingcountries-1.6%DevelopingcountriesexcludingBIC*2007 estimate 2008 forecast* BIC: Brazil, India and China (mainland).Source: FAO.projections gives an indication of thestrength of each influence. The five keyassumptions examined were: (i) biofueluse of grains and oilseeds; (ii) petroleumprices; (iii) income growth in majordeveloping economies: Brazil, China,India, Indonesia and South Africa (EE5);(iv) the exchange rate of the US dollarrelative to the currencies of all othercountries; and (v) crop yields.For coarse grains and vegetable oil, theprice outlook would be most affected ifbiofuel production were to remain constantat 2007 levels. Changes in demand forthese commodities as feedstocks forbiofuel production are a source ofuncertainty irrespective of whether thecause is an oil price change, a change inbiofuel support policies or a newtechnological development that leadsprocessors to buy different feedstocks.Holding biofuel production constant at its2007 level results in a 12-percent decline inthe 2017 projected prices for coarse grainsand around 15 percent in the projectedprice of vegetable oil. The second scenarioshows that wheat, coarse grains andvegetable oil price projections are all highlysensitive to petroleum-price assumptionsand would be a further 8–10 percent lowerif oil prices fell to their 2007 level. Thereduced gross domestic product (GDP)growth scenario produces wheat andcoarse grains prices that are only modestly(1–2 percent) below the baseline. Forvegetable oils, reflecting presumably amuch higher income elasticity of thedemand and a greater influence of the fivecountries in world trade, the simulatedprice difference exceeds 10 percent. Afourth scenario simulating a strongerUS dollar raises prices in domesticcurrency terms in exporting countries,providing greater incentives to increasesupplies. At the same time, a strongerUS dollar reduces the import demand inimporting countries. The combination ofgreater export supply and weaker importdemand puts additional downwardpressure on world prices. By 2017, wheat,coarse grain and vegetable oil prices wouldall be some 5 percent below thecorresponding baseline projection. Thescenario under which cereals and oilseedsyields are assumed to be 5 percent higherleads to projected wheat and maize pricesfor 2017 that are 6 and 8 percent lower,respectively, than the correspondingbaseline value, but make little difference toprojected vegetable oil prices.Why have prices fallen?The sharp fall in international food pricessince July 2008 has reversed their equallysharp rise up to that point and pushedthem back towards their 2007 levels. Theunderlying causes of the reversal are amixture of supply and demand factors.High prices have encouraged anCereal production in developingand developed countriesMillion tonnes1 3001 100900700500Developedcountries30065 70* Forecast.758095 00 05 08*Source: FAO.expansion in global production of cereals.However, this supply response has beenconcentrated mostly in the developedcountries and, among developingcountries, Brazil, China and India. With theexception of these three, cerealproduction actually fell between 2007 and2008 in developing countries. Therefore, itis clear that high food prices were not anopportunity seized by the majority of poorfarmers in developing countries – theirsupply response was limited in 2007 andvirtually zero in 2008. Falling food priceshave little to do with increasing globalsupplies. The explanation lies more interms of slowing demand as the financial8590DevelopingcountriesThe State of Agricultural Commodity Markets 2009 23

What happened toworld food prices and why?The financial crisis, recession and agricultural commodity pricesThe global economy is expected to grow by the cost of food imports on which many alsoonly 2 percent in 2009 compared withdepend. The prevailing uncertainty and3.8 percent in 2008. Evidence of global consequent negative market expectationsrecession has accumulated with projected are likely to dampen overall demand further.growth in major developed economies Hopes that commodity demand and pricesreduced to zero or even negative. Themight be sustained by continuing highfinancial crisis and, more significantly, the growth rates in China and India and otherglobal recession have obviously contributed rapidly growing economies in the developingto the dramatic fall in agricultural commodity world now look less tenable as theirprices. However, it is difficult to separate the projected growth has been revisedimpacts of the crisis and recession from the downwards. Availability of credit and liquidityexpected market adjustments to apparent is constraining agricultural trade, adding toovershooting of prices upwards in 2007 and the downward pressure on internationalthe first half of 2008. Agricultural markets prices but also reducing trade volumes.and prices will be affected on both theFalling oil prices will compound downwarddemand side and the supply side, not only pressure on prices for commodities usablethrough reduction in economic growth rates as feedstocks in biofuel production.and demand but also through exchange rate However, the net effect will depend on theirchanges, changes in the availability and cost price movements relative to oil and theof credit and changes in the availability of extent of biofuel policy support.other external funding, including aid.Lower prices in general are good news forHowever, the reduction in global economic consumers but will affect incentives forgrowth will be the major influence onproducers to make the investments neededagricultural commodity markets andto achieve greater food security in thedeveloping country agricultural prospects in medium and long term. With incentives forthe near future.producers reduced, some cutback inThe impacts on demand for commodities production might be expected, also reducingwill be negative. Experience of previous scope for rebuilding grain stocks. Whetherrecessions suggests that demand for, and falling prices are really good news forprices of, raw materials such as natural consumers depends on what happens torubber and fibres will be hardest and fastest incomes, which will fall along withhit, followed by livestock products for which employment in the event of worldwideincome elasticities are relatively higher. The recession. Many developing countries areimpact on basic foods such as cereals may also highly dependent on remittances, sobe less, as consumption levels are defended downturns in the developed economiesand demand is maintained. Developing could have an indirect impact on domesticcountries dependent on exports of raw demand in developing countries asmaterials and tropical products will face employment and incomes of migrantbalance of payments problems in theworkers fall. Remittances also provide fundsabsence of a similar or stronger decrease in for investment, including in agriculture.crisis and emerging global recession havereduced economic activity and oil priceshave tumbled. The declining demand hasbeen having most impact, at least initially,on the markets and prices of agriculturalraw materials such as rubber, but foodprices are also being affected.While falling food prices are good newsfor consumers, they should not be takenas implying that the global food system’sproblems are solved. Most of the criticalfactors that underlay the high-priceepisode and the resulting threat to foodsecurity remain. Developing country foodproduction has not seen any significantincrease and weaker price incentives willnot encourage further expansion ofproduction elsewhere. Global cerealstocks are still low with the stock-to-useratios for cereals in 2008/09 below theirfive-year average. Although oil priceshave fallen drastically, biofuel demandremains strong as feedstock prices havefallen and new ethanol productionThe State of Agricultural Commodity Markets 2009 24

Medium-term projections for selected commodity pricesWheatUS$/tonne400MaizeUS$/tonne200RiceUS$/tonne40030015030020010020010050100019972007201701997200720170199720072017Nominal priceReal priceSource: OECD–FAO, 2008.capacity comes on line. The impact offalling oil prices on agricultural prices iscomplicated. Lower oil prices reduceenergy and fertilizer costs but willcompound the downward pressure onprices of those commodities usable asfeedstocks as biofuel becomes lesscompetitive. The net effect will depend onthe relative price movements between oiland feedstocks, notably maize.What aboutthe medium term?The fall in food prices on internationalmarkets has been sharp but prices remainsubstantially above their average of thelast five years. The big question is whetherprices will fall further or remain at thesehistorically high levels. Prices fell in thesecond half of 2008 as dramatically asthey increased in the first half. In eithercase, some overshooting is likely,reflecting the much-increased volatility, soit is difficult to distinguish an adjustment toa new trend. However, some of the factorscited as explanations for high pricessuggest that they will persist, against thepattern of past commodity pricebehaviours where price spikes have beenshort-lived and followed by prolongedslumps. More generally, as noted above,with the significant exception of oil prices,the factors that contributed to high foodprices remain unchanged. Supplies havenot increased substantially and stocksremain low.The OECD–FAO Agriculture Outlook2008–2017 (OECD–FAO, 2008) indicatedthat both nominal and real agriculturecommodity prices would fall from therecord levels reached in early 2008 butwould remain higher over the next decadecompared with the previous one. Thisdecline has already begun, but morerapidly than expected as a result of thefinancial crisis and the downturn in theworld economy. How long that decline willcontinue will depend on the speed ofrecovery from the recession. However, theOutlook argues that among the primefactors in the latest price spike – droughtsin key grain-producing regions, increasedbiofuel feedstock demand, high oil prices,US dollar depreciation and a changingdemand structure for commodities, all inthe context of low stocks – some havepermanent elements that are expected tosustain higher prices over the next tenyears. In particular, the Outlook pointed tobiofuel demand and oil prices. Whileglobally, and in absolute terms, food andfeed remain the largest sources of demandgrowth in agriculture, there is now a fastgrowingdemand for feedstock by thebioenergy sector. Biofuel demand is thelargest source of new demand in decadesand is seen as a strong factorunderpinning the upward shift inagricultural commodity prices. Biofuelshave forged a new link betweenagricultural product prices and oil prices,which also has the potential to break thepattern of long-run decline in realagricultural commodity prices, at least inthe medium term.The State of Agricultural Commodity Markets 2009 25

What happened toworld food prices and why?The impacts of high food pricesThe impacts of rising food priceson consumers 4The impact of high food prices isobviously most severe for the poorwho rely on purchased food. Forthe poor in developing countries, food canaccount for at least 50 percent and up to70–80 percent of their budget. Thus,higher prices affect not only their foodconsumption in terms of quantity andquality, but also their spending in general.The most visible indicator of this negativeimpact was the social unrest and riotingthat erupted around the world triggered bysoaring food prices. The disturbances weremostly concentrated in urban areas. Theseare the areas where dependence onimported food and exposure tointernational food prices is probablyhighest and consumers feel the brunt of theimpact of soaring food prices. However,the rural poor are also affected eventhough their connections to internationalfood markets might be weaker. The impactof higher food prices on the poor dependscrucially on whether they are net foodsellers, in which case the impact could inprinciple be positive, or net food buyers, inwhich case the impact is unequivocallynegative. The evidence suggests that mosthouseholds in the developing world andespecially the poor are net buyers of food,and this holds even for rural householdsthat are mostly engaged in agriculture.Whether urban or rural, it is the poorest ofthe poor who spend the largest share oftheir income on food and who have noaccess to assets such as land who suffermost. Female-headed households figuredisproportionately on both counts, so thenegative impacts of high food prices alsohave a gender dimension that needs to beaddressed in policy responses.Faced with sharply rising food prices,poor households had to adjust their food4 See The State of Food Insecurity in the World 2008(FAO, 2008a) for a detailed discussion of theseimpacts.consumption patterns. Households arereported to have reduced their food intakeor to have attempted to maintain it byreducing their spending on moreexpensive foods and other non-fooditems. Among the poorest populationgroups, per capita cereal consumptionmay even rise in spite of increasing pricesas consumers shift to a cereals-baseddiet away from more expensive andhigher-quality food groups, includingmeat, dairy products and vegetables. Inspite of the soaring prices in globalcommodity markets (in particular oftradable staples such as wheat, rice andmaize), the most recent data on the fooduse of these key commodities illustratethe resilience of per capita consumption.This trend is the same for most lowincomecountries, including those withhigh levels of undernourishment.However, there are also instances ofconsumers returning to more traditionalfoods as the costs of preferred butimported cereals increased.Rising food pricesfuel inflationRising food prices contribute to the overallrate of inflation in most countries,including developed countries. Changesin food prices are an importantcomponent of the general rate of inflation,as measured by the consumer price index(CPI). This is a weighted average of thechanges in the prices of a representativefixed basket of goods, including food, andwith the weights reflecting the importanceof each good in the typical householdbudget. The greater the share of food inthe household budget, the more risingfood prices fuel general inflation. For mostdeveloped countries, food expenditureshares range between 10 and 20 percent.In developing countries, the share of foodexpenditure in household budgets is muchhigher, absorbing more than half of familyincome in countries such as Bangladesh,Haiti, Kenya and Malawi.The State of Agricultural Commodity Markets 2009 26

In addition to imposing a heavyburden on the cost of living, rising foodprices can have further indirect effects oninflation if they prompt pay increases –higher wage demands have been at thecore of several protests. An inflationtargetingcentral bank might have to curbinflationary pressure from higher foodprices when the effect on non-food pricesis significant, and this would mean raisinginterest rates. This has become a growingtendency in developing countries, buthigher interest rates would undermine themuch-needed investment in sectors thatprovide a path out of poverty forvulnerable countries, especially theagriculture sector.Higher food prices meanhigher food import billsIn spite of the recent falls in internationalfood prices, the global cost of importedbasic foodstuffs in 2008 is forecast toreach more than US$1 trillion, nearly25 percent higher than in 2007, driven bysubstantially increased prices of rice,wheat, coarse grains and vegetable oilsand compounded by increased freightcosts, which nearly doubled for manyroutes. Many of the poorest countries arefood importers, heavily dependent oncereal imports. Higher food prices onworld markets mean higher food importbills and a balance of payments problem.The total cost of food imports fordeveloping countries was alreadySelected annual consumer price indices as of September 2008SenegalTogoEcuadorMauritaniaPhilippinesNigerUnited Rep. of TanzaniaDem. Rep. of the CongoBangladeshHondurasLesothoZambiaYemenMozambiqueAngolaGhanaSierra LeoneHaitiEgyptPakistanSudanNicaraguaAzerbaijanSri LankaEthiopiaKenyaMongolia0 10 20 30PercentageSource: FAO.Food import bills in 2007 and 2008Million US$2007 2008300200Food import bills of developedand developing countriesIndex (1998–2000 = 100)350300250200Forecast changesin global food import bills by type,2008 over 2007RiceVegetable oilsSugar1000SugarDairyMeatOilsand fatsCerealsSource: FAO.1501005098 99 00WorldNFIDCsLIFDCs01020304050607LDCsDeveloping countriesDeveloped countries08Note: NFIDCs, net food-importing developingcountries; LIFDCs, low-income food-deficit countries;LDCs, least-developed countries.Source: FAO.Coarse grainsMeatWheatDairy0 20 40 60 80 100PercentageSource: FAO.The State of Agricultural Commodity Markets 2009 27

