The 2008 Food Crisis

Michael Arkus

Overview

The food crisis of 2008 has been described as the Perfect Storm – fundamental shifts in supply and demand combined with cyclical climatic and other phenomena that have sent food prices soaring to unprecedented levels, threatening to plunge 100 million or more additional people into hunger, severely crimp the educational and health spending of hundreds of millions of others, and severely undercut overall development efforts in scores of poor countries. This in turn has already led to civil unrest and riots in dozens of countries, with the danger of spreading turmoil in dozens more. The Economist magazine’s food price index has risen to its highest level since it was started in 1845 and United Nations and other experts say that even if food prices level off from their present upward spiral, they are likely to remain high for years to come.

The multiple causes include:

  • The rapid economic development in China and India that has brought scores of millions of additional mouths to the market place as the newly relatively prosperous, if not affluent, seek more nourishing and diversified foods, including beef and dairy products;
  • The growing demand for bio-fuel from crops such as sugarcane, wheat, and maize that is pushing up prices while at the same time decreasing the food supply by diverting crops from the food market to the fuel market, and crop land to ‘fuel land’.
  • Stock market trends, which have seen many hedge funds and mutual funds move towards commodity future markets as a bump in futures prices coincided with the low dollar, further raising prices.

Less publicized, but also important, is the fact that investment in agriculture has dropped dramatically since the 1980s. Countries in developing governments are investing less in agriculture and developed countries are giving less aid for agriculture. For more information, please see United Nation official KS Jomo’s paper here - LINK PDF.

These in turn have been accompanied by cyclical vagaries that have afflicted food supply and costs in the past such as:

  • Adverse weather conditions including cold snaps, droughts and excessive rains that have slashed wheat and rice production in places as far afield as Australia, Europe and the United States. This in turn could be further exacerbated by another fundamental change – global warming and climatic change – although the overall global implications are not yet clear, since some regions may become more fertile as others, especially in certain regions of sub-Saharan Africa, turn to desert.
  • Soaring oil and other energy prices that have affected the entire spectrum of food production, from fertilizer to harvesting to storage and delivery.

But it is the fundamental shifts that are of the greatest concern and necessitate fundamental long-term solutions. While three times over the past 60 years, according to UN documents, food prices have soared in a similar way, today’s crisis is unique in that the earlier hikes resulted from poor harvests and were reversed when good harvests returned. Now, ironically, the 2007 Global cereal crop was the highest on record. Today’s crisis is not so much one of shrinking supplies but of massive new demands.

In the face of these problems the international community has taken a series of both short- and long-term measures, which illustrate the extent of the crisis:

  • In March the UN World Food Programme (WFP) issued an “extraordinary emergency appeal” to world government leaders for an additional $500 million over the $2.9 billion it sought at the beginning of the year just to feed the same 73 million people in 78 countries. Shortly afterwards it raised the appeal by another $255 million – again just to feed the same number, not including those joining the ranks of the hungry as a result of high prices.
  • In April World Bank President Robert B. Zoellick announced a doubling of the Bank’s agricultural assistance in Africa to $800 to “help create a ‘Green Revolution’ for sub-Saharan Africa.”
  • In June the UN organized an emergency world food summit in Rome at which Secretary-General Ban Ki-moon called for a 50 per cent increase in food production by 2030.
  • Experts have proposed long-term solutions including the genetic engineering of food plants to withstand the effects of global warming and of special fuel-producing plants.

As UN World Food Programme Executive Director Josette Sheeran told the Rome summit: “Today, we are in the eye of that storm.”  And as Mr. Ban said: “This is a fight we cannot afford to lose." The following sections deal in detail with the causes, expected impact and suggested solutions to the crisis.

