Food prices continue towards record levels

Record food consumption and rising fuel demand contributed to unprecedented price levels for food and fuel in 2007. Increased use of agricultural produce including food crops for fuel production, combined with low output in some drought-affected areas, made agriculture commodity prices soar. This meant gains for some, and threats to others detrimental effects are already visible.

Global economic growth and record world food prices is an opportunity for Africas agriculture, but at the same time a threat to the continents food security which is greatly linked to price levels. Even if there is food in the markets, people go hungry. (Photo: Dag Leraand)

Food and energy – particularly food security and energy availability – became a major issue towards the end of 2007, and continues to be high on the agenda in 2008. With the oil price establishing itself on a level way above the profitability line for producing fuel from feedstock, there was a great surge toward bio-energy, especially bio-fuel.

Modern agriculture, like other energy-intensive sectors, is now keenly aware that the price development of fuel and food is more closely interconnected than ever before. This is supported by the Worldwatch Institute’s recent publication Vital Signs 2007–2008, which has food and agriculture as its key indicator and feature.

Another indication of the importance of food and food security in international affairs, not only in developing countries, is the fact that the World Economic Forum’s 2008 Global Risks Reportranks food security as risk number two, just after the spread of infectious diseases. ‘Is food security the emerging risk of the 21^st century?’ asks the Global Risk Network, established by the WEF in 2004.

Food Prices

Whereas world food prices fell by three-quarters in real terms during 1974–2005, prices are now increasing sharply and several key products reached peak prices in 2007. Wheat climbed above USD 400 a ton, the highest ever – coinciding with oil prices reaching a record USD 100 a barrel. The Economist, world food price index was higher at the end of 2007 than at any time since its creation in 1845, leading the magazine to declare “the end of cheap food”. The food price index of the UN Food and Agriculture Organization (FAO), based on export prices for 60 internationally traded foodstuffs, climbed nearly 40% in 2007 – following a 9% increase the previous year.

There are several factors driving the current food price boom – a phenomenon described as “agflation”. The results of high economic growth, particularly the increasing consumption of meat in populous countries such as China and India, is one major factor. The production of beef is energy-intensive, driving up prices for feedstock, which is mainly grain.

Another key factor is the strong demand for cheaper fuel than that derived from traditional – and costly – oil. Particularly bio-fuel made from crops such as sugarcane and maize, and especially in the USA, is exerting a strong influence on the global food market and world food prices. At the same time as crops were moved from the food to the fuel market, harvests in major food producing countries like Australia were again hit by droughts. The fact that food stocks are at a record-low and major grain producers have imposed export restrictions to secure domestic supply, has added to the price hikes.

Still, according to the International Grains Council, the 2007 total cereals crop was the highest on record. Reaching record prices at a time of record supply is another indication of fundamental changes – of a new era of more expensive food.

In their joint Agricultural Outlook 2007–2016 the FAO and the Organisation for Economic Co-operation and Development (OECD) say temporary factors, such as droughts in wheat-growing regions and low stocks, explain in large measure the recent hikes in farm commodity prices. But when the focus turns to the longer term, structural changes are underway which could well maintain relatively high nominal prices for many products over the coming decade.

Prices are likely to climb further, according to several estimates. This is the opinion of the International Food Policy Institute (IFPRI), and its president, Joachim von Braun. In The World Food Situation of December 2007, he sums up recent developments and points to a situation where a new set of driving forces (income growth, climate change, high energy prices, globalization, and urbanization) rapidly transform food consumption, production and markets. The internationally renowned institute describes a future with high demand and high prices – where “changes in food availability, rising commodity prices, and new producer-consumer linkages have crucial implications for the livelihoods of poor and food-insecure people”. 

Both the IFPRI and the FAO believe cereal prices will continue to rise over the years to come, indicating a marked change from a long period of declining world food prices to one of price increases. “Food prices have been steadily decreasing since the Green Revolution, but the days of falling food prices may be over,” von Braun said when launching the report.

At the same time, the Director-General of the FAO, Jacques Diouf, urged governments and the international community to implement immediate measures in support of poor countries hard hit by the dramatic food price increases. “Without support, poor farmers and their families in the hardest-hit countries will not be able to cope,” Diouf warned in December 2007. The FAO called for urgent action to provide small farmers with improved access to inputs like seeds and fertilizer to increase local crop production.