What happened toworld food prices and why?33 percent higher in 2007 than in 2006,and annual food import bills for lowincomefood-deficit countries (LIFDCs)are now more than double their 2000level.At the national level, the impact of highcommodity prices depends, among otherthings, on whether a country is animporter or an exporter, what it importsor exports, its trade policy and itsexchange rate policy. LIFDCs dependenton increasingly costly cereal imports(in some cases for up to 80 percent ofdietary energy supplies) and on exports oftropical products or agricultural rawmaterials, for which prices have increasedForecast changes in food import bills of selected LIFDCs, 2008 over 2007United Rep. of TanzaniaLesothoEritreaNicaraguaSwazilandTogoDem. Rep. of the CongoHondurasAngolaBangladeshYemenGuineaMauritaniaSomaliaHaitiZambiaCameroonGambiaMozambiqueCôte d’IvoireSenegalBeninPakistanLiberiaKenyaZimbabweGuinea-BissauNiger0 20 40 60 80PercentageSource: FAO.The State of Agricultural Commodity Markets 2009 28

less, and with currencies linked to ordepreciating against the US dollar arethe most vulnerable. The situation ofcountries that in addition are foodinsecure(in the sense of more than30 percent of the population beingundernourished) and net fuel importersis obviously extremely precarious. Thereare more than 20 developing countrieswith these characteristics, at least 16 ofthem in Africa.It is apparent that the most vulnerablecountries bore the highest burden of theincreasing cost of imported food, withtotal expenditures by LIFDCs some35 percent higher in 2008 than in 2007 –the largest annual increase on record.Compared with other developingcountries, LIFDCs already tend to havesignificantly greater current accountdeficits as a percentage of their GDPs,spend a much greater share of the value oftheir merchandise exports to import foodand have lower income per head. 5 The5 On average, LIFDCs had significantly lower annualGDP per capita (US$2 213) compared with otherdeveloping countries (US$7 453) in the period 2000–04.Vulnerability of LIFDCs according to risk factorsmajority of LIFDCs have witnessed adecline in the value of their currenciesagainst the US dollar, which has furtherincreased the cost of their food imports.These countries find themselves undereconomic pressure from all sides.In addition, the financial crisis couldhave serious implications for foodsecurity in many developing countries.The tight credit situation may restrictaccess by poor countries to finance, thuslimiting their ability to import food.LIFDCs in particular can have difficultyfinancing their cereal import needsthrough debt and may face increasedfiscal pressure.Consumers lose butdo producers gain?Clearly, the impact of high food prices onconsumers is unequivocally negative.However, in principle, high prices shouldhave been good news for farmers aroundthe world. Higher food prices stand toimprove the incentives for thoseproducing the particular productsconcerned. In principle, higher foodprices increase the funds available toproducers for investment, leading toincreased agricultural growth and povertyreduction. In this sense, higher foodprices might be considered an opportunity –at least for windfall gains for some.Access to means of production and assetssuch as land is a critical factor indetermining who reaps the benefits ofhigher food prices. Large landholders willbenefit most. Households highlyspecialized in agriculture are also likelywinners, although these constitute arather small proportion of the population,relative to the rest. However, willproducers respond by increasing supply?It appears that the high food prices havenot been an opportunity for mostdeveloping country farmers and a supplyresponse has not materialized. As notedabove, in spite of enormous increases inprices, developing countries increasedtheir cereal production by less than onepercent in 2008 and production actuallydecreased in the vast majority of them.The hoped-for supply response simplyfailed to materialize. Understanding thereasons for this and, hence, what needsto be done to promote supply responseare crucial strategic and policy issues.These are addressed in detail in Part 2 ofthis report.Current accountbalance/GDP*Commercial foodimport bill/GDP**Commercial foodimport bill/merchandiseexports***Import dependence(calorie basis)*-10 0 10 20 30 40 50PercentageOther developing countriesLIFDCsNote: Differences in group means: * = significant at 5% level;** = not statistically significant; *** = significant at 10% level.Source: FAO.The State of Agricultural Commodity Markets 2009 29

Part 2Why were high food pricesnot an opportunity for poor farmers?Producers in developing countries have faced real declines in prices inmost of the last 50 years. The result has been a lack of investment inagriculture and stagnant production. These formed the background tothe recent problems in international food system and they also made itmore difficult for developing countries to deal with these problems. So,on the face of it, the high food prices, and the possibility that they mightpersist (even if not at the peak levels reached in early 2008), looked likean opportunity for small poor producers. But was it? Would producersinvest and increase productivity and production in response andgenerate agricultural growth? Most developing country producers are fardistanced from what happens on international markets, so increasingfood prices there do not necessarily mean higher prices for poorproducers. For this to be the case, those high international prices needto be transmitted across national borders and through marketing chains.However, higher output prices alone are still not sufficient. Incentives toinvest and produce also depend on how much the costs of inputs such asseeds and fertilizers have risen. Producers need access to affordableinputs. They also need access to affordable credit. Even where adequateincentives are in place, a positive supply response from producers can beblocked by a range of supply-side constraints, especially a lack oftransport and market infrastructure for bringing any increase inproduction to market. In many developing countries, none of theseconditions is adequately met. As a result, higher prices on internationalmarkets have not triggered a positive supply response by smallholderfarmers in developing countries.The State of Agricultural Commodity Markets 2009 30

Do world price increasesreach developing country producers?Food prices increased sharply inmany countries in line with theinternational price boom. In others,domestic food prices did not follow theincrease in world prices or were slow toadjust. Unless higher prices actually reachagricultural producers in developingcountries, those producers will not benefitfrom increasing prices on world marketsand they will have no incentive to increaseproductivity and production. There aretwo questions to consider: first, dointernational price changes lead to pricechanges at national level; and second, ifnational prices do change, do they filterthrough to producers?In theory, prices in a country that islinked to the world market in a free-tradeenvironment will move together withinternational prices expressed in the samecommon currency. If the national price isabove the international price, imports willtake place until the national pricebecomes equal to the international priceafter allowing for any transport costs.Increased exports fulfil the sameequilibrating role if the national price isbelow the international price. Under theseconditions, “price transmission” iscomplete – the price of a commodity soldon competitive world and nationalmarkets can only differ by the cost oftransporting it. Commodity analysts viewfast and complete price transmission asan indication of the efficient functioning ofa market. However, in practice, a numberof factors can limit the extent to whichworld price changes “pass through” to thenational level. 6Policies at the border affect the extentto which world price changes passthrough to national markets. For example,export restrictions or taxes hinder thetransmission of price signals. Ad-valoremimport tariffs, unless they are prohibitivelyhigh, allow world price changes to be fullytransmitted to domestic markets inrelative terms. Therefore, an increase inthe international price will result in aproportional increase in the domesticprice at all points in time provided thattariff levels remain unchanged. Domesticmarkets can also be insulated by largemarketing margins that arise from hightransport costs. Especially in developingcountries, poor infrastructure, transportand communication services give rise tolarge marketing margins because of thehigh costs of delivering the locallyproduced commodity to the border forexport or the imported commodity to thedomestic market. High transport costsand marketing margins hinder thetransmission of price signals as they mayprohibit arbitrage. Other factors, such asconsumer preferences for specificattributes of locally produced food orquality differences between domestic andinternationally traded commoditiesdetermine the extent to whichdomestically produced food can besubstituted by food purchased in the worldmarket and, thus, affect pricetransmission. The distinction betweenSouth Africa: maize pricesUS$/tonne400300200100short-run and long-run price transmissionis also important. Changes in the price inone market may take some time to betransmitted to other markets for a numberof reasons, such as policy interventions,adjustment costs, complexity of themarketing chain, contractualarrangements between economic agents,storage and inventory holding, delays intransportation or processing or evensimple inertia. As a result, pricetransmission is rarely complete or rapid.In the case of maize in Africa, transportcosts, a weakening US dollar andconsumer preferences hindered thetransmission of price signals from theworld market, and domestic pricesresponded slowly. White maize is notreadily substituted in consumption withinternationally traded yellow maize.Nevertheless, increases in the volumes ofmaize traded, both formally andinformally, across the Eastern andSouthern African regions mean thatnational markets are integrated with oneanother. Statistical analysis using monthlymaize price data for 1998–2008 suggeststhat both yellow and white maize prices inWhiteYellowWorld6 A comprehensive review of issues surroundingprice transmission is provided in Rapsomanikis,Hallam and Conforti (2006).0200320042005200620072008Source: FAO.The State of Agricultural Commodity Markets 2009 31

Why were high food prices notan opportunity for poor farmers?South Africa, the leading maize exporterin the region, respond slowly to changes inthe world market price but that worldmarket price signals do pass throughacross countries in the region. BetweenJune 2006 and June 2008, the averageEastern Africa: maize pricesUS$/tonne400300monthly rate of increase in the worldmarket price for yellow maize amountedto 3.9 percent, compared with white andyellow maize average increases of 1.2 and1.6 percent per month, respectively, ondomestic markets.NairobiKampalaWorld2001000200320042005200620072008Source: FAO.Rice prices in selected countriesUS$/tonne6005004003002001002003BangladeshPhilippines20042005IndiaThailand (domestic)IndonesiaWorld20062007Source: FAO.The State of Agricultural Commodity Markets 2009 32

Maize prices in important markets inEastern African countries such as Kenyaand Uganda also move together with theworld price. On average, in the period2003–08, world price changes filteredacross these markets relatively slowly,with maize prices in Kenya and Ugandaadjusting fully to world price changesafter about seven months. Nevertheless,the large increase in the world price ofmaize from July 2007 onwards wasreflected in both countries, suggestingthat adjustment to world market pricechanges can be fast, especially whensuch changes occur simultaneously withlow stocks or shocks in regional foodsupply or demand. In this period, theaverage monthly rate of growth in maizeprices in Nairobi and Kampala amountedto 3.7 and 7.1 percent, respectively,compared with a world price monthly rateof 4.3 percent.In the case of rice in Asia, the impactof world market price changes hasvaried from country to country, againdepending on exchange rates against theUS dollar, trade and market policies andthe domestic demand and supplysituation.On average, the weakening of theUS dollar in 2006–07 partly offsetworld price increases for a number ofAsian countries. For example, in India,the Philippines and Thailand, theappreciation of the national currenciesvis-à-vis the US dollar blunted worldprice increases at the border, resulting indifferent patterns of domestic pricebehaviour, mainly reflecting nationalmarket fundamentals and, in somecases, policy response to the internationalrice price boom. In India, a majorexporter of rice, domestic pricesincreased at a moderate rate owing toincreased production in the 2007–08marketing season in conjunction withpolicy measures (implemented in thelast quarter of 2007) that effectivelybanned most rice exports. In netimporting countries, the larger part of theFAO case study evidence on levels of smallholder market participationCommon to all the countries studied isthe significant heterogeneity of householdstatus with respect to maize productionand sales.In Kenya, the proportion of maize sold isrelatively high at 46 percent of totalproduction. However, while 98 percent ofhouseholds cultivate maize, only 36 percentsell the product, with 20 percent of householdsaccounting for the majority of sales.In Zambia, about 80 percent of farmhouseholds grow maize, but fewer than30 percent of them sell the product. Of thetotal sales, 40–45 percent come from5 percent of farm households in thesmallholder sector. These households tendto have incomes that are significantly higher(8–9 times) and are located in areas moreaccessible to markets than those householdsthat do not sell.increase in domestic prices took placein 2007 and in most cases coincidedwith increased rice imports. In the caseof Bangladesh, food shortages owingIn Mozambique, production and sales arealso highly concentrated. Ninety percent ofhouseholds in the central region produce maizebut only 24 percent sell it. In the southernregion, 59 percent produce but only 4 percentsell maize, and the average amount sold is only150 kg per household per year. Five percent ofhouseholds account for 80 percent of salesnationally.In South Africa, 18 000 commercial farmersaccount for 90 percent of grain production, withthe remaining 10 percent accounted for by3 million smallholders.The differentiation across households islikely to become more distinct as averagelandholding sizes continue to fall. In Malawi,smallholdings have fallen from an average of1 ha to less than 0.7 ha in the past 30 years. Inan “average” year, only 20 percent of maizeproduction is marketed.Average monthly changes in domestic and world rice prices, 2006–2007Percentage2.01.51.00.50.0BangladeshIndiaIndonesiaDomestic pricesPhilippinesWorld prices in national currencyThailandWorld (US$)Source: FAO.to a cyclone and floods in 2007contributed to significant increasesin the domestic price of rice, while inIndonesia and the Philippines, riceThe State of Agricultural Commodity Markets 2009 33

Why were high food prices notan opportunity for poor farmers?imports rose in order to meet theincreasing demand for food.Even if there is transmission ofinternational price changes to thenational level, this does not necessarilymean that price increases will reach allproducers or consumers, althoughconsumers in urban areas may be morequickly exposed to price increases. Howmuch producers are affected depends onthe extent to which they participate inlocal markets and the extent to which localmarkets are linked with broader national,regional or international markets. Itcannot be assumed that there is strongspatial price transmission and significantsmallholder market participation in wellintegratedmarkets. In many developingcountries, these assumptions simply donot hold.Smallholders are generally engaged ina different value chain from morecommercial farmers. The latter may belinked to large grain-trading, processingand retailing firms, commodityexchanges, networks of integrated silos,millers, and supermarket retailers,sometimes with transnational firmownership, accessible marketinformation, large transaction volumes,well-specified grades and standards, andlegal systems that accommodate moresophisticated contracting arrangements.This contrasts with the more informalchains in which smallholders are typicallyinvolved and which are characterized byspot market transactions, smallpercentages of production sold off thefarm, weak road and communicationsinfrastructure, weak information systemsand limited coordination between inputdelivery, credit and sales.There is considerable evidence thatsmallholders in Eastern and SouthernAfrica are only entering local-levelmarkets as sellers of grain to a ratherlimited extent. Throughout the regions,the proportion of maize producers whoare actively selling maize into localmarkets is low and there is often agreater level of participation of producinghouseholds as purchasers rather than assellers of maize.Given the limited market participationby smallholders, it follows that priceincreases may not have much effect onproduction incentives for many ruralhouseholds who are not participating inmarkets to any significant extent assellers. Compounding this is the fact thatmany producers are effectively isolatedfrom regional or international markets asa result of weakly integrated markets. Insuch cases, price increases at thosemarket levels will have no effect on thesituation of smallholders. Econometricstudies of market integration and pricetransmission in Africa tend to confirmthis view.The State of Agricultural Commodity Markets 2009 34