SOME SALIENT FACTS

  • During the first three months of 2008, international nominal prices of all major food commodities reached their highest levels in nearly 50 years while prices in real terms were the highest in nearly 30 years, according to the UN Food and Agriculture Organization (FAO). While the FAO food price index rose, on average, 8 percent in 2006, it increased by 24 percent in 2007. The increase for the first three months of 2008 compared to the same period in 2007 stands at 53 percent. The continuing surge is led by vegetable oils, which on average increased by more than 97 percent during the same period, followed by grains with 87 percent, dairy products with 58 percent and rice with 46 percent. Sugar and meat product prices also rose, but not to the same extent. (See "Soaring Food Prices: Facts, Perspectives, Impacts and Actions Required"). 
  • According to latest World Bank figures, food grain prices have more than doubled since January 2006, with over 60 percent of this increase occurring since January 2008.
  • According to FAO estimates, the total global bill for imported foodstuffs reached $812 billion in 2007, 29 percent more than 2006 and the highest level on record. Developing countries as a whole could face an increase of 33 percent in aggregate food import bills, coming on the heels of a 13 percent increase the year before, and their annual food import basket could cost well over twice what it did in 2000.
  • On June 16, The price of corn at the Chicago Board of Trade soared above $8 a bushel for the first time as relentless rains and overflowing rivers raised fears that farmers will not be able to grow much of anything on as many as 5 million acres in the Midwest heartland of the United States, the world's top grain exporter.
  • On June 9, the WFP’s Ms. Sheeran gave a startling account of the meteoric rise in rice prices: On March 3, rice was selling at $430 a metric tonne, five weeks later at $780, and two weeks after that at $1,000 a metric tonne. “Imagine a family living on one dollar a day, already spending 70 percent of their income on food, trying to keep up,” she told her executive board.
  • Since the previous explosion of prices in 1995, global stock levels have declined, on average, by 3.4 percent per year as demand growth outstripped supply. By the close of the 2008 seasons, world cereal stocks are expected to decline a further 5 percent from their already reduced level at the start of the season, reaching their lowest levels in 25 years, according to the FAO. The US department for agriculture says the country's wheat stocks are at their lowest for 50 years.
  • World cereal production is expected to increase by 2.6 percent in 2008, reaching a record level of 2,164 million tonnes, according to the FAO, but this will do little to ease the crisis. With many agricultural commodity markets continuing to be tight despite positive expectations for some, and with low stock levels that are not likely to be replenished quickly, the possibility of further sharp price hikes seems likely for the next few seasons. On a slightly less pessimistic note, the World Bank reports that prices should start to decline towards the end of 2008 given record global production forecasts for 2008 and 2009, but even then they are expected to remain above 2004 levels through 2015.
  • The world's population is expected to reach 7.2 billion by 2015, compared with 6.1 billion in 2000, and 9.2 billion people in 2050.
  • An estimated 850 million people in the world today suffer from hunger, 820 million of them in developing countries, according to UN figures. Approximately 1 billion people still live on less than $1 dollar a day, the threshold defined by the international community as absolute poverty, below which survival is in question, according to the WFP.
  • Economic growth in China eased slightly in the first quarter of 2008, but was still 10.6 percent year-on-year, according to latest Organization for Economic Cooperation and Development (OECD) figures. It is expected to slacken further into 2009, but domestic demand growth is projected to remain robust with buoyant incomes driving up consumption.