FAO has also pointed to the opportunities the prevalent high prices pose for African farmers, both in terms of high-value agricultural exports and in a more viable domestic sector better able to compete with local and regional imports. By applying more irrigation, fertilizer and improved seeds, Africa has the possibility to make major advances in its agricultural productivity.

Bio-fuel Demand

Production of bio-energy can be a part of the solution to the global energy challenge and can help mitigate Africa’s development challenges. But it can also contribute to food insecurity, if farmland and harvests are diverted towards agro-fuels when and where there is a need for food. Jean Ziegler, the UN’s independent expert on the right to food, has even called the use of crops to replace gasoline a crime against humanity. Agricultural production used for energy may also be an environmental threat if forests are cleared, easily offsetting the potential climatic gains from using bio-fuel.

In 2000, around 15 million tons of the US maize crop was turned into ethanol used for fuel; in 2007 the amount was about 85 million tons. As a result, the USA – the world’s largest maize exporter – used a larger share of its maize crop for fuel than for food exports. High fuel prices drive up the prices of bio-fuel crops by encouraging farmers to switch their production from food crops, resulting in less food but at higher prices.

Nevertheless, the production of bio-fuel has considerable potential positive impacts, both on the climate (reducing carbon emissions from traditional fuel) and the economy of poor countries able to develop parts of their agriculture and industry towards bio-fuel production while reducing their energy import bills. This goes for a number of African countries, some of which have ventured into bio-fuel production, such as Mozambique and South Africa. Bio-fuel production might be a valuable part of the African Green Revolution, especially when utilizing non-edible plants like Jathropa, which can be grown with few inputs (water and fertilizer) on land unfit for food production. Oil from this shrub is hailed as an alternative to palm oil, a food oil widely used in developing countries that is now being used for bio-fuel. Several edible oils have seen steep price hikes, as prices are now set by the fuel market rather than the cooking oil market. Bio-fuel production accounted for almost half the increase in worldwide demand for vegetable oils last year, according to Oil World.

Food Security

The increased use of agricultural land and products for energy production involves several dilemmas, including a concern for food security, not least in Sub-Saharan African where poverty is widespread and climate change is feared to have a more devastating effect on food production than anywhere else.

The present trend of rising crop prices is advantageous to those producers that can benefit from it by producing and selling products in high demand – to some extent also in developing countries. However, poor people, including poor small-scale farmers and import-dependent poor countries, stand to lose from price hikes on both energy and food. The ones likely to lose greatly outnumber those who might gain. The developing countries’ combined cereals import bill for 2007 increased by around 10% on the previous year, amounting to about USD 50 billion.

High food prices are already leading to political unrest, with “food riots” in several countries, including Mauritania, Morocco and Senegal. Jacques Diouf of the FAO, himself a Senegalese, warned in November 2007 of a “risk of social and political troubles in Third World nations in the months or years to come” due to the global rise in cereal prices. Even Italy has seen street protests against increases in pasta prices. At the beginning of 2008, there were already signs of trouble in West Africa, where food prices at markets were seasonally high and rising. Meanwhile, grain prices reached record-high levels at the Chicago Board of Trade in January.

High food prices may well spell hunger: the humanitarian crisis in Niger in 2005 was accredited as much to the price of food as to its lack of availability.

Poor people suffer from high food prices, whereas governments suffer from higher import bills and are reluctant to maintain food subsidies to reduce popular discontent. Food security also has implications for security in a wider context.

According to IFPRI, the expansion of bio-fuel production based on agricultural crops can have a detrimental effect on calorie intake, reducing it by 4–8% in Africa, and 2–5% in Asia by 2020, contributing to a fall in living standards in the poorer segments of society. Another consequence of the increased use of crops for fuel, and resultant high prices for food, is that food for emergency distribution has become more expensive. The World Food Programme(WFP) is now struggling to find food and the funds to pay for it. The organization’s food aid costs increased by more than 50% over the past five years, and stand to climb by another 35% in the next couple of years.

For several countries, not least in Africa, there are also considerable opportunities connected to the rising prices of food, with increased income for farmers and savings for countries, provided a number of bottlenecks can be overcome, including storage and transport.

Related resources