Prices increased but so did costsWhatever improvement higherproduct prices might havemade to the incomes ofproducers, increases in input costs haveworked against it or even cancelled it out.Input costs have been increasing steadilyfor some years and many farmers sawrising output prices as a temporary respitefrom diminishing margins over costs untilinput prices shot up dramatically in 2007,outpacing output prices.The dramatic increase in oil prices thatbegan in 2003 has had a profound effecton all economic sectors, includingagriculture. Increases in fuel priceshave raised the costs of producingagricultural commodities both directly byraising the cost of far power and transport,but also indirectly because oil is animportant cost item in fertilizerproduction. The increase in energy priceshas been both rapid and steep, with theReuters-CRB energy price index morethan tripling since 2003.The US dollar prices of some fertilizers(e.g. triple superphosphate and muriate ofpotash) rose by more than 160 percent inthe first few months of 2008 comparedwith the same period in 2007. This rate ofincrease in the price of fertilizer wasChanges in output and input prices for selected products and inputs(percentage)(Jan–Apr) Meat Dairy Cereals Oils Sugar Food priceindex 12008–07 9 49 80 94 23 522007–06 5 35 32 29 –39 12(Jan–Apr) Ammonia Urea CAN NPK DAP IRACcrude oil 21 Food price index: beans, butter, cocoa, cottonseed oil, hogs, lard, maize, steers, sugar and wheat. Input priceindex: ammonia, urea, CAN, NPK, DAP and IRAC crude oil.2 Imported Refiner Acquisition Cost (IRAC) of crude oil in the United States of America.Sources: For food items: FAO for meat, dairy, cereals, oils and sugar composites; and FAO and CRB for the foodprice composite index. For input items: FAO-AGP, Yara and Energy Information Administration.Input priceindex2008–07 82 31 85 213 163 70 992007–06 4 29 15 41 33 –3 19greater than the rate of increase in pricesfor agricultural products.The ratio of output to input pricesprovides a broad indication of how farmprofitability is changing. The steadyincrease in input prices in the last decadehas led to a declining trend in this ratio.Increasing productivity can offset thenegative income consequences of adeclining ratio but this did not happen inmost developing country agriculture,especially in Africa. The ratio deterioratedsharply with the sudden major increase infertilizer prices in 2007. Furthermore,there is some evidence that, while outputprice increases are not completely andrapidly transmitted to producers,increases in the prices of inputs, especiallywhere these are imported, are passed onfully and quickly.Crude oil and fertilizer price indicesOutput to input price ratio: food vs inputsIndex (1995 = 100)600Percentage1204002001008060095 96 97 98 99OPEC reference basketPotash f.o.b. Vancouver01 02 03 04 05DAP f.o.b. North AfricaUrea f.o.b. YuzhnyyNote: DAP = diammonium phosphate;OPEC = Organization of the Petroleum Exporting Countries.00060708Sources: International Fertilizer Association and OPEC.400304Note: Output and input price indices are unweighted geometric means of the relativenominal prices of the individual commodity prices. The relative price of eachcommodity is the nominal price over the base period price (2003 = 100).Sources: For food items, FAO and Commodity Research Bureau;for input items, FAO, Yara and Energy Information Administration.05060708The State of Agricultural Commodity Markets 2009 35

Why were high food prices notan opportunity for poor farmers?Supply-side constraintsIf price incentives do materialize,the lack of integration into marketsof many small producers preventsthem from responding. In manydeveloping countries, the structure ofsmallholder agriculture has a significantimpact in constraining supply responseand it is changing – land–labour ratiosare declining as population increases –in a way that could further lowersmallholder producers’ capacity torespond to higher prices. Evidence fromEastern and Southern Africa shows thatthere is a high concentration of marketedmaize among a small number ofhouseholds (in some countries, 2 percentof households supply 50 percent of thetotal volume of marketed maize), andother smallholders are not makingthe investments needed to generatesurpluses for sale on even moderatelysized holdings (3–4 ha). In Uganda,smallholder agricultural productiondominates, with farmers with an averagelandholding of less than 2 ha accountingmore than 90 percent of total foodproduction. Smallholder farmers accountfor about 80 percent of agriculturalproduction in Ghana.Throughout Africa, smallholderagriculture is often characterized by lowproductivity, rudimentary technology,minimal use of inputs (includingfertilizers), problems with marketingsystems and high crop losses.Agricultural yields have remainedrelatively unchanged, with much farmingconducted by the elderly with little or noknowledge of modern farming practices.The incentives for investment in terms ofadequate and stable levels of profitabilityhave been lacking, but there are alsosignificant constraints to the adoption ofimproved technologies, such as shortageof locally improved seeds, plantingmaterials and other inputs. Althoughaccess to inputs has improved in somecountries following reforms, with morelicensed dealers and smaller quantitiesavailable for purchase, input use bysmallholders remains low and constrainsproductivity.The small quantities of productsavailable to sell and a frequent lack oforganization among smallholders to bulkthese together into more economicvolumes, together with the high cost ofmarketing owing to weak infrastructureand communications, mean it is notsurprising that supply response to betterprices is weak. Yet without that supplyresponse, funds are not generatedfor investment. Throughout theproduction and marketing chain, a lackof access to affordable credit furtherlimits the feasibility of productivityimprovinginvestments. Theseconstraints need to be overcome toallow a significant supply response,and policy interventions are needed tobreak out of this vicious circle that trapssmall producers in poverty.Development of physical infrastructureappears to be of particular importance inmost developing countries. Welldevelopedtransport, communication,storage and marketing infrastructure canfacilitate the selling of output and thebuying of inputs. Numerous FAO casestudies from all over the developing worldshow that deficiencies in transportinfrastructure are a major constraint,limiting access to domestic, regional andinternational markets.Credit markets facilitate production,consumption smoothing and thedevelopment of new enterprises. Theyare an important mechanism to assistthe poor in adjusting to a new economicenvironment. Limited access to financialservices (both credit and savings) hasexacerbated vulnerability to shocks.However, most Structural AdjustmentProgrammes have reduced theavailability of credit to rural householdsand raised its cost.FAO studies report widespreaddifficulties for farmers in accessing credit.Small-scale farmers in Cameroon havelittle access to credit. MicrofinanceThe State of Agricultural Commodity Markets 2009 36

institutions were set up in 1992, but theyremain poorly distributed throughout thecountry and sometimes lack goodmanagerial practices. Smallholderfarmers in Malawi face credit constraints,with microfinance institutions tending toemphasize finance for off-farm businessactivities, and much of the availableagricultural credit is confined to thetobacco sector. Small- and medium-scaletraders in the United Republic of Tanzaniacannot access the credit that wouldenable them to purchase stocks ofproduce and sell out of season at higherprices. Some farmers have shifted awayfrom the production of cash crops such ascotton because food crops can moreeasily be sold on cash terms. In Uganda,the only source of credit for rural dwellersis the microfinance industry, whichfavours non-agricultural activities.Attempts are currently underway inUganda to develop financial services thatmeet the needs of the rural populationand integrate them into the nationalfinancial system. In Guatemala,agricultural credit availability is low anddeclining. Most available credit ischannelled towards export products(traditional and non-traditional) with littlesupport for basic grains production.Guyana has attempted to overcome theproblems concerning obtainingacceptable forms of collateral securityfaced by many small farmers. TheInstitute of Private EnterpriseDevelopment (IPED) was established in1986 as a local non-governmentalorganization (NGO) to provide loans tosmall entrepreneurs. It uses a crossguaranteesystem, whereby eachmember of a small group is liable for thedebts of the others. The IPED has beeninstrumental in facilitating outputincreases for a number of smallproducers. On the other hand, theexperience with government creditprovision schemes in Peru was notpositive, with massive losses in capitalreported. Most of the credit to theagriculture sector now comes fromcommercial banks, and there was adramatic reduction in the number of smallfarmers supported by the formal financialsystem during the 1990s.Can developing country farmersrespond to high food prices?It is claimed that the recent high foodprices present an opportunity for theagriculture sector in developing countriesto increase production, raise incomesand re-establish itself as an engine ofgrowth. While there is some evidencethat output responds positively to realprice increases and negatively todecreases, this is not always found to bethe case. A wealth of FAO case studyevidence shows that price increases aloneare not enough to increase productivityand supply. In a review of 150 episodes ofprice and production changes in therecent past, FAO found that only in66 percent of cases was the response inthe direction expected, with 34 percent ofcases either reporting an increase inproduction when prices were fallingor a decrease in production when priceswere increasing. Overall, the pictureis mixed regarding how developingcountry farmers are likely to react to highproduct prices.What is clear is that higher outputprices alone are not sufficient toencourage a significant expansion in foodsupplies. A significant supply responserequires investment to increasesmallholder productivity. Expandingproduction into new land will not beenough to meet future food needs. In orderto match the global demand for affordablypriced food by 2050, annual foodproduction must increase by more thanone percent annually, and an estimated80 percent of the increase will have tocome from growth in yields. Moreover,productivity-led increases in food andagricultural production will increase notonly farm incomes, but will also stimulatebackward and forward linkages in therural economy and lead to a reduction inpoverty.Significant supply response based onproductivity improvement requires afavourable and stable incentivesenvironment in which higher commodityprices are transmitted to the farm leveland producers have access to affordableinputs and can deliver their output tomarket. This requires addressing thevarious structural constraints that limitsmallholder productivity – rudimentarytechnology, lack of access to moderninputs and credit, poor marketing andtransport infrastructure, and ineffectiverural services and institutions. Effectivegovernment policies have a role inensuring that the necessary conditions aremet. For example, successes intransforming agriculture in India werebased on state support to credit, inputsand irrigation infrastructure, which themarket had failed to provide. However, thewrong policy choices can block thetransmission of higher prices toproducers, stifle incentives anddiscourage supply response.The State of Agricultural Commodity Markets 2009 37

Part 3What shouldthe policy response be?The State of Agricultural Commodity Markets 2009 38

What are the policy problems?Faced with rapidly increasing foodprices, many countries madepolicy changes or introduced newpolicy measures. High food prices pose aseries of interrelated policy challenges.Most obviously, there is the short-runemergency of ensuring affordable foodsupplies for poor consumers in order toavoid increasing the incidence ofmalnutrition. While this can be achieved tosome extent at least with available foodsupplies, there may also be some scopefor measures to increase food productionand moderate prices even in the short run.However, the main potential for asignificant supply response and morestable prices is in the medium to longerterm. The current problems reflect thecontinuing underlying precariousness ofthe food security situation in somecountries and this needs to be rectified.High prices provide an incentive and anopportunity to producers in developingcountries but, as indicated above, thereare many constraints to be overcome if asignificant supply response is tomaterialize in the medium to longer term.Actual policy interventions bygovernments around the world haveemphasized a limited range of easy, fastactingand cheap measures (especiallytrade policy measures) to secure foodsupplies for domestic markets and tomoderate the cost to consumers. Thisshort-termism, while entirelyunderstandable in view of the emergencysituation, means that in many casesmedium- and longer-term needs to raiseproduction have been neglected. Effortsto protect consumers from higher foodprices need to be balanced againstmaintaining incentives for producers toachieve the productivity and productionincreases that are necessary to stabilizeprices and supplies. Some of the shorttermmeasures introduced bygovernments to address the immediatefood security needs of poor consumershave held down prices for producers and,hence, incentives to invest in increasingproductivity and production. There is aneed for policy measures to be targeted,non-distortionary and positive towardsagricultural investment.Policy problems are not confined to theagriculture and food sectors. High foodprices also have macroeconomicimpacts. For food importers, these includebalance of payments problems resultingfrom higher food import bills andincreased inflationary pressure becausefood is such a large element in theconsumer’s basket of goods. Foodexporters enjoying higher earnings fromhigher food prices on world markets mayneed to consider how best to manageincreased export earnings in order toensure that they are channelled intoproductive investments to stimulate longrungrowth.The State of Agricultural Commodity Markets 2009 39