A GLANCE AT THE IMPACT

  • Increased Hunger: The World Bank estimates the food crisis could push a further 100 million people into hunger beyond the more than 850 million already suffering, reversing the gains made in poverty reduction over the last seven years, while WFP estimates the figure could be as high as 130 million. World Bank President Robert Zoellick says 2 billion people are struggling every day to put food on the table. (See the 2008 Press conference on Food Security). High food prices represent the biggest challenge that WFP has faced in its 45-year history with Ms. Sheeran calling it a “silent tsunami for the world’s hungry.” In rich countries people spend 10-20 percent of their income on food so they can afford to pay more, but in many poor countries they already spend 60 percent, sometimes even 80 percent, of their budget on food. 
  • Riots, Instability: According to World Bank President Robert Zoellick, there have already been riots in over 30 countries due to soaring food prices and Mr. Ban told a news conference at the Rome summit that such turmoil showed that hunger and the threat of hunger breed unrest and instability. People were killed in riots in Haiti and food protests have hit countries as far apart and as varied as Burkina Faso, Bangladesh, Egypt, Indonesia, India and the Philippines. The phenomenon is especially feared in insecure states where the urban poor may join protests by political dissidents.
  • Overall Threat to Development: Mr. Ban warned that the food crisis affects the UN’s Millennium Development Goals (MDGs) and overall development, particularly in developing countries. He said it would impair the MDGs that seek to eradicate poverty and hunger, cut child and maternal mortality and combat infectious diseases, including HIV AIDS, malaria, and tuberculosis. Mr. Zoellick said African leaders had told him high food and energy prices are putting their reforms and growth strategies at risk.
  • Education and Health: In developing countries across the world, the price crunch means that families which may have had money to pay school fees for children, to go to clinics when sick, or take much-needed nourishing food together with anti-retroviral drugs, will suffer as they cut back in these areas, according to WFP. The FAO warns that the risk of further malnutrition is high among these population groups, as households have to give up more expensive sources of protein and other nutrient-rich foods and depend on low-cost high-energy foods to maintain a minimum level of productivity. The World Bank calculates that for each 1 percent rise in food prices, energy intake among the poor drops 0.5 percent.
  • Price-Hunger Correlation: The UN International Fund for Agricultural Development (IFAD) warns that that the number of food-insecure people in the world will rise by more than 16 million for every percentage increase in the real prices of staple foods, meaning that 1.2 billion people could be chronically hungry by 2025 - 600 million more than previously predicted.
  • Current Account and Inflation Effect: Increased food import bills might lead to substantial widening of the current account deficit, which in turn could impact other macroeconomic variables such as the exchange rate, the reserve position of national banks or increased indebtedness, according to the FAO. The World Bank reports that nearly all countries that managed to restrain annual inflation to under 7 percent during 2000-2005 are experiencing higher inflation due to higher food, fuel, and other commodity prices.
  • Aid Agencies Dilemma: Humanitarian agencies may well be faced with the massive challenge of trying to respond to a large increase in the number of hungry at a time when they are being forced to cut distributions or limit populations they can assist because of the increased prices. Ms. Sheeran has said the WFP was able to buy 40 percent less food today than it could eight months ago with the same contributions. Only a successful drive for $1.2 billion by June enabled it to cover the shortfall from food and fuel costs and to cover an additional 15 million new hungry.
  • Effect on Agricultural Input: Poor farmers have been priced out of the market for seeds and fertilizers, and the FAO estimates that $1.7 billion is needed urgently to help them, while IFAD is seeking $1.2 billion in regular replenishment contributions to expand its support for poor rural people to raise their productivity.
  • Crisis Snapshots:
    • “In Liberia recently, I met people who normally would buy rice by the bag. Today, they buy it by the cup” – Mr. Zoellick’s speech to the Rome summit.
    • “In Cote d'Ivoire , the leaders of a country recovering from conflict and trying to build a democracy told me how they feared that food riots could undo all their hard work” – same speech.
    • “One of the factors of the new face of hunger is we are often seeing market places with food, and people are simply priced out of the market. I was just in Myanmar, and I was in one area of the delta where there is food in the markets but people are cut off in their livelihoods” – Ms Sheeran at Rome summit news conference.
    • In Yemen, the doubling of the price of wheat and bread has resulted in a 12 percent loss in real income of the poor – World Bank report.
    • In East and Southern Africa, 12 million AIDS orphans are amongst the most vulnerable to rising food prices – same report.
    • In Somalia, 2.6 million (approximately 35 percent of the population, more than half of them children) are already affected by a nutrition crisis caused by drought and prolonged conflict. Because of rising food prices, many are now either skipping meals or are switching to cheaper and lower quality cereals. It is estimated that the number of people needing humanitarian assistance could reach 3.5 million (or half the total population of Somalia) by the end of 2008 – Mr. Zoellick at Rome summit.

THE CAUSES

The causes of the crisis are sometimes divided between those stemming from the supply side such as adverse weather, low food stocks and fuel costs and the demand side such as the emerging biofuels market and the increasingly discerning and relatively prosperous palate in fast developing countries, such as China and India. They can also be categorized as more cyclical, such as weather, and more fundamental like those on the demand side above. The borders between the categories can be rather vague, as in the case of weather which might be just a repeat of cyclical droughts and rains, or a more permanent factor stemming from climate change.

