Food Crisis and Recession

Stephen DeAngelis

July 22, 2009

In 2007 and the beginning of 2008 (before the global recession began grabbing all of the headlines), the global crisis most discussed involved a shortage of food and the resulting high food prices. During that time I wrote a number of posts on the subject that discussed everything from how biofuels were exacerbating the crisis to how rich countries like Saudi Arabia were buying farms in more fertile countries to supply them with food. The Economist reports that the food crisis is creeping back into the news even though crops have been substantial this past year [“Whatever happened to the food crisis?” 4 July 2009 print issue]. The article reports:

“World food prices soared in 2007-08, pushing hundreds of millions into poverty. But—said people at the time—there was a silver lining: high prices would be good for farmers, especially smallholders in poor countries. … Higher returns would suck money into farming, leading to higher yields, bigger harvests and stable or falling food prices. Eventually, the argument ran, farmers and consumers would all be better off. This happy state of affairs seemed to be coming to pass in the second half of 2008. Ethiopia reported a record cereals harvest this January, up 10% on the previous year. Across the world, the picture was similar. After the price spike in the first half of 2008, farmers harvested 2.3 billion tonnes of cereals in 2008/09, the biggest crop ever seen. Big exporters began lifting the trade bans they had imposed to keep local prices from rising, so more food became available to world markets. The sharp fall in the price of oil, which occurred at the same time, increased food supplies further because, by making oil cheaper than ethanol, it encouraged farmers to sell for feed the maize they would otherwise have turned into biofuels. As food supplies surged (and demand, hit by the global recession, stagnated), prices plummeted. Between its peak in July and a trough in December 2008, The Economist’s index of food prices fell by 40%. All that seems fairly rational and hopeful.”

The wide availability of cheaper food hardly seems like cause for alarm. The article goes on to note, however, that the happy state of affairs found at the end of 2008 changed in a puzzling way in 2009.

“Between December and mid-June, the food index rebounded by a third, even though this year’s total cereals crop is expected to be another bumper (2.2 billion tonnes, says the Food and Agriculture Organisation, second only to 2008/09. Meanwhile, soyabean and sugar prices have risen by nearly half from trough to peak—see chart below—and the index of ‘non-food agriculturals’ (plants such as cotton or rubber) also rose by a quarter between December and mid-June. Prices have been increasing at a time of plenty. If this was happening during a boom, it might be understandable. But recession would normally dampen down price rises. So what explains the return of food-price inflation? And does it mean that the so-called world food crisis is returning?”

It doesn’t take a Nostradamus to predict that higher food prices during a recession are going to create desperate times for the world’s poorest people. That’s one reason that despite the many challenges facing world leaders, one of the issues they concentrated on during the latest G-8 Summit was food security [“World leaders take fresh approach on global hunger,” by Alessandra Rizzo, Kansas City Star, 10 July 2009]. In a post entitled Development and the Future of Afghanistan, I mentioned a conversation that one developer had with an Afghani farmer. He wanted to know why the farmer grew opium poppies instead of a more socially-productive crop. The farmer answered, “What else can I do? We don’t have the seeds. We don’t have the fertilizer. We don’t have anyone to sell to.” Addressing those conditions, Rizzo reports, is at the heart of the new global approach.

“Leaders of rich and developing countries launched a new approach to global hunger, … saying they wanted to spend $20 billion on seeds, fertilizers, tools and other aid for small farmers over the next three years so poor nations could feed themselves. The initiative announced at the end of a Group of Eight summit marked a new emphasis on helping farmers in the developing world boost production over the long term, moving away from an emphasis on emergency food aid for people suffering from drought and famine. … For farmers in poor countries in Africa and elsewhere, any new money would help buying seeds, fertilizers and tools, said Adrian Lovett, a spokesman for Save the Children. There was expected to be a focus on ensuring property rights for poor farmers, who often cannot invest in their small farms because they don’t hold legal title to the land.”

Just as importantly as helping farmers work their land is upgrading the infrastructure to get their products to market. The promised money will also help address those challenges.

“The money would also likely go to building infrastructure such as roads between fields and markets, giving farmers better access to clean water by drilling wells and building pipelines and allowing them to store their products so they don’t have to be sold immediately, experts said.”

The G-8 leaders understand that “emergency food aid for people affected by drought, floods or conflict” is still going to be required, but the new approach was widely welcomed by both humanitarian aid and development groups. They also recognized that the 2007-2008 food crisis is not over.