What shouldthe policy response be?How have developing countriesresponded?National policy responses tohigh food prices have varied innature and effectiveness.In many cases, governments have usedexisting policy measures already in place.The policy responses made can begrouped into three broad categories,targeting consumption, trade andproduction, respectively (see AnnexTable 1). There appears to have beenrelatively little action on longer-termmeasures.Safeguardingfood consumptionMany countries, especially leastdeveloped countries (LDCs), haveintervened to safeguard poor consumers’access to food though a variety ofemergency and “safety net” measures.These have included distribution of basicfood staples (grains, bread and milk),cash to buy food (or food for work) to themost vulnerable groups – the poorest inurban and rural areas, schoolchildren orthe sick in hospitals. Consumer pricesubsidies, especially for the main foodstaples, have been widely used. At thesame time, some governments havealso reduced consumption taxes. Forexample, price controls, through salesfrom public stocks at pre-set prices orsimply freezing retail prices by decree,have also been used.An FAO survey of 77 countries showsthat 55 percent of them have used pricecontrols or consumer subsidies in anattempt to reduce the transmission ofprice increases to consumers (see box).While such measures can be effective incontrolling prices in the short run, theyare expensive in terms of scarcebudgetary resources and can distort foodmarkets. Price controls can lead torationing and suppress incentives toproducers. Income transfers are lessdistortionary than subsidies on food andcan be targeted on the poor andvulnerable, whereas non-selectiveblanket subsidies and price controlsbenefit the rich and poor equally. This alsoapplies to other safety nets such as foodand nutrition programmes.Encouraging food imports anddiscouraging food exportsMany countries have introduced tradepolicy measures to curtail priceincreases and ensure adequate supplieson domestic markets. These includetariff reductions to facilitate imports,export bans and taxes to divert suppliesonto domestic markets. More than halfof the 77 countries in the FAO surveyhad reduced grain import tariffs andone-quarter had imposed exportcontrols of some kind – either taxes orphysical controls such as bans andquotas. In the short term, these trademeasures are feasible, cheap and easy toimplement. However, they may haveadverse effects on incentives to expandfood supplies through increased domesticproduction and on world markets byfurther restricting supplies and pushingup prices even more. While imposingexport taxes raises some additionalgovernment revenue, a number ofexporting countries have reported thatexport controls and, hence, low outputprices coupled with high input pricesactually led to decreased planting ofcereals. Reducing import tariffs alsoincurs a loss of tariff revenue, whichmay make an important contribution tooverall budgetary resources fordevelopment.Boostingagricultural productionReducing producer taxes, especiallyon grain production, has been a widelyused policy to boost production in bothlow- and middle-income countries.Production subsidies, especially on grainproduction, have been used to reinforceincentives. Subsidies on inputs such asThe State of Agricultural Commodity Markets 2009 40

FAO survey of policy responsesA survey of policy responses for 77 countriesundertaken in May 2008 revealed thefollowing: reduction in or elimination ofcereal import duties in about half of the77 countries; price controls or consumersubsidies in 55 percent of the countries;some form of export restrictions, includingtaxes, in one-quarter of the countries; androughly the same proportion took measuresto increase supply, drawing on cereal stocks.On the other hand, only 16 percent ofcountries surveyed had implemented nopolicy responses whatsoever.Policy responses also varied considerablyby region. Countries in East Asia, South Asiaand the Near East and North Africaundertook significant activities in all fourareas of intervention. In every geographicalregion except sub-Saharan Africa,50 percent or more of the countries reportedusing price controls or consumer subsidies.On the other hand, the regions of sub-Saharan Africa and Latin America and theCaribbean showed the lowest level of policyintervention, with roughly 20 and 30 percentof their countries, respectively, reporting noactivity in any of the policy categories listedabove.Policy actions to address high food prices(sample of 77 countries by type of action)Reduce taxeson foodgrainsIncrease supplyusing foodgrain stocksExport restrictionsPrice controls/consumer subsidiesNone0 10 20 30 40 50 60PercentageSource: FAO.Policy actions to address high food prices(sample of 77 countries by region)Percentage100806040200AfricaEastAsiaEurope/CentralAsiaLatinAmerica/CaribbeanNear East/NorthAfricaSouthAsiaReduce taxeson foodgrains44%80%33%44%60%78%Increase supply usingfoodgrain stocks22%80%0%0%60%56%Export restrictions19%40%33%19%20%44%Price controls/consumer subsidies33%80%67%50%100%67%None22%0%0%31%0%11%Source: FAO.fertilizer and seeds have also beencommon. While such subsidies and thedistribution of productive inputs (e.g.seeds and fertilizers) can provide a shortormedium-term stimulus to production,these schemes can be costly and maylead to suboptimal use of these inputs,especially if they are maintained over along period. In spite of a perceivedneed to secure adequate food supplies,some countries continue to controlproducer prices, setting the price lowerthan the free market price, or procuregrains from domestic suppliers at lowprices for stockholding. Moreover, therelease of grain stocks at low prices putsdownward pressure on prices,discouraging increases in domesticproduction.The State of Agricultural Commodity Markets 2009 41

What shouldthe policy response be?What policy measures should be taken?As the previous section showed,governments around the worldhave responded to high foodprices with a variety of policy measures.Understandably, these have emphasized alimited range of fast-acting measures tosecure food supplies for domestic marketsand to moderate the cost to domesticconsumers. However, the medium- andlonger-term needs to increase foodproduction and the internationalimplications of unilateral national policychoices should not be overlooked. Whatthe “best” policy choice is depends on avariety of considerations including thecause of the price increases, the severityof their impact, the size of the vulnerablepopulation groups, their location, thepolicy options and policy space availableto the government, the financial andbudgetary situation, and theadministrative and institutionalinfrastructures to implement policies. Thissection looks in more detail at the policyoptions and reviews the pros and cons ofthe various policy instruments available.These address two basic challenges. Thefirst is to provide direct support toconsumers, especially those in vulnerablegroups, to help them maintain their foodconsumption levels through so-called“safety net” measures. The second is toincrease supplies of food on domesticmarkets through manipulating foodstocks or trade or by stimulating a shortrunsupply response from the domesticagriculture sector. Ultimately, it isincreasing agricultural productivity andproduction that is the foundation forachieving adequate and stable foodsupplies and prices in the medium andlong term, and care must be taken toensure that short-run emergencymeasures do not compromise this goal.Safety nets for poor consumers“Safety net” is an umbrella term thatcovers various programmes aimed atassisting vulnerable population groups. Itincludes targeted food distributionprogrammes, targeted cash transferschemes, feeding programmes andemployment schemes. Many countrieshave one or more safety net programmeswith varying degrees of coverage of thepopulation and the extent of assistancedelivered. An employment scheme mayalso be a guaranteed programme, backedby legislation. The case for targetedinterventions can be made on budgetarycost grounds or to avoid leakage to nonpoorpopulations. Although they can beadministratively burdensome, they can benarrowly targeted on beneficiaries withoutcreating distortions in the markets. A“food for work” programme can also bemade self-targeting by the choice of thefood distributed, the food that the poorconsume, or by targeting an area withmost vulnerable population groups.In the context of high food prices, one ofthe problems noted is that not all countrieshave safety net programmes in placebecause of their budgetary costs andadministrative complexity. Where this isthe case, it will be very difficult to put inplace a scheme in a short period, giventhe administrative, institutional and othersupports required for this. It is only wheresuch a scheme already exists that it can bescaled up when an emergency arises.Cash transfers can include thedistribution of cash or cash vouchers andcan be tied to cash for public worksprogrammes and/or microfinanceinitiatives. They are appropriate wherefood markets work and improved accessto food is the objective of the intervention.In addition to providing the ability toprocure higher-priced food, unrestrictedcash transfers allow households to makedecisions as to how to spend or invest thecash. For example, some households, inallocating labour to on-farm activities,may have produced sufficient food butmay have limited cash for otherconsumption or investment needs. Suchinterventions can also foster local marketdevelopment in food and other goods byThe State of Agricultural Commodity Markets 2009 42

providing greater incentives to the privatesector to engage in higher-volume, morestable marketing channels.However, where markets workimperfectly, for example, where they arepoorly integrated with other markets orwhere there is limited supply response toincreased prices, such interventions canresult in price inflation as the increasedspending power bids up the prices ofscarce goods. The design should beappropriate – in some contexts, increasingpublic-sector wages as a means oftransferring cash can assist poorer urbanconsumers, but in other contexts, the poorare engaged primarily in informal-sectoractivities and may not benefit. Where foodprices are increasing rapidly, adjustmentto the value of transfers will be needed inorder to maintain purchasing power, andthis can be administratively difficult.Other schemes aimed at ensuring thatthe poor have access to food offer lessflexibility than straight cash transfers.Such interventions include food stampsor vouchers and conditional cash transfers(e.g. in exchange for attendance atschools or clinics). As with cash transfers,these interventions are appropriate wherelocal food markets work and improvingaccess to food is the objective. Voucherscan become a parallel currency inmarkets for food and other goods. Assuch, they can have some of the positiveeffects of unrestricted cash transfers infostering local market development, butthey tend not to be used for investment.The schemes tend to have highertransaction costs than cash-basedmeasures and although restrictingundesirable consumption may be anobjective, this can be difficult. Thedesign of these interventions can becomplicated. For example, schoolfeeding programmes can miss targetpopulations, such as poor householdswithout children who attend school. It isimportant, as with cash transfers, todetermine ex ante any potential disruptionto private marketing channels.Approaches such as vouchers, cashtransfers and nutritional programmesshould only be implemented incombination with targeted food salesthrough public food stores if privatechannels are constrained in their ability toscale up distribution. Otherwise, the sidebenefitof fostering local marketdevelopment will be diluted.Local food supplies can also beaugmented directly through thedistribution of food aid, which is mostappropriate where insufficient food supplyis the main reason for reducedconsumption. In such cases, cashtransfers would result in price inflation,particularly where markets are notfunctioning well, or where food is in shortsupply as a result of weakly integratedmarkets, whether infrastructure- orpolicy-constrained. Food aid is also moredifficult to divert to undesirableconsumption and, therefore, is moreappropriate in such situations. In addition,it places a lower budgetary strain ongovernment resources.Managing markets and stocksto increase food suppliesGovernments in many countries alsoresort to a variety of other measures thatmay be called “market managementpolicies”. These could include measuressuch as price controls throughadministrative orders, restrictions onstockholding by private traders,restrictions on interdistrict movement offoods, antihoarding measures, restrictionson futures trading of basic foods and openmarket operations selling public stocks offoods with a view to lowering marketprices. These measures were fairlywidespread in many developing countriesin the 1970s and 1980s but have beendiscontinued in normal times for not being“market friendly” or pro-private-sectordevelopment. However, the fact thatgovernments resort to such measuresduring food crises shows that they canhelp the situation to some extent.Experience has shown that many ofthese measures may work for a very shortperiod. However, they could also bedestabilizing, as economic agents oftenreact by hoarding and thus add to furtherprice rises, defeating the basic purpose ofsuch measures. The longer-term solutionto this problem is to take measures tonurture various elements that will ensurethat food markets function well and arecompetitive. The concentration of marketpower, observed typically for semiprocessedor processed agriculturalproducts, is perceived by society at large– as well as by the government – as amajor source of the problem. The solutionlies in effective pro-competitive policiesthat are lacking in many developingcountries.An important market managementpolicy is open market operations – the sellingof publicly held stocks to lower or stabilizedomestic market prices. These operationsused to be fairly widespread but manycountries have now eliminated suchprogrammes. In Asia in particular, thesemeasures are actively used. Examples areopen market operations by the FoodCorporation of India, Badan UrusanLogistikin in Indonesia and the RiceMarketing Board in Viet Nam. Thegovernment parastatals maintain the foodreserves through domestic purchases orimports, including food aid, and release thestocks when food prices begin to rise, whichcould be for seasonal reasons or owing toincreased prices in the world markets.The effect of these measures is tocheck food prices in the short run.However, food availability can only beaugmented and prices restrained byreleasing public stocks if adequate publicstocks exist. This can be problematicgiven that maintaining stocks is a highcostoperation. Furthermore, releasingpublic stocks to hold down prices canhave a negative impact on incentives forproducers and traders, discouragingproduction expansion and investment.Unlike safety net measures, theseoperations cannot be targeted and theyalso benefit rich consumers who may notneed the support.Given the high costs associated withopen market operations and the potentialfor unintended negative effects, mostgovernments have preferred to rely lesson stocks operations and more on tradepolicy measures to encourage imports orrestrict exports for price stabilization.Trade measures are discussed below.However, where governments do notperceive trade to be a reliable source offood at short notice, some stockholdingand open market operations are stillcarried out.Cutting tariffsto increase food importsImport tariffs raise the price of importedfoods, protecting domestic productionfrom international competition and in theprocess providing tariff revenues for thegovernment. Reducing import tariffsincreases the volume of imported food,The State of Agricultural Commodity Markets 2009 43

What shouldthe policy response be?adding to domestic supplies and slowingthe increase in domestic prices. Being apolicy that affects the market as a whole,reducing import tariffs has an impact onall households, food-insecure as well asfood-secure, in contrast to the kinds oftargeted policies described earlier. Asprices climbed through 2007 and into2008, many countries lowered tariffsinitially, eventually eliminating them asworld prices continued to soar. As thereneeds to be scope to reduce tariffssignificantly to be able to offset suchdramatic price increases, so tariffs have tobe high enough to begin with to permitthis. However, while the tariff rates“bound” in the World Trade Organization(WTO) might be high, those actuallycharged – the “applied” tariffs – tend to bemuch lower. Available tariff data show thatthe majority of developing countries didnot have applied tariffs high enough to beable to use them to stabilize domesticprices as prices soared. In a sample of60 LIFDCs, applied tariffs on cereals andkey vegetable oils were already quite lowin 2006 – in the range of 8–14 percent onaverage – and tariffs were much lowerthan these averages for the majority ofLIFDCs. This means that reducing theseapplied rates, even to zero, was sufficientto stabilize only a small part of the overallrise in the world prices, which were higherby at least 50 percent in 2008 comparedwith 2006 levels. Therefore, tariffreductions alone could not be relied on tocounter the dramatic increase in foodprices. Reducing or eliminating importtariffs also reduces tariff revenues, whichcan be an important source of budgetaryfunds for many governments. Reducingall food import tariffs to zero would havecost LDCs about US$2.1 billion in lostrevenue.Besides reducing domestic prices and,therefore, the incentives for farmers andfood manufacturers to invest and producemore, reducing import tariffs exposes thedomestic agriculture and food sectors togreater international competition.Increased competition can provide achallenge to domestic food production tomake additional efforts to increasecompetitiveness for the benefit ofconsumers. However, in many developingcountries, the agriculture and foodmanufacturing sectors are weak and maynot be able to withstand competitioneasily, especially where it is from importswhose production receives support.Therefore, there is the risk ofcompromising efforts to developdomestic agriculture and food sectors.Reductions in import tariffs may alsohave an impact on the country’s exchangerate as they increase the incentive toimport and reduce foreign currencyreserves. This can lead to a depreciationof local currency, especially in theagriculture- and food-dependenteconomies. If agricultural inputs areimported and paid for in increasingly highvalueforeign currencies, then the risk ofhigh food prices could re-emerge,cancelling out the price reduction effectsof the import tariff cut.Restricting exports to increasedomestic food suppliesAbout one-quarter of the countries in theFAO survey resorted to some form ofexport restrictions in attempts to ensuredomestic food availability. Theserestrictions range from increasing orimposing export taxes through to outrightexport bans. They have been perhaps themost controversial of the various policymeasures introduced in response to risingfood prices. However, current WTO rulesdo not constrain policies on export taxes,while those on export restriction andprohibition are also very weak andessentially non-binding. By diverting acertain volume of food that wouldotherwise have been exported to thedomestic markets, domestic prices arereduced, thereby providing relief toconsumers. Where export taxes are used,the government also raises tax revenue,which might be used to fund othermeasures such as safety nets. On theother hand, by reducing domestic prices,export restrictions reduce incentives toproducers. Producers may shift resourcesaway from the taxed commodities to otheractivities. Therefore, the eventual resultcould be a decline in productivity andproduction, which might reverse thedecline in prices that the policy initiallyintended to achieve. However, the maincriticism of export restrictions is that theymake the international market smallerand can exacerbate price instability inworld markets, thus hurting consumers inother countries. This is especially sowhere the country imposing the exportrestrictions is a significant exporter of theThe State of Agricultural Commodity Markets 2009 44