  • Weather-related production shortfalls: A critical trigger for the price hikes, according to the FAO, has been the droughts, flooding, and cold snaps that sent cereals production into decline in major exporting countries, by 4 percent in 2005 and 7 percent in 2006. In 2006/07 a year’s worth of wheat was lost to drought in Australia, and cold weather caused grain crops to fail in Europe and the United States. Yields in Australia and Canada fell by about one fifth in aggregate, and yields were at or below trend in many countries. There was a significant increase in cereal output in 2007, especially in maize in the US, in response to higher prices, but not nearly enough to overcome other factors. (See "Soaring Food Prices: Facts, Perspectives, Impacts and Actions Required").
  • Climate Change: The full projections on climate change are not in – while spurring desertification in some areas, it could spark fertility in others and bring new pests and diseases to yet others. According to UN estimates, the phenomenon could cut South Asian millet, maize and rice production by 10 percent or more by 2030, and rain-fed agricultural production in Africa could halve by 2020. A fungal disease, ‘wheat stem rust,’ has also just emerged in Pakistan and Yemen with the ability to wipe out 40 to 70 percent of wheat yields. A supply crisis caused by these factors on top of a demand crisis could have devastating humanitarian consequences, UN agencies have warned. They note, too, that creeping deserts might eventually drive 135 million people off their land.
  • Low Stock Levels: The FAO cites ‘production shocks’ stemming from recent low stock levels as helping to set the stage for rapid price hikes. This is one of the important reasons that international cereal prices spiked so sharply in 2006 and are expected to remain at high levels for some time.
  • Increased Fuel Costs: With oil soaring to $140 or more a barrel, these have reverberated across the spectrum from transportation of seeds and ripe crops to agricultural input, such as fertilizers. The dollar prices of some fertilizers rose by more than 160 percent in the first two months of 2008, compared to the same period in 2007, while freight rates doubled within a one-year period beginning in February 2006, according to the FAO, and that was before oil’s current soaring spasms.
  • Emerging Biofuels Market: There is a dispute between UN agencies and the US Government about how major a role this has played. The FAO cites the significant increase in demand for commodities such as sugar, maize, cassava, oilseeds and palm oil as one of the leading factors behind the increase in their prices, unleashing in turn higher food prices. One report ascribes 65 percent of the rise to biofuels (See "Soaring Food Prices: Facts, Perspectives, Impacts and Actions Required"). Others put the figure at around 30 percent. But US Agriculture Secretary Edward Schafer told a news conference in May that biofuel production was responsible for only 2 to 3 percent of the global food price increase. Then again the US Agriculture Department’s long-time chief economist Keith Collins, who retired in January, said ethanol was the “foot on the accelerator” of corn demand, an essential feed for both humans and farm animals. And US Nobel Economics Prize winner and former World Bank chief economist Joseph E. Stiglitz warns: “The market has been distorted badly by some of the bio-fuel requirements. The whole system is affected by this very large withdrawal of agricultural output that was going into food production.” The FAO says the additional demand for maize and rapeseed for fuel has had the potential for the strongest impacts on prices. For example, out of the nearly 40 million tonne increase in global maize utilization in 2007, almost 30 million tonnes were absorbed by ethanol plants alone, mostly in the US. Over 30 percent of that country’s 2008 maize harvest is forecast to be diverted to ethanol distilleries, amounting to over 12 percent of global maize production. The issue is not limited to how much of each crop may be used for biofuels instead of food and livestock feed, but how much planting area could be diverted from producing other food crops. For example, an 18 percent increase in US maize planting in 2007 was only possible because of reductions in soybeans and, to a lesser extent, in wheat areas, thus causing the prices of the two latter to rise as well. The World Bank also stresses the substantial impact of biofuels on land use and food prices. Prices for crops used as bio-fuels have risen more rapidly than other food prices in the past two years, with grains up 144 per cent, oilseeds up 157 percent. In the past three years, 5 million hectares of cropland that could have been used for wheat has gone to rapeseed and sunflowers for bio-fuels in major wheat producers, including Canada, the EU and Russia, the Bank reports. In 2000, about 15 million tons of the US maize crop was turned into ethanol, in 2007 the amount was about 85 million tons. The Bank predicts that European wheat to be turned into ethanol could rise 12-fold by 2016. Even nations with emerging economies such as Thailand are now requiring that all of its diesel fuel include a component made from palm oil, making palm oil prices soar.
  • More Mouths Seeking Better Food: The FAO notes that economic development and income growth in developing and emerging countries, especially China and India, as well as population growth and urbanization, have been gradually changing the structure of demand, moving diet patterns from starchy foods towards more meat and dairy products, intensifying demand for feed grains. But it does not see this as the main cause of the sudden spike that began in 2006, although it says changing consumption patterns might have played a role in reducing stock levels in cereal and oilseed markets over the past decade and, hence, on the observed price hikes. It also does not discount the role these diet changes are likely to play in the future. China and India have usually been cited as the main contributors to this because of the size of their populations and the high rates of economic growth, but the FAO reports that since 1980 cereal imports by the two have trended down, on average by 4 percent per year, from an average of 14.4 million tonnes in the early 1980s to 6.3 million tonnes over the past three years. However, as the two countries increase consumption in meat and dairy products, this drives up overall grain prices as 1 kilo of beef requires about 7 kilos of cereals to feed the livestock. “This trend is the paradox of successful poverty reduction leading to higher demand for food, and better food,” the FAO notes.
  • Export Bans: After the start of price hikes, some of the measures to reduce the impact on vulnerable consumers, such as export bans and increased export taxes, exacerbated the short-run rise in international prices. This happened in the rice markets when important exporting countries such as India, China and Vietnam introduced export bans to protect their own consumers. The same happened with wheat when Argentina, Kazakhstan, and Russia introduced export restrictions. The FAO notes that while such barriers may help to contain domestic prices, they can also cause panic buying on domestic markets or lead to reduced planting by farmers in the face of low domestic prices coupled with high prices for inputs such as fuel, seeds and fertilizers. The US Government, which itself has a whole arsenal of trade-distorting subsidies and regulations, criticized the export bans. “The structural causes of food insecurity will require a broad response to these trade measures in developing countries, by reducing internal market barriers and barriers to trade and increasing incomes and production,” the US Agency for International Development (USAID) said.

