Food Prices – is the only way up?

Steve Wiggins, Andrew Norton and Anna Locke
18 October 2011
Comment
By Anna Locke, Andrew Norton and Steve Wiggins

On 7 October we brought together key people involved in the food prices agenda to understand the differences in projections of food prices that have emerged over recent months and possible policy responses to this. Merritt Cluff from the Food and Agriculture Organization (FAO), Dirk Willenbockel from the Institute for Development Studies (IDS) and Chris Gilbert from Trento University presented their views on the future of food prices.

Everyone agreed that food prices would probably fall in real terms from 2010 to 2020. The apparent difference between the IDS projections (which appeared to forecast a rise in prices over that period) and those from FAO/OECD and the US Department of Agriculture (which projected a decline) arose because the model used by IDS projected prices for 2010 rather than using observed values. As this model would not have projected the price surge seen in 2010, it understated prices for that year, and hence forecasted prices rising from 2010 to 2020, rather than falling from the observed values in 2010 to those expected for 2020.

The meeting identified several factors that could take some of the steam out of the market over the next decade:

  • Growth in large Asian economies, identified as being a principal upward pull on prices in the last few price hikes, is expected to slow down. Growth in this region, with some participants singling out the role of China, has been reflected in rises in overall food consumption (skewed towards greater consumption of meat and processed products), increasing competition for cereals for direct food, and feed consumption.
  • Demand for cereals as a feedstock for biofuels, spurred by mandates in the US and European Union, should start to level out in 2015.  Nonetheless, the demand for maize will remain high.
  • On the supply side, agricultural yields are assumed to improve, boosting production, although growth in productivity is assumed to be slowing. This is a key factor, with prices reacting strongly to variations in yields.

However, there are some factors that could continue to place upward pressure on prices, keeping them above 2006 levels:

  • Oil prices are likely to remain high, affecting food markets through different channels by increasing input prices and making biofuels attractive even without mandates. Index-linked investments have made energy and food markets increasingly interlinked.
  • Good quality land may become less available. This could be exacerbated if water is factored into the equation, currently a missing link in the models.
  • Stocks are at precarious levels, as global stocks have been run down in aggregate over a span of several years when consumption has exceeded production.

The role of funds in changing food prices remains elusive, partly due to the lack of transparent data. However, it was not highlighted as a significant factor by any of our three speakers. While some thought that it played a (minor) role in 2007/08, it was felt that by now, traders on markets have taken this into consideration so that prices are less likely to be pushed beyond the levels that reflect fundamental supply and demand.

But all projections need a big health warning. Low stocks mean that any unexpected poor harvests (and extreme weather arising from global warming may well increase their frequency), sudden increases in demand, or policies that restrict exports will lead to adjustment largely by price, rather than by release of stocks. Conversely, high food prices may provide the incentive to invest in boosting yields, with a dampening effect on prices. But we don’t know how any of this will work out (and the modellers of these projections know this better than most).

So there are no grounds for complacency on the policy side. Firstly, food systems – for sometime fine-tuned for efficiency – need to be made more resilient to shocks. This probably means holding more stocks or finding ways to divert grain from animals and ethanol plants to human food when price spikes threaten. Secondly, low-income countries that import food need access to extra funds to cover import needs (‘shock facilities’) as and when prices rise. Finally, poor and vulnerable people need social protection: if schemes are to be expanded when prices rise, the institutional infrastructure for delivery of effective social protection needs to be in position in advance of any crisis.

Steve Wiggins, Andrew Norton and Anna Locke