product in question or whereinternationally traded volumes are small.Export restrictions also have longer-termimplications – producers in the exportingcountries may be discouraged frominvesting in agriculture and the pricecompetitiveness of the export products ininternational markets is negativelyaffected. For net importing countries, theimage of the world markets as reliablesources of food supply could beundermined, leading towards a policy ofimport substitution. As with cutting importtariffs, export restrictions may also havean impact on exchange rates. As exportearnings decline, there will be pressure onthe local currency to depreciate,increasing the domestic prices ofimported goods, including agriculturalinputs (adding a further disincentive toexpand food production).Overcoming supply-sideconstraints and institutionalweaknessesIn the medium to longer term, increasedproductivity and production are seen asthe structural solution for stable foodsupplies and prices. In principle, highagricultural prices provide producers withan incentive to expand production. In thissense, the high food prices can be seen asan opportunity. However, in many cases,realizing this supply response will requireovercoming a variety of supply-sideconstraints. These include not only highinput costs and a variety of infrastructuralobstacles but also institutionalweaknesses that lead to inefficientmarketing systems and problems ofaccess to inputs, credit and technology.Institutional weaknesses are a majorcause of poor performance of developingcountry agriculture, especially in foodproduction in Africa.In general, these supply-sideconstraints cannot be addressed andovercome in the short run. However, theremay be some scope for immediate actionto improve access to necessary inputs,(e.g. seeds and fertilizers) that canenhance food availability in the followinggrowing season. If implementedeffectively, these immediate interventionscan increase the income of smallproducers and may reduce priceincreases in local markets, therebycontributing to improvements in thenutritional status of net food-buyingfamilies. However, the budgetary costs ofprogrammes to improve access to inputscan be high. Such programmes mightinclude productive safety nets (e.g. seedand fertilizer distribution), smart subsidiesto reduce selectively the cost of fertilizersand seeds, and support to financeinstitutions to help alleviate creditconstraints. Efforts to improve access toinputs in the short run need to be designedcarefully in order to avoid any potentiallyadverse side-effects, taking account of theavailability of additional inputs and thepossible impact on private-sectordistribution networks. Where inputmarkets are working and inputs areavailable but producers do not have thecash to buy them, voucher systems areappropriate, as free distribution couldundermine input markets. Where inputmarkets are not working, starter packscould be distributed. However, if localoutput markets are not well integrated,such interventions, in promotingincreased production, could result in a fallin local food prices to the detriment ofproducers and wage labourers.Short-term measures to improveaccess to inputs need to be supplementedand supported by longer-term actions toaddress institutional weaknesses,including facilitating the development ofthe private sector. These actions includeresearch and dissemination of improvedtechnologies through more effectiveextension systems, development ofmarket and credit infrastructure andcapacity building. Support needs to focusparticularly on enabling poor ruralproducers – those least able to respond tochanging market signals – to expand theirproduction and market their supply.Often, they do not have even the basicinformation necessary to make rationaland efficient choices about what toproduce and how. They need informationon market opportunities, price trends,appropriate input packages andproduction and marketing alternatives.Agricultural research needs to focus onthe needs of these poor rural producers,and their capacity to take advantage ofresearch results needs to be strengthenedthrough more effective extensionnetworks. The scope of individualsmallholders to contribute to increasedfood supplies is limited by the economicsof marketing outputs and buying inputs,which require a certain scale of operationto be viable. For example, there aresignificant economies of scale in thetransportation of fertilizers, and it may beuneconomic to supply individualsmallholders whose needs are small.However, individual smallholders canbenefit from these economies of scale ifthey organize themselves to collaborate inaccessing inputs (including credit) andmarketing outputs. Organizingthemselves into groups to market theiroutputs collectively can reap economiesof scale in storage and in transportingproducts to market. Farmers’organizations, cooperatives and producerassociations can all help smallholders toaccess inputs and market outputs moreefficiently and on better terms. However,many producer organizations are weak.They also need support to strengthen theircapacity to fulfil these roles.Managing increasing food pricesfor investmentWhile high food prices can be seen as anopportunity to kickstart agriculturalgrowth, the agriculture sector andcommodity-producing households mayfail to benefit in the long run if the highpricewindfalls are consumed right awayinstead of invested. Unless the institutionalenvironment in a country assists in thecreation of investment opportunities, highprices will have no permanent impact onthe sector. Governments play a crucialrole even if the sector is not protected orcharacterized by price or trade policies.Commodity price booms have to beappropriately managed by producers,consumers and governments if they are toresult in sustained benefits forcommodity-producing countries andminimum costs for importing countries.Policies need to be put in place to provideincentives to private agents and promotefavourable economic conditions forinvestment that will lead to long-runsustained growth and poverty reduction.This involves macroeconomic as well assectoral policy measures.Can the risk of high pricesbe managed?Volatility in agricultural commodity pricescreates risks for market participantswhether as producers (revenue and exportThe State of Agricultural Commodity Markets 2009 45

What shouldthe policy response be?earnings risk) or as consumers (foodimport bill risk). Increasing internationalfood prices prompt the interestingquestion of the extent to whichcommodity-dependent and net foodimportingdeveloping countries mightbenefit in the future from an increased useof market-based risk management toolsto hedge against world marketfluctuations. Futures, options and otherforms of derivative contracts can beconsidered as tools to hedge againstunpredictable changes in both import andexport prices. However, such instrumentsare not designed to stabilize exportrevenues or import bills but only to makethem more predictable. This can bebeneficial to the extent that it allowsproper planning of financial and otherresources. In theory, the unpredictabilityof the import bills and export revenues ofdeveloping countries might be reducedthrough appropriate hedging. However, inmost countries, a number of institutionalobstacles need to be overcome beforehedging the national import or exportpositions with the aim of promoting foodsecurity would become feasible.security problems of the vulnerable poorcoupled with incentives and support forthe investment and productivity growthneeded to ensure continuing food securityin the longer term. Such a twin-trackapproach provides a coherent policystrategy that avoids the policy conflictswarned against above. However,budgetary costs can be prohibitive forsome governments and the scope forfinancing such schemes through internalor external borrowing can be limited.Therefore, there is a need for internationalsupport.Policy choices andcomplementarities:the need for a twin-track approachDetermining appropriate policy solutionsto the problems caused by the recentsustained high food prices is notstraightforward given the needs both forimmediate action to protect the foodsecurity of vulnerable groups and forestablishing a foundation for more stableprices and supplies in the future. There is apotentially strong relationship betweenmeasures to protect consumers againsthigher food prices and the enhancementof agricultural productivity. Well-designedcomplementary policy measures canencourage risk-averse food staplesproducers to take the risks necessary toinvest in improved technologies. They canstimulate local market development,increasing volumes and reducingvolatility. However, if poorly designed orimplemented, they can distort incentives,discourage investment and beunsustainable in terms of budgetaryresources. Clearly, this kind of policyconflict needs to be avoided. What isrequired are non-distorting safety netmeasures to address the immediate foodThe State of Agricultural Commodity Markets 2009 46

The need for international actionThere appears to be an expandingconsensus that the appropriatepolicy response to sustained highfood prices should be a package of safetynet measures to address immediate foodsecurity needs and targeting those worstaffected, accompanied by measures toencourage and facilitate supply responseto stabilize supplies and prices in themedium and longer terms. However, it isalso recognized that not all developingcountries will have the resources,institutions or knowledge to design andimplement such policies. Safety nets havea high budgetary cost and areadministratively burdensome. Policiesaimed at sustainable expansion of foodsupplies are also demanding in budgetaryterms, requiring a reversal in thedownward trend in investment inagriculture. As a result, many haveresorted to cheaper and more readilyimplemented policies that aim to boostfood availability and restrain prices ondomestic markets but which maycompromise incentives to producers toincrease production and productivity andmay have adverse effects on tradingpartners. Therefore, many countries needinternational support in the form ofresources and technical assistance. Thedomestic policy problem also has aninternational dimension in that, moststrongly in the case of export restrictions,policies introduced by one country toincrease local food availability andrestrain prices can reduce availability andincrease prices to other countries. Thus,there is also a need for at leastinternational discussion of policy choicesto promote coordination and avoid thesenegative side-effects. The issues of highfood prices and the impacts of policy arenot only the preserve of developingcountries. Developed-country policychoices, e.g. in relation to biofuels, arealso relevant to the discussion of whatshould be done. More generally, manyaspects of international food marketdevelopments and policy are the concernof the WTO and under negotiation in theDoha Round. Disciplines agreed in theWTO have a bearing on the choice ofpolicy responses to high food prices.High food prices are an issue of globaldimension and, therefore, a matter forinternational debate and internationalaction. The international communitymobilized to deal with what was seen as aninternational food crisis through actions tomitigate the negative impact of high foodprices on the poor and food-insecure andto help millions of poor farmers around theworld seize the opportunity provided bygreater demand for their products. Theimmediate food needs of the poor arebeing addressed through short-termactions that include increasing resourcesfor food aid and safety nets in developingcountries, providing more balance ofpayments and budget support to helpmeet increased food and energy bills, andfinancing emergency programmes aimedat increasing agricultural production infood-deficit countries. In the mediumterm, efforts are being made to restoreagriculture to the centre of thedevelopment agenda, reversing the longtermdecline in agricultural investment toensure that it can continue to meet thedemands of a world population that isincreasing and becoming more urbanizedand wealthier. In addition, greater policycoordination is being promoted to assistcountries in making efficient policychoices, to maximize synergies inresponding to high food prices and toavoid situations where one country’smarket intervention hurts others.International supportto meet immediate food needsThe top immediate priority is to ensureaccess to food for the most vulnerable.Expanded safety net programmes alongthe lines described above are seen as themost effective way of achieving this. Theywould include assistance in the form offood, vouchers or cash transfers,employment programmes (food or cashfor work), school feeding and insuranceschemes. Targeted programmesaddressing the most vulnerable groupsneed to be scaled up. However, safety netprogrammes involve significantbudgetary costs, which many developingcountries will require international supportin order to meet. For food-deficitcountries, increasing food prices push uptheir food import bills, which together withhigher energy costs lead to a need forbalance of payments support. The IMFand the World Bank have an importantrole to play in providing balance ofpayments and budget assistance to thosecountries. Failure to do so runs the risk ofjeopardizing important developmentprogrammes and projects as scarcenational resources are diverted to meetimmediate food import requirements.Food aid was declining even as theneed for it was increasing rapidly. Aidagencies found food more costly toprocure as food prices increased. Thisprompted requests from aid agenciessuch as the WFP for additional fundingeven to maintain their current levels ofassistance. Their difficulties were furthercompounded by increasing transportationcosts. Given the high food prices, thedeclining trend in food aid needs to bereversed, with greater internationalsupport for relief agencies, particularly theWFP and the United Nations Children’sFund (UNICEF). High food and fuel pricesmean that food aid can reach fewer peoplewith the same resources. Food aiddeliveries from the WFP declined almostcontinuously from 15 million tonnes in1999 to 7 million tonnes in 2006. The costto the WFP of delivering food tobeneficiaries increased by more than70 percent in the period 2002–07. Furtherincreases between the end of 2007 andearly 2008 meant additional costs simplyto maintain the current low levels ofassistance. The WFP and UNICEF haveextensive experience in the developmentof safety net programmes, and in targetingThe State of Agricultural Commodity Markets 2009 47