SOLUTIONS

All involved agree on the need for a twin-track approach aimed at (i) immediately alleviating the impacts of high food and fuel prices on the weakest population groups through direct transfers and safety nets; and (ii) promoting agricultural and rural development both in the short and long run, especially in poorer countries. This can be seen in the Rome Summit Declaration; proposals for a Comprehensive Framework for Action set forth by a High-Level Task Force set up by Mr. Ban; and the FAO report: "Soaring Food Prices: Facts, Perspectives, Impacts and Actions Required".

Some of the proposals are rather short on mechanics and other details. Basically for the short term they call for, among other things, increased assistance for developing countries, including timely balance of payments support and/or budget support; reviewing debt servicing; immediate support for agricultural production and trade to help farmers, such as access to appropriate locally adapted seeds, fertilizers, animal feed and other inputs, as well as technical aid and expanding micro-credit programs; completion of World Trade Organization (WTO) Doha Development Agenda and an aid for trade package to complement the Agenda; and the minimization of restrictive measures that could increase volatility of international prices. The World Bank, in a slightly more specific 10-point program, calls for expanding social protection programs such as school feeding, food for work, and conditional cash transfer programs for the most vulnerable groups; and changing policies towards biofuels in G8 countries. Mr. Zoellick has called for immediate help for the 20 most vulnerable countries before the G8 summit meeting in July 2008.

For the medium and longer term, the proposals stress the vital need for biodiversity to increase the resilience of present food production in the face of climate change, calling on governments and the private sector to decisively step up investment in science and technology to foster optimal food crops and better animal production systems. Mr. Zoellick goes beyond Mr. Ban’s call for a 50 per cent increase in global food production by 2030, proposing to double it over the next 30 years. He says investment in small farmers, agribusiness and agricultural research could triple yields. Liberalization of international trade in agriculture must be continued by reducing trade barriers and market distorting policies, giving farmers, particularly in developing countries, new opportunities to sell on world markets and support their efforts to increase production.