“Food security, or ensuring adequate access to food, jumped high on the political agenda after high prices last year led to food riots in some countries. Prices have receded but remain high and the U.N. Food and Agriculture Organization said recently that the number of hungry people this year had hit a record 1 billion.”

The Economist article explains why food prices remain high, even during a recession:

“There are two clusters of explanation: cyclical factors—features of the farm cycle and world economy that fluctuate from season to season—and secular, long-term factors. Cyclical influences include re-stocking: cereal stocks were run down as prices spiked and need to be replenished. In 2006 and 2007, stocks fell below 450m tonnes, about 20% of consumption; now they are back up over 520m, or 23%. That is one source of new demand. Another comes from ethanol. As oil prices rise, ethanol starts to be competitive again (as a rule of thumb, ethanol is profitable when petrol costs $3 a gallon in America, a level it has just reached in California). The fall in the dollar and in freight rates has also kept the local-currency costs of importing a tonne of cereals lower than dollar-denominated world prices. This has encouraged many countries to buy more. Lastly, it is possible that the widespread hunger brought about by soaring prices—the FAO says a billion people will go hungry this year—may have reached a peak and the poor may be back in the market for grain again. This may sound unlikely, as traditionally poor consumers have had little influence over world food prices, but economic growth has continued in the largest emerging markets (notably China and India) and governments in much of the developing world have been expanding aid programmes for the poor, such as conditional cash-transfer schemes. That may be boosting demand; it would explain why prices of grain, which everyone eats, have been rising this year while prices of meat—the food of the rich and aspiring middle classes—have continued to fall.”

The article goes on to explain that these two factors alone don’t capture the entire picture. They may explain the current rise in food prices, but there are other long-term factors that are also applying pressure and causing food prices to rise.

“The world food crisis of 2007-08 showed that food prices are not influenced solely, or even mainly, by cyclical factors. They soared in large part because of slow, irreversible trends: population growth; urbanisation; shifting appetites from grain to meat in developing countries. There is no sign that these trends are abating. At the moment, the world’s population is 6.7 billion and 750m people are born each year. Though the rate of increase is declining, inertia means the total will go on rising until 2050, when the population will reach 9 billion. In Ethiopia, for example, 18m children are born every year, rising to 24m a year by 2040. That will double its headcount from 80m to 160m. The FAO reckons that, to keep pace, the amount of food available in developing countries will have to double by 2050, equivalent to a 70% rise in world food production. If that does not happen, fears Joachim von Braun, the head of the International Food Policy Research Institute in Washington, DC, there could be a return to the food conflicts of 2007-08 which caused riots in more than 60 countries and set off a controversial worldwide land grab—a rush by rich food-importers to buy swathes of Africa and South-East Asia on which to grow food. Even if the rise in output comes about but in the ‘wrong’ way, there could be problems, since water in some areas is growing scarce and increasing food output will make it scarcer.”

The “wrong way” apparently means increasing output by clearing more land using inefficient methods to grow more food.

“The right way, argues Alexander Mueller of the FAO, is for farmers in poor countries to boost their yields. This would be better for the countries themselves, since it would make them richer. And it would be better for the world, too, because the potential for higher yields should be greatest where they are now low, especially in Africa. At the moment, cereal yields in Africa are around one tonne per hectare, compared with three-to-four tonnes in Europe and rich Asia. It should be easier to get an extra tonne per hectare by increasing African yields to two tonnes a hectare than by boosting already-fecund European or north-east Asian yields even further (water is more abundant in parts of Africa, too). Hence the hope that high prices in 2007-08 would goad farmers in poor countries to respond by increasing yields. Alas, there is little sign of that happening so far.”

Back in 2006, I posted a blog entitled Gates & Rockefeller Foundations Tackle Food Security in Africa. In that post, I concluded:

“This initiative is taking a very Development-in-a-Box-like approach to the problem of hunger in Africa. First, it is looking at the problem holistically — considering everything from irrigation to seeds to harvesting to transporting to marketing crops. Second, it is taking a standards-based approach that builds on best practices. Finally, it’s generating a powerful community of practice to ensure that the effort is sustainable. … This is a very promising start and one worth watching. If successful, this program will have made an enormous contribution to shrinking the Gap.”

Apparently, not much has changed between then and now. That’s a bit discouraging. What’s encouraging is that people haven’t given up. The initiative announced at the end of the G-8 Summit complements the efforts of the Gates and Rockefeller Foundations. Promoting agricultural excellence is also an area that my company is exploring. The Economist is correct — if we can get it right we can generate a win-win situation for developing countries and the world. More importantly, we can help eliminate the wrenching hunger that affects too many people around the world.