What shouldthe policy response be?FAO’s Initiative on Soaring Food PricesFAO’s Initiative on Soaring Food Prices(ISFP), launched in December 2007, targetscurrent problems to avoid furtherdeterioration. The ISFP has put in placeemergency measures worth US$40 million in57 countries. Much of the work carried out byFAO implies the scaling-up of existingprogrammes to support agriculture andrebuild the livelihoods of the rural poor,80 percent of whom make their living infarming. FAO is working closely with UnitedNations (UN) partners, especially the WorldFood Programme and the International Fundfor Agricultural Development, as well as theWorld Bank, the International MonetaryFund, regional organizations anddevelopment banks. The ISFP measuresprovide essentially start-up funds; they coveronly the most immediate needs of smallfarmers in LIFDCs and aim to enable them toboost agricultural production for theupcoming planting seasons.An ISFP Programme Document outlinesthe type of actions countries need toundertake in the short term (between nowand the end of 2009) to face the food securitycrisis arising from high food prices:1. providing seeds, fertilizer and toolstogether with good extension services toensure the best possible use of the inputssupplied, which will lay the foundationsfor sustainable intensification ofproduction in the future;2. working to improve infrastructure, such asirrigation systems, market infrastructureand better rural roads;3. strengthening know-how to add value tosmallholder farmers’ final marketableproduct by growing higher-quality andhigher-yielding crop varieties or byutilizing processing techniques todiversify products, and facilitating supplycontracts with agricultural companiesthat are secure and beneficial to farmers;4. reducing losses (sometimes as much asone-fifth of the harvest) through betterhandling, milling and storage, defendingcrops and livestock from pests, sicknessand disease (e.g. through integrated pestmanagement systems), and takingmeasures to limit the impact of naturaldisasters.In all these areas, FAO offers technicaland policy assistance and advice, as well ascapacity building, along with support indelivery where it already has strongemergency programmes in place. The ISFPProgramme Document, complemented byaction plans and specific project/programmeproposals developed with countries, is nowbeing used to mobilize resources toimplement country action plans. The supportprovided by the ISFP is put in motion at therequest of countries. Exactly what is neededis determined by needs assessmentmissions and consultations withgovernments. These focus on identifying themost vulnerable groups, those hardest hit bythe food price increases. Possible responseoptions and policy measures are thenidentified. Individual action areas include:nnnnnprovision of food security programmes,safety nets and social support networks;improving access to essential inputs suchas seeds and fertilizer;help to improve water and soilmanagement;technical support in all the above areas;policy assistance, which includesassessment of current agricultural andtrade policies, tariffs, taxes, pricecontrols, competition and marketpolicies, and food security policies.The resulting country action plans focuson the food security of the most vulnerablegroups and aim at creating new opportunitiesfor small farmers to access inputs,investments and technology and to takeadvantage of high market prices.FAO has contributed significantly to thedevelopment of the ComprehensiveFramework for Action (CFA), created throughthe UN Secretary General’s High-LevelTaskforce on the Global Food Security Crisis,partnered with other UN agencies and theBretton Woods Institutions. All activitiesundertaken under the ISFP are fullyconsistent with the CFA and aim at achievingthe Framework’s short-term outcomes.The State of Agricultural Commodity Markets 2009 48

them to the most vulnerable especiallywomen and children. However, theyrequire additional resources in order torespond effectively to the currentsituation.Some scope exists for increasing foodsupplies from domestic production in theshort run. Support needs to focusparticularly on enabling poor ruralproducers – those least able to respond tochanging market signals – to expand theirproduction and seize the opportunityoffered by higher commodity prices. Infact, cereal production by LIFDCs(excluding China and India) declined by2.2 percent in 2007 as international priceswere rising. Yields in many LIFDCscontinue to be much lower than the rest ofthe world, as they lag in the use offertilizers, high-yielding varieties,irrigation, integrated nutrient and pestmanagement, and conservation tillage.International assistance can help providenecessary seeds and fertilizers.Support to investmentin agricultureThe high food price episode serves as areminder of the fragility of the balancebetween global food supplies and theincreasing needs of the world’spopulation, and also of the fact thatagriculture has been neglected in globalefforts to reduce poverty. Thus, while theimmediate need is to prevent humansuffering from hunger and malnutrition aswell as to induce a rapid supply responseto restore a better balance between foodsupply and demand, these must beaccompanied by actions in the mediumterm that will result in sustainedagricultural growth. There is ample scopefor substantial increases in agriculturalproduction and productivity in developingcountries. Production and productivityhave not grown because resourceschannelled to agriculture have fallen.There is a need to increase public andprivate investment in developing countryOfficial development assistance (ODA)Billion US$10075502501980Total ODA19831986ODA for agriculture19891992agriculture. Much more investment isrequired, particularly for watermanagement, rural roads, marketing andstorage facilities, as well as research andextension, yet investment in raisingagricultural productivity has been trending19951998200120042007Source: OECD.downwards. In addition, there has been aslowdown in investment in internationalagricultural research centres even as newchallenges, such as climate change andincreased demand for biofuel feedstocks,have arisen.Proportion of total official development assistance allocated to agriculturePercentage15105080838689929598010407Source: OECD.The State of Agricultural Commodity Markets 2009 49

What shouldthe policy response be?The fall in resources devoted toagriculture has largely been caused by thesharp reduction in external assistance toagriculture. Total official developmentassistance (ODA) – combined bilateraland multilateral flows – increased sharplyfrom US$43 949 million in 1997 toUS$120 942 million in 2006 (all values incurrent US dollars). ODA directlyearmarked for expenditure in theagriculture sector also rose, albeit moreslowly, from just over US$3 000 million toabout US$4 000 million in 2006.However, as a proportion of total ODA,ODA for agriculture has continued todecline, falling from 7 percent in 1997 toless than 4 percent from 2002 onwards.However, 2006 suggests a slight increasein the proportion of total ODA allocated toagriculture.Donors need to increase the share ofODA going to agriculture. Many donorsexpressed their willingness to provideadditional funds and made pledges toaddress the immediate and longer-termagricultural and food security problems ofdeveloping countries at the High-LevelConference on World Food Securityorganized by FAO in June 2008. It isimportant that these commitments bemaintained in spite of the financial crisisand global recession. More generally, theinternational community needs to takeconcrete steps to increase its capacity torespond in a coordinated and expeditiousway to requests from developing countriesnot only for financial support but also fortechnical assistance to revive agriculturalgrowth over the longer term. However,developing country governments alsoneed to act by allocating additionalresources to agriculture from theirnational budgets and by putting in placepolicies that are conducive to privatesectorinvestment in agriculture.Improving the policy environmentIn addition to the need to ensure access tokey productive inputs, a conducive policyenvironment is crucial if producers are torespond to the opportunities offered byhigh food prices and make the necessaryinvestments to increase productivity andproduction. However, as noted above,some policy measures introduced bydeveloping countries to cope withincreasing food prices have militatedagainst a significant supply response.Therefore, there is a need to promotegreater policy coherence at the nationallevel. In some cases, poor policy choiceshave been made simply because of a lackof reliable information concerning keymarket variables, such as availablesupplies, prices and especially stocks,both public and private. There is an urgentneed to establish a comprehensive andreliable international market informationsystem to provide a stronger basis formore efficient policy choices.International organizations can providepolicy advice and support to developingcountries to mitigate the impact of highfood prices, improve the food securitysituation, protect productive assets –including land – of rural poor householdsand enable them to benefit from theopportunities that high food prices create.The United Nations (UN) system candisseminate experiences and bestpractices to help countries prepare theirpolicy frameworks and strategies. Thiscould include:n helping design food insecurity andvulnerability monitoring systems;n identifying and assessing theeffectiveness of alternative measuresthat could enhance the ability ofproducers to respond to improvingmarket signals;n assessing the impact of changingsupport to, and taxes on, foodcommodities;n analysing how to use existing fooddistribution systems effectively anddetermining the most appropriatetargeting criteria for food sales tovulnerable groups;n assessing the appropriate role of foodThe State of Agricultural Commodity Markets 2009 50

eserves for reducing intra-annual pricefluctuations and emergency shortfalls;n determining the most effective meansof enabling the private sector toparticipate more fully in agriculturaldevelopment and, in particular, play acritical role in trade of food and supplyof agricultural inputs.The use of trade policy measures toincrease domestic food supply may alsohave implications for other countries,notably in the case of export restrictions.This implies a need for better coordinationof policy internationally, which theinternational organizations mightfacilitate. International trade policies fallunder the jurisdiction of the WTO, whoserules, currently under negotiation in theDoha Round, provide the context for tradepolicy responses to high food prices. WTOrules are discussed further below.It is not just in poor developingcountries that policy changes might beintroduced to increase food supplies andslow the increase in prices. If, as appearsto be the case, biofuel production iscommanding outputs and resources thatwould otherwise have contributed to foodproduction, then reductions in subsidies orusage targets would correct for anymarket distortions. As described above,the emerging biofuels market is a new andsignificant source of demand for someagricultural commodities, such as sugar,maize, cassava, oilseeds and palm oil,that are also basic foods. A considerablepart of the diversion of food commoditiesto biofuel production is considered to bepolicy-driven, notably by subsidies. Oneissue being debated actively is the WTOcompatibilityof the biofuel subsidies. Theother related issue is the indirect effect onfood prices of subsidies on biofuelproduction and whether this amounts tocross-subsidization from the standpoint ofthe WTO Agreement on Agriculture orother Agreements. Aside from these legalaspects, there is also the ethical issue ofwhether subsidies that are perfectly legalfrom the WTO perspective should beremoved if they have a negative impact onfood supplies, poverty and food insecurity.Ensuring that the WTO rulesare supportive of policy measuresto respond to future food crisesOne of the problems addressed by theUruguay Round Agreement on Agriculture(UR AoA) was excessive production andthe resulting trade distortions caused bydomestic and export subsidies. The DohaRound is continuing the reform processalong similar lines. A question beingasked in the context of the high foodprices is whether some of the trade rulesrequire rethinking so that governmentsand the international community canrespond better to future food crises. Someof these would be rules on exportrestrictions and taxation on basic foods.While export taxation is not disciplinedeither by the UR AoA or by the parentGeneral Agreement on Tariffs and Trade(GATT) 1994 rules, current discipline onexport restrictions is rather weak, merelycalling upon the exporter to give advancenotification and to give due considerationto the effects of the restriction on theimporter. One of the dangers of a weakdiscipline on export restrictions is that itraises doubts about the reliability of theworld market as a source of food supplies.Rules on food aid are likely to be mademuch tighter if the Doha Round issuccessfully concluded. While this willprevent circumvention of exportsubsidies, the draft provisions for food aidduring non-emergencies – most probablyevents like the high food prices episode –may need revisiting so that appropriatetriggers are built in to facilitate theprovision of timely food aid in suchperiods also.A third consideration is the coverage ofcountries for special treatment. Currently,several special treatments to counternegative effects of trade liberalization arelimited only to the two groups of countriesmentioned in the Marrakesh MinisterialDecision on Measures Concerning thePossible Negative Effects of the ReformProgramme on Least-Developed and NetFood-Importing Developing Countries (theMarrakesh Decision) – the LDCs and thenet food-importing developing countries(NFIDCs). Aside from the LDCs, there aremany other LIFDCs that are not amongthe NFIDCs but that also require specialtreatment or access to food aid, exportcredit, food financing facility and so on.The current crisis of high food priceshas been used both to argue for a speedyresolution of the Doha Round negotiationsand to argue against any furtherreductions in protection that might resultfrom a new agreement. Those arguing fora substantive agreement for furtherliberalization of agricultural markets havesuggested that current levels of protectionand support have depressed globalmarket prices and curtailed incentives forinvestment in increased food productionin many food-importing countries,contributing to recent surges in importbills. Those arguing against have pointedto evidence that liberalization would resultin upward pressure on prices as surplusproduction in subsidizing countries falls.Perhaps more importantly, they raisedconcerns that further reducing the policyspace available to developing countries toprovide adequate protection in promotingthe development of their agriculture wouldresult in further reductions in investmentin the sector, which could leave countrieseven more susceptible to rapid increasesin food import bills in future crises. It wasone of the proposed mechanisms forprotecting vulnerable agriculture sectors,the Special Safeguard Mechanism, thatproved to be the stumbling block that ledto the breakdown of the negotiations inJuly 2008.In general, it appears that current rulesdo not constrain policy responses to highfood prices and that the draft agreementthat was under negotiation was unlikely tohave changed this situation. However,many rules could be improved andThe State of Agricultural Commodity Markets 2009 51

What shouldthe policy response be?strengthened to promote future policyresponses that are more appropriate bothto implementing countries and to theirWTO partners. The current impasseprovides an opportunity for further debateand negotiation on rules and agreementsthat might reduce the potential negativeimpacts of future food price crises.A system of global assurancesof smooth suppliesGlobal food price spikes have the greatestnegative impact on those countries thatrely on food imports for a large share oftheir domestic food supplies, and amongthose, they affect even more negativelythe many LIFDCs. If food security is to beenhanced for the LIFDCs (and FAO’scurrent list includes 82 such countries)and if they are to avoid costly policies offood self-sufficiency, a reliable system ofassurance of food supplies is needed forthese countries on a bilateral and possiblya multilateral basis. Such a system can bebuilt by reference to agreed “protocols forcollaboration”, much as the InternationalEnergy Agency has done for petroleum.A system of such protocols could beexplored and agreed by all concerned inappropriate international or regional fora.Such protocols would also provide anenhanced form of internationalcollaboration and should lead to a “win–win” situation.hampered by the need for ex-anteagreement among interested andparticipating parties in management –something that has proved elusive.Currently, only a few such schemes existand, unfortunately, the experience withthese has not been satisfactory. Forexample, experience with the IMF’s BufferStock Financing Facility, a mechanism forfacilitating the creation of buffer stocks,has shown that modest price stabilizationachieved in practice by buffer stocks hastypically been outweighed by the interestand carrying costs of the stocks (IMF,1999). Similarly, the ASEAN EmergencyRice Reserve, a food reserve schemeestablished by the Association ofSoutheast Asian Nations (ASEAN), hasseen reserves of only up to 87 000 tonnes,which equals a consumption volume for0.4 of one day (0.1 percent of totaldemand) of ASEAN countries (MAFF,2005), and hence has not had anyinfluence on rice prices.Food reserves can perhaps be betterutilized for facilitating food availabilityduring severe food shortages as opposedto stabilizing food prices, which requiresavailability of resources to financeimports. Thus, a more feasible approachto dealing with food price risks can be thesetting up of mechanisms or facilities toassist countries in financing their foodimports, especially during sudden, sharpemergencies.A role for regional food reserves?The hike in food prices fuelled partially bylow levels of global cereal stocks hasprompted discussion regarding the role ofregional food reserves to help mitigatefood shortages and reduce price volatility.If properly coordinated and managed,regional food reserves can assist foodimport-dependentcountries in particularin accessing food at stable prices,especially during times of crisis. Althoughthe concept is well founded,implementation of such schemes isThe issue of a global arrangementto guarantee financing offood imports to LDCs and NFIDCsThe issue of possible difficulties infinancing normal levels of food importsduring food crises has been a recurringconcern to NFIDCs from the time theUruguay Round was negotiated, resultingin the Marrakesh Decision. One of theresponse instruments listed in theMarrakesh Decision is international foodfinancing facilities. Work by FAO and theUnited Nations Conference on Trade andThe State of Agricultural Commodity Markets 2009 52