A more detailed look at some of the proposals follows:

  • Infusion of Money: Although the Rome summit was not a pledging conference, financing announced there totaled over $12 billion, including $5 billion from the US, and $1.5 billion each from the Islamic Development Bank and France over a five year period. The World Bank pledged $1.2 billion and the African Development Bank $1 billion. In addition to $6.06 billion mobilized earlier in the year, this brought the global commitment to food security and agriculture to $18.36 billion. The FAO has called for $1.7 billion just to provide low-income countries with seeds and other support, while Mr. Ban has set aside a reserve of $100 million from the UN's Central Emergency Response Fund to help fund new humanitarian needs due to the soaring prices. The NGO Oxfam in a report ahead of the July 2008 G8 summit calls for $14.5 billion to scale up immediate aid to at least 290 million people threatened by the price hikes. UN experts estimate the requirements to realize a Green Revolution in Africa at some $8 billion to $10 billion annually, just to boost productivity. Mr. Ban has put the overall global price tag for national governments and international donors at over $15 billion to $20 billion annually over a number of years, while FAO Director-General Diouf is calling for $30 billion a year to boost productivity in low-income, food-deficit countries. He notes that from 1980 to 2005 aid to agriculture fell in real terms by 58 percent to $3.4 billion in 2004 and that agriculture’s share of Official Development Assistance (ODA) fell from 17 percent in 1980 to 3 percent in 2006.
  • Green Revolution and Bio-Technology, particularly in Africa: Many see this as essential to easing the crisis, and it depends on several elements including the elimination of trade-distorting subsidies in rich countries that price poorer farmers out of the market, an infusion of funds and technology and, according to some, greater use of genetically modified crops. France’s $1.5 billion announced at the Rome summit is aimed at boosting agricultural productivity in Africa and Mr. Ban has called other UN member states to also contribute. The NGO Action Against Hunger (AAH) calls for building capacity in Africa through access to credit, agricultural extension programmes and training, citing the continent’s untapped potential and the need to avoid the high transportation costs as oil prices soar. Dr. Siwa Msangi, Research Fellow in the Environment and Production Technology Division of the Washington-based International Food Policy Research Institute (IFPRI) believes bio-technology holds the solution and that genetically mutated crops need to be de-demonized. “Biotechnologies can help us grow more drought-resistant, pest-resistant, disease-resistant traits in staple crops,” he says, noting that this could counter climate change by producing submergence-resistant strains to withstand increased flooding, for example. But he warns that prejudices against so-called ‘franken-foods’ and ‘franken-fish’ need to be overcome, noting that farmers in Africa are afraid to use bio-technologies that might reduce their competitiveness on the European market due to negative attitudes there.
  • Biofuels: Most agencies call for a re-evaluation of policies on biofuels. The World Bank calls on the US and Europe to ease subsidies, mandates and tariffs on bio-fuels that are derived from corn and oilseeds that compete with their use as food, and to accelerate the development of second generation lignocellulosic products for fuel that do not compete with agricultural products for land resources. Oxfam is calling on the G8 “to stop burning food and start supporting poor farmers” by freezing all new biofuels targets, to urgently rethink existing targets and to dismantle the subsidies and tax exemptions that provide incentives for the diversion of agricultural production. Mr. Diouf of the FAO said it was incomprehensible that $11 billion to $12 billion in subsidies in 2006 were used to divert 100 million tonnes of cereals from human consumption, mostly to “satisfy a thirst for fuels for vehicles”. IFPRI’s Dr. Msangi believes biotechnology has an important role to play by providing high yielding varieties both for food and fuel, foreseeing a switch to grasses and using the stock instead of the grain of maize for fuel.
  • Market Distortion, Bans, Subsidies: Most proponents call for scrapping the export bans and tariffs that have been imposed to keep domestic prices lower. Mr. Ban called them “beggar thy neighbor food policies” that cannot work since they distort markets and force prices even higher. Mr. Zoellick made a similar call and emphasized the need to complete the Doha trade round of the WTO with sharp reductions of producer subsidies and import tariffs as part of the long-term solution. Ending subsidies to US and European farmers would let poor farmers compete, helping to boost production in developing countries and thus pushing down food prices. While criticizing the subsidies for biofuels, a comparative drop in the ocean, Mr. Diouf said the basic contradiction lay in the fact that OECD countries were distorting world markets by spending $372 billion in 2006 alone to support their agriculture.

TIPS FOR JOURNALISTS

  • Beyond the source addresses given above trawl the home sites given below for the latest situation reports that are being produced quite frequently.
  • Use them to provide talking points to question local government agencies and civil society in your own country.
  • Look for real live crisis snapshots in your own area.

Publication Information

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Program Journalism Backgrounders
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