Development (UNCTAD) since theUruguay Round has revealed a number ofconstraints facing developing countryimporters at times of excess food importneeds (because of domestic shocks) orhigher international prices. One of themost severe is credit and exposure limitsthat export-financing institutions (mainlybanks) place on themselves for financingdestined to various developing countries.In times of excess financing needs, suchas those accompanying the recent periodof high food prices, these limits preventprivate exporters to and importers inLDCs and NFIDCs from obtaining theappropriate letters of credit to financeexports and imports even if developingcountry importers have the capacity topay for them. The idea that has followedfrom this logic is to create a system ofpublic (nationally or internationallyagreed) guarantees to the financialinstitutions (in both developed anddeveloping countries) to augment therelevant credit ceilings under specificconditions.In itself, this concept is notrevolutionary. In recent years, theEuropean Bank for Reconstruction andDevelopment, International FinanceCorporation, Inter-AmericanDevelopment Bank and the AsianDevelopment Bank have introducedsimilar “trade facilitation schemes” to addrisk capacity to the market. At a bilaterallevel, the Export-Import Bank of theUnited States, United States Departmentof Agriculture and some others have beendoing this for years. However, little of thishas targeted food importers in LDCs andNFIDCs, and these schemes do not haveproper capacity-building components forlocal banks, which are often the weakestpart in the chain. Moreover, OECDcountries signed a commitment to set up amechanism of this nature in the run-up tothe creation of the WTO.In that context, FAO and UNCTADproposed in 2005, in a paper circulated todelegations in Geneva, the creation of theFood Import Financing Facility (FIFF).The FIFF would involve no new institutionor additional financial resources. Instead,it would provide additional guarantees,utilizing existing multilateral facilities, torelevant export and import financingbanks of exporting and also importingcountries for the cost of excess(additional) food import bills duringexcess food import bill periods. Financingwould be provided to traders via centraland commercial banks, with thegovernment of the borrowing countryproviding sovereign guarantees. Thefacility would utilize donor guarantees toallow banks to extend the relevant credit.Unlike some of the current internationalfinancing schemes, lending would not belimited by any conditionality (e.g. lowbalance of payments position of theborrowing country). However, in line withthe Marrakesh Decision, priority lendingcould be accorded to LDCs and NFIDCsfacing food crises. FAO estimated that,over the period 1974–2003, a system ofsuch guarantees would have beenrequired to guarantee “excess financing”of only about 2 percent of the total foodimport costs of LDCs and NFIDCs. Giventhe reservations regarding the feasibility ofmaintaining physical food reserves, it maybe timely in the context of the recent foodprice increases to re-examine therationale for this proposal and explore howit could be implemented in practice.Mobilization of international actionThe need for international action to assistdeveloping countries suffering the adverseconsequences of high food prices and theforms this assistance might take werediscussed at the High-Level Conference(HLC) on World Food Security in June2008. Representatives of 181 countries,including 43 Heads of State and more than100 Ministers, and high-levelrepresentatives of internationalorganizations, NGOs and civil-societyorganizations met in order to review theissues and address the challenges of highfood prices.The HLC’s Declaration on world foodsecurity called on the internationalcommunity to increase assistance fordeveloping countries most negativelyaffected by high food prices through aprogramme of urgent and coordinatedaction. Donors and international financialinstitutions were urged to provide balanceof payments and budgetary support tolow-income food-importing countries andto assure the international agencies ofsufficient resources to expand andenhance their food assistance and supportsafety net programmes. The Declarationcalled for assistance to countries to put inplace policies and measures to helpproducers to increase production.Reaching consensus on the morecontentious issues surrounding biofuelsand their relationship to food availabilityand prices proved more elusive, and moredetailed research was called for.Although the HLC was not intended tobe a pledging event, a number of donorcountries and international financialorganizations used the opportunity toannounce significant additional financialsupport totalling more than US$12 billion.Perhaps even more importantly in themedium and longer term, the outcome ofthe HLC indicates a new recognition of theimportance of agriculture, putting it backcentre-stage on the development agenda,and a commitment to reverse thedownward trend in agriculture-focuseddevelopment aid. The HLC clearly calledfor increased food production andinvestment in agriculture in order toensure food security.The State of Agricultural Commodity Markets 2009 53

AnnexTable 1Policy responses to rising commodity pricesin selected countriesSub-Saharan AfricaPoliciesAngolaBeninBurkina FasoBurundiCameroonCentral African Rep.ChadCôte d'IvoireDem. Rep. of the CongoEritreaEthiopiaGhanaGuineaGuinea-BissauKenyaLesothoLiberiaMadagascarMalawiMozambiqueNamibiaNigerNigeriaOn consumptionEmergency & targeted food aid n n n n n n nCash transfer n nFood for work n n nSchool/hospital – feeding n n n nConsumer price subsidynConsumer price control & stabilization n n n n n nReduction/elimination of consumption taxes n nOn productionProducer price controlReduction in producer taxes n n n n n n n n nProduction subsidiesnInput subsidies n n n nOn tradeInput export banExport ban n n n nExport quota/controlnRaising export taxesReduction/elimination of import tariff & quota n n n n nOther policiesWith long-term effects n n n n n n n n n nThe State of Agricultural Commodity Markets 2009 54

Near East and North Africa Latin America and the Caribbean AsiaSenegalSierra LeoneSomaliaSouth AfricaSudanSwazilandUgandaUnited Rep. of TanzaniaZambiaZimbabweAlgeriaEgyptIraqJordanLebanonMauritaniaMoroccoSaudi ArabiaTunisiaYemenArgentinaBolivia (Plurinational State of)BrazilChileCubaDominican Rep.EcuadorEl SalvadorGuatemalaHaitiHondurasMexicoNicaraguaPeruAfghanistanBangladeshCambodiaChinan n n n n nn n n n nn nn n n n nn n n n nn n n n n nnn n n n n n n n n n n nnnnnn n n n n n n n nn n n nnnn n n n n n n n n n n n nn n n n n n n n n n n n nSpecific policyresponses to risingcommodity prices inselected countriesCategories:n On consumptionn On productionn On traden Other policiesSub-Saharan AfricaAngolan School/hospital – feeding:basic mealBeninn Consumer price controland stabilization: wheatn Reduction/elimination ofimport tariff and quota:wheat flourBurkina Fason School/hospital – feeding:basic mealn Consumer price controland stabilization: moststaple foodn Reduction/elimination ofconsumption taxes: grainsand other staple foodsn Reduction in producertaxes: grains and otherstaple foodsn Export quota/control:staplesn Reduction/elimination ofimport tariff and quota:staple foodn With long-term effects:partial payment of poorhouseholds’ energy andwater billsBurundin Emergency and targetedfood aid: main staple(grain, maize) to thevulnerablen Reduction in producertaxes: grains and otherstaple foodsn With long-term effects:improving agriculturalproductivityCameroonn Emergency and targetedfood aid: main staple(rice, other grains) to thevulnerablen Consumer price controland stabilization: rice,wheat, breadn Reduction in producertaxes: riceCentral African Republicn With long-term effects:improving agriculturalproductivityThe State of Agricultural Commodity Markets 2009 55

AnnexChadn Emergency and targetedfood aid: main staple(grain) to the vulnerableCôte d’Ivoire–Democratic Republicof the Congon Emergency and targetedfood aid: main staple(grains) to the vulnerablen With long-term effects:improving agriculturalproductivityEritrea–Ethiopian Emergency and targetedfood aid: cereals (teff) tothe vulnerablen Cash transfer: to thevulnerablen Food for work: food (teff,cereals) to vulnerablen Consumer price subsidy:cerealsn Reduction in producertaxes: grainsn Export ban: cerealsn With long-term effects:food for assets; improvingagricultural productivityLesothon Reduction in producertaxes: grainsLiberia–Madagascarn Emergency and targetedfood aid: rice, wheat flour,biscuitsn Food for work: basic meal;food stampn School/hospital – feeding:basic meal (rice, bread,milk)n Consumer price controland stabilization: ricen Reduction/elimination ofconsumption taxes: ricen Input subsidies: riceproductionn Export ban: ricen Reduction/elimination ofimport tariff and quota:ricen With long-term effects:improving agriculturalproductivity; diversifyingstaple sources andpreparations (e.g. planto expand sorghumproduction)Malawin Export ban: maizeNigerian Consumer price controland stabilization: cerealsn Reduction in producertaxes: grainsn Production subsidies: ricen Input subsidies: riceproduction (free seedsand fertilizers)n Reduction/elimination ofimport tariff and quota:ricen With long-term effects:improving agriculturalproductivitySenegaln Consumer price subsidy:rice, wheatn Consumer price controland stabilization: rice,wheatn Reduction/elimination ofimport tariff and quota:wheat flourn With long-term effects:improving agriculturalproductivitySierra Leonen With long-term effects:improving agriculturalproductivitySomalia–United Republicof Tanzanian Export ban: maizeand other agriculturalcommoditiesn Reduction/elimination ofimport tariff and quota:maizen With long-term effects:improving agriculturalproductivityZambian Input subsidies: maizen Export ban: maizen Export quota/control:maizen With long-term effects:increase investment inagricultureZimbabwen Consumer price controland stabilization: maize,sorghum, wheatn Reduction in producertaxes: grainsGhana–Guinean Export ban: all agricultural(including livestock)commoditiesGuinea-Bissau–Kenyan Emergency and targetedfood aid: food (maize,milk) to poorestn Food for work: basic meal(based on maize, milk)n School/hospital – feeding:basic mealn Reduction in producertaxes: grainsn Input subsidies:agricultural production: agovernment loann With long-term effects:improving agricultureproductivity (Kenya Vision2030)Mozambiquen Cash transfer: to thevulnerablen Reduction in producertaxes: grainsn With long-term effects:improving agriculturalproductivityNamibia–Nigern Consumer price controland stabilization: cerealsn Reduction in producertaxes: grainsn Input subsidies: underconsideration forfoodgrainsn Reduction/elimination ofimport tariff and quota:ricen With long-term effects:improving agriculturalproductivitySouth African Cash transfer: to thevulnerablen Reduction in producertaxes: grainsn With long-term effects:raising the interest rate toreduce inflationSudann Reduction in producertaxes: grainsSwaziland–Ugandan School/hospital – feeding:meal (including maize andmilk)n Reduction in producertaxes: maizen With long-term effects:increase investment inagricultureThe State of Agricultural Commodity Markets 2009 56

Near East and NorthAfricaAlgerian With long-term effects:long-term investment inagricultureEgyptn Cash transfer: to thevulnerablen Consumer price subsidy:wheat, bread and otherfoodn Export ban: ricen Export quota/control: keyagricultural commodities(staple, dairies)n Reduction/elimination ofimport tariff and quota:dairies, edible oil, riceIraq–Jordann With long-term effects:raising the wages of somecivil servantsLebanonn Consumer price subsidy:wheatMauritanian Reduction/elimination ofimport tariff and quota:food in generalMoroccon Reduction in producertaxes: grainsn Production subsidies: feed(for livestock production)n Reduction/elimination ofimport tariff and quota:wheatSaudi Arabian Reduction/elimination ofimport tariff and quota:dairies, vegetable oil,wheatTunisian Cash transfer: to thethe vulnerableYemenn Consumer price subsidy:wheatLatin America andthe CaribbeanArgentinan Export ban: maizen Raising export taxes:grains, soybean, oilseedsBolivia(Plurinational State of)n Reduction in producertaxes: grainsn Export ban: grains,soybean, meatn Reduction/elimination ofimport tariff and quota:maize, rice, soybean oil,wheat, wheat products,meatn With long-term effects:improving agriculturalproductivityBraziln Emergency and targetedfood aid: food to thevulnerablen Cash transfer: to thevulnerablen School/hospital – feeding:mealn Reduction in producertaxes: grainsn Reduction/elimination ofimport tariff and quota:wheatChilen With long-term effects:rising wheat flour importsfrom ArgentinaCuba–Dominican Republic–Ecuadorn Emergency and targetedfood aid: food to thevulnerablen Consumer price controland stabilization: wheat,wheat flour, breadn Reduction/elimination ofimport tariff and quota:wheat, wheat flour fromneighbouring countriesEl Salvadorn Reduction/eliminationof import tariff andquota: wheat flour fromneighbouring countriesGuatemalan Reduction/eliminationof import tariff andquota: wheat flour fromneighbouring countriesHaitin Emergency and targetedfood aid: rice to thevulnerablen Consumer price controland stabilization: riceHondurasn School/hospital – feeding:meal (incl. maize)n Reduction in producertaxes: grainsn Export ban: maizen Reduction/eliminationof import tariff andquota: wheat flour fromneighbouring countriesMexicon School/hospital – feeding:meal (incl. maize)n Reduction/elimination ofimport tariff and quota:maizen With long-term effects:plan to cut fertilizer pricesby one-third; allowedexperimental planting ofgenetically modified crops(incl. maize)Nicaraguan Emergency and targetedfood aid: wheat and otherfoodn Consumer price controland stabilization: wheatn With long-term effects:innovation in foodpreparation: potato breadto replace wheat breadPerun Reduction in producertaxes: grainsASIAAfghanistann Emergency and targetedfood aid: rice to thevulnerablen Reduction in producertaxes: grainsBangladeshn Emergency and targetedfood aid: food to thevulnerablen Food for work: basic mealto the vulnerablen Consumer price subsidy:ricen Producer price control:ricen Reduction in producertaxes: grainsn Export ban: palm oil,soybean oilCambodian Food for work: basic meal(especially rice) to thevulnerablen Export ban: ricen Export quota/control: keyagricultural commoditiesChinan Cash transfer: to thevulnerablen School/hospital – feeding:foodn Consumer price controland stabilization: rice,wheat, milk, eggs, breadn Reduction in producertaxes: grainsn Production subsidies: rice,livestockn Input export ban:agricultural productionn Export ban: rice, maizen Export quota/control:agricultural commoditiesn Raising export taxes:grainsn With long-term effects:risk mitigation andcompensation to avianflu losses for poultryproductionThe State of Agricultural Commodity Markets 2009 57

AnnexTable 2Trends in real commodity prices1970s 1980s 1990s Average2000–052003 2004 2005 2006 2007FAO food price index(1998–2000 = 100)194 129 105 102 101 106 109 116 138Bananas 746 675 559 476 351 478 532 578 562Beef 88 84 117 96 90 104 105 99 98Butter 164 131 99 68 57 74 85 69 111Cocoa 252 154 70 61 75 64 62 62 74Coffee 322 215 109 56 49 57 79 82 89Cotton 201 121 82 52 64 48 50 51 61Hides 104 98 96 70 64 61 58 59 60Jute 1 087 599 380 269 226 256 256 325 277Maize 311 191 130 93 98 102 87 104 135Rapeseed 825 452 287 234 277 276 230 268 355Rice 932 504 329 203 187 224 254 266 278Sisal 1 578 997 802 693 654 786 780 792 813Sorghum 292 182 124 94 102 102 89 111 143Soybean 742 431 291 230 248 278 242 228 319Sugar 37.27 18.91 12.13 7.51 6.63 6.53 8.72 12.60 8.36Sunflower 1 004 470 364 259 269 294 268 258 410Tea n.a. 3.14 1.96 1.52 1.41 1.51 1.44 1.67 n.a.Wheat 371 237 153 123 143 128 n.a. 135 206Note:Base year is 2000.Basis for prices for individual commodities:banana, Ecuador (US$/tonne);beef, Australia, c.i.f. USA (US cents/lb);butter, New Zealand (US cents/lb);cocoa, ICCO indicator price (US cents/lb);coffee, ICO indicator price (US cents/lb);cotton, United States of America (US cents/lb);hides, United States of America (US cents/lb);jute, Bangladesh (US$/tonne);maize, United States of America (US$/tonne);rapeseed, Rotterdam (US$/tonne);rice, Thailand 100% B (US$/tonne);sisal, East Africa and Brazil (US$/tonne);sorghum, US No. 2, yellow (US$/tonne);soybean, Rotterdam (US$/tonne);sunflower, Amsterdam (US$/tonne);sugar, ISA (US cents/lb);tea, FAO tea composite price (US$/kg);wheat, Argentina (US$/tonne).n.a. = not available.Source: FAO.The State of Agricultural Commodity Markets 2009 58

Table 3Monthly commodity prices, nominal termsFAO food price index(1998–2000 = 100)2007Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec135 138 139 141 143 150 155 160 170 174 179 186Bananas 639 655 648 648 689 779 734 697 665 659 651 648Beef 118 119 118 118 117 119 117 118 118 116 118 120Butter 88 92 94 107 100 116 142 160 168 172 188 184Cocoa 1 702 1 814 1 924 1 977 2 005 2 017 2 153 1 902 1 938 1 915 1 967 2 113Coffee 106 104 100 99 100 107 106 108 113 116 114 118Cotton 59 59 59 57 55 60 64 59 61 64 62 66Hides 76 78 78 78 77 73 68 67 68 67 68 68Jute 330 330 325 325 325 325 330 330 330 330 350 370Maize 164 177 170 150 159 165 146 152 158 163 171 179Rapeseed 357 349 342 345 360 371 407 440 486 518 560 594Rice 318 322 325 322 325 333 337 336 332 338 358 376Sisal 920 926 918 928 939 930 1 019 1 030 1 025 1 032 1 041 1 042Sorghum 175 182 173 148 158 168 159 170 179 174 172 201Soybean 306 323 324 320 334 362 374 386 430 445 489 516Sugar 10.7 10.8 11.1 11.3 11.2 11.5 11.1 11.7 11.4 11.4 12.0 12.3Sunflower 338 339 346 368 395 416 456 513 636 697 711 704Tea 1.78 1.78 1.85 1.84 1.81 1.88 1.91 2.00 2.11 2.15 2.10 2.17Wheat 183 175 187 209 219 239 249 273 325 321 290 310(Continued)The State of Agricultural Commodity Markets 2009 59

AnnexTable 3 (continued)Monthly commodity prices, real termsFAO food price index(1998–2000 = 100)2008Jan Feb Mar Apr May Jun Jul Aug195 215 217 214 215 219 213 201Bananas 689 792 1 027 967 923 868 722 799Beef 122 129 133 137 154 162 176 169Butter 184 184 181 179 178 182 184 171Cocoa 2 216 2 523 2 670 2 628 2 690 3 022 2 954 2 810Coffee 122 139 136 127 127 131 133 131Cotton 68 71 83 71 68 69 70 69Hides 65 65 66 67 67 67 68 n.a.Jute 383 383 410 460 460 460 510 510Maize 206 220 234 247 242 281 267 232Rapeseed 645 700 758 709 713 722 679 596Rice 385 463 567 853 963 870 835 787Sisal 1 088 1 088 1 092 1 141 1 141 1 142 n.a. n.a.Sorghum 226 224 230 242 242 277 234 211Soybean 536 579 576 556 570 625 634 557Sugar 11.7 10.7 9.8 9.8 9.2 8.0 8.6 8.5Sunflower 752 826 920 919 785 767 767 589Tea n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Wheat 330 365 395 n.a. n.a. 363 329 307Note:Base year is 2000.Basis for prices for individual commodities:banana, Ecuador (US$/tonne);beef, Australia, c.i.f. USA (US cents/lb);butter, New Zealand (US cents/lb);cocoa, ICCO indicator price (US cents/lb);coffee, ICO indicator price (US cents/lb);cotton, United States of America (US cents/lb);hides, United States of America (US cents/lb);jute, Bangladesh (US$/tonne);maize, United States of America (US$/tonne);rapeseed, Rotterdam (US$/tonne);rice, Thailand 100% B (US$/tonne);sisal, East Africa and Brazil (US$/tonne);sorghum, US No. 2, yellow (US$/tonne);soybean, Rotterdam (US$/tonne);sunflower, Amsterdam (US$/tonne);sugar, ISA (US cents/lb);tea, FAO tea composite price (US$/kg);wheat, Argentina (US$/tonne).n.a. = not available.Source: FAO.The State of Agricultural Commodity Markets 2009 60

Further reading and informationFAO. 2007. The State of Agricultural Commodity Markets 2006. Rome (also available atwww.fao.org/SOF/soco).FAO. 2008a. The State of Food Insecurity in the World 2008. Rome (also available atwww.fao.org/SOF/sofi).FAO. 2008b. Food Outlook (available at www.fao.org/giews/english/fo/index.htm).FAO. 2008c. High-Level Conference on World Food Security: the challenges of climatechange and bioenergy, 3–5 June 2008, Rome. Report on the Conference (available atwww.fao.org/foodclimate/conference/en).FAO. 2008d. The State of Food and Agriculture 2008. Rome (also available athttp://www.fao.org/SOF/sofa).FAO. 2009a. Crop Prospects and Food Situation (available at www.fao.org/giews/english/cpfs/index.htm).FAO. 2009b. National basic food prices – data and analysis tool (available atwww.fao.org/giews/pricetool).FAO. 2009c. World Food Situation (available at www.fao.org/worldfoodsituation).Gilbert, C. 2006. Trends and volatility in agricultural commodity prices. In FAO.Agricultural commodity markets and trade. New approaches to analyzing marketstructure and instability, A. Sarris & D. Hallam, eds., pp. 31–61. Rome, FAO andCheltenham, UK, Edward Elgar.IFPRI (International Food Policy Research Institute). 2008. High and rising food prices(available at www.ifpri.org/presentations/20080411jvbfoodprices.pdf).IFPRI. 2009. IFPRI’s Action Plan for the Food Price Crisis (available at www.ifpri.org/themes/foodprices/foodprices.asp).IMF (International Monetary Fund). 1999. Review of the Compensatory andContingency Financing Facility (CCFF) and Buffer Stock Financing Facility (BSFF) –Preliminary considerations (available at www.imf.org/external/np/ccffbsff/review).IMF. 2008. Regional Economic Outlook – Middle East and Central Africa.Washington, DC (also available www.imf.org/external/pubs/ft/reo/2008/MCD/eng/mreo0508.pdf).MAFF (Ministry of Agriculture, Forestry and Fisheries of Japan). 2005. Toward aworld free of starvation and poverty (introductory information on the InternationalFood Stockholding Scheme and East Asia Emergency Rice Reserve). Tokyo (alsoavailable at www.maff.go.jp/eaerr.pdf).OECD–FAO. 2008. OECD–FAO Agricultural Outlook 2008–2017. Paris,OECD Publications (Highlights available at www.fao.org/es/ESC/en/2/3/highlight_550.html).Rapsomanikis, G., Hallam D. & Conforti, P. 2006. Market integration and pricetransmission paper in selected food and cash crop markets of developing countries:review and applications. In FAO. Agricultural commodity markets and trade. Newapproaches to analyzing market structure and instability, A. Sarris & D. Hallam,eds., pp. 187–217. Rome, FAO and Cheltenham, UK, Edward Elgar.The Economist. 2007. The end of cheap food. 6 December.The Oil Drum. 2009. Discussions about energy and our future (available atwww.theoildrum.com).Time. 1974. The world food crisis. 11 November.World Bank. 2007. World Development Report 2008: Agriculture for Development.Washington, DC (also available at www.worldbank.org/reference).The State of Agricultural Commodity Markets 2009 61

FAO Trade and Markets Divisionpublications, 2006–08Commodity Market Review 2007–2008 (2008)Trade reforms and food security: case studies and synthesis (H. Thomas, ed.) (2006)OECD–FAO Agricultural Outlook 2008–2017 (2008; copublished with OECD)OECD–FAO Agricultural Outlook 2007–2016 (2007; copublished with OECD)OECD–FAO Agricultural Outlook 2006–2015 (2006; copublished with OECD)Agricultural commodity markets and trade. New approaches to analyzing marketstructure and instability (A. Sarris and D. Hallam, eds.) (2006; copublished withEdward Elgar)WTO rules for agriculture compatible with development (J. Morrison and A. Sarris,eds.) (2007)FAO Review of Agricultural Commodity Policies1. Policies for Basic Food Commodities: 2003–2004 (2006)FAO Commodities and Trade Proceedings20062. Governance, coordination and distribution along commodity value chainsFAO Commodities and Trade Technical Papers200811. Value-adding standards in the North American food market. Tradeopportunities in certified products for developing countries (P. Liu, ed.)200710. Rural household vulnerability and insurance against commodity risks –Evidence from the United Republic of Tanzania (A. Sarris and L. Christiaensen)20069. Agriculture and poverty in commodity dependent African countries: a ruralhousehold perspective from the United Republic of Tanzania (A. Sarris,S. Savastano and L. Christiaensen)8. The agricultural dimension of the ACP–EU Economic Partnership Agreements(S. Koroma and J.R. Deep Ford, eds.)FAO Commodity and Trade Policy Research Working Papers200825. WTO provisions in the context of responding to soaring food prices (R. Sharmaand P. Konandreas)24. China, India and AFTA: evolving bilateral agricultural trade and newopportunities through free trade agreements (R. Sharma)The State of Agricultural Commodity Markets 2009 62

200723. Liberalizing trade under structural constraints in developing countries:A general equilibrium analysis of Tanzania (P. Conforti and A. Sarris)200622. Threshold cointegration in the sugar-ethanol-oil price system in Brazil:evidence from nonlinear vector error correction models (G. Rapsomanikis andD. Hallam)21. Estimating price elasticities of supply for cotton: a structural time-seriesapproach (B. Shepherd)20. Market access and preferential trading schemes: evidence from selecteddeveloped and developing countries (P. Conforti and L. Salvatici)19. The role of agriculture in reducing poverty in Tanzania: A householdperspective from rural Kilimanjaro and Ruvuma (A. Sarris, S. Savastano andL. Christiaensen)18. Producer demand and welfare benefits of rainfall insurance in Tanzania(A. Sarris, P. Karfakis and L. Christiaensen)17. Household vulnerability in rural Tanzania (A. Sarris and P. Karfakis)The State of Agricultural Commodity Markets 2009 63

2009Agricultural Commodity MarketsThe State ofIn the first half of 2008, the world was facing the highest food price levelsin 30 years and a global food insecurity crisis. Although international food priceshave since fallen, they are still above the levels seen in recent years and areexpected to remain so. FAO estimates that soaring food prices pushed another115 million people into chronic hunger in 2007 and 2008, bringing the world total tonearly one billion hungry people.This report explains why food prices increased and the steps needed to ensure thathigh food prices become an opportunity for developing country farmers to helpsafeguard world food supplies at affordable prices. It focuses on the extent to which“new” explanations – biofuel demand, record oil prices and increasing food demandin China and India – can account for the sudden food price inflation as well as the roleof traditional market drivers. It also explores why so few producers in developingcountries responded by investing more and increasing production. Soaring foodprices and the consequent food crisis are matters of international concern thatrequire concerted action – there is an urgent need to strengthen the governance ofworld food security.The State of Agricultural Commodity Markets 2009 aims to bring to a wider publican accessible discussion of agricultural commodity market issues and policy matters.It seeks to provide an objective and straightforward treatment of economic issues forall those interested in agricultural commodity market developments and their impacton developing countries.ISBN 978-92-5-106280-79 7 8 9 2 5 1 0 6 2 8 0 7I0854E/1/6.09/2500