Food Security and Market Volatility - Vicious Cycle of Economic Development and Food Security in the Least Developed Countries (LDC's)

Food Security and Market Volatility - Vicious Cycle of Economic Development and Food Security in the Least Developed Countries (LDC's)

“The dogs of hunger are not dead: some are sleeping, others are biting.”
~ Global Hunger Index 2011

Introduction to food price volatility and food security
Since 1999 the world has witnessed several severe food crisis and famines, in 2006 and 2008, and currently again in 2011-2012 in the Horn of Africa and the Sahel region droughts have hit and famines have broken out. Immediate Humanitarian relief is provided in the form of food aid, solving short-term under-nourishment, but leaving the underlying problems untouched. Among these underlying-factors are high and volatile food prices. Food price volatility plays an important role in the vicious cycle of economic development and food security in the Least Developed Countries (LDCs), because price volatility also makes both smallholder farmers and poor consumers increasingly vulnerable to poverty due to the relatively large share of income and budget attributed to food.

In Tanzania and other LDCs, poor households spend up to 70 per cent of their income on food, whereas middle- and high-incomes only require 30 per cent or less of their income, with as little as 10 per cent in the United States. For people living on subsistence level, food spikes have a severe impact on what they can spend per day. Haitian citizen Julio Beljou remarks: “It’s difficult to predict how food prices will be tomorrow or in the coming months. Sometimes I get enough money for my products, at other times it’s not enough. That makes it more difficult to satisfy the needs of my family.” They do not have reserves or savings to make-up for these sudden price differences. This results in them cutting down on meals per day, from three to two; from two to one. Another farmer in Sierra Leone notes that she “can’t afford to return home with [her] products from the market again, [and] prefer[s] to sell the products even at a lower price than expected.” Moreover, large short-term price changes can have long-term impacts on development: forced sales of (agricultural) equipment to make up for current financial problems can lead to lower agricultural output in the future. In addition, if there was money to buy a new machine to increase agricultural yields, price uncertainty adds additional risk to the monetary pay-off of this investment.

The impact of food price volatility is not exclusive to LDCs; middle-income countries also feel the burden of rising food price volatility. Robles et al. (2008) reported that 21 million people were pushed into poverty because of rising food prices in middle-income Latin America from 2006 to early 2008. This number may reflect the inadequacy of social safety nets in some of these countries, but points out the fragility of economic classes.
Climate change and an increased frequency of weather shocks, increased linkages between energy and agricultural markets due to growing demand for bio-fuels, and increased financialisation of food and agricultural commodities all suggest that price volatility is here to stay. So how then do we combat or mitigate food price volatility? The next sections will outline the determinants of food price volatility; the recent trends and examples of food price volatility; and the distinction of food price volatility between domestic and global markets. The last sections will discuss several policy options to mitigate food price volatility and their complications.

Drivers of food price volatility
Are the recent spiking food prices a product of random events and unfortunate coincidence of separate factors, or are there reasons to believe the world is entering into a new period of extreme price volatility? Before this can be determined and appropriate policy responses designed, the drivers of these sudden drops and surges and food prices need to be explored.
Most of the agricultural commodity markets are characterised by a relatively high degree of volatility compared to other products. This is because agricultural output varies from period to period due to weather events and pest waves. In addition, food is a basic need for people and as such demand is relatively ‘inelastic’, i.e. people still have to eat and will buy their food at any given price, even if that means not buying other goods. The fact that markets cannot adjust quickly, allowing for volatility, stems from the fact that global or regional output is constrained in the short run: the number of farmers and cultivated land is constant and only over a long period of time can these be adjusted to tailor to demand.
With the above in mind, we can now consider several of the expected future drivers of food prices and volatility: climate change, stock levels, energy prices, currency movements, and increasing global demand.

Extreme weather events and climate change
The most frequent and significant factor causing volatility is unpredictable weather conditions and their impacts. Climate factors have indisputably contributed to the price rises in 2007/2008 and 2010. In addition, climate change is altering weather patterns, and is expected to severely diminish the agricultural yields in dry or low-latitude regions as well increase the frequency and intensity of extreme weather events such as droughts and floods. A Pakistani citizen explains: “At the moment, we can’t afford vegetables either apart from onions. Vegetables, in particular, have become more expensive: they’re not so plentiful any more because of the floods."
Climate change is a fairly systemic type of risk and as such classified as difficult to combat, but a systemic risk that is likely to increase in the next century and therefore an important factor to take into account while drafting policy recommendations.

Stock levels
Stock levels have an important role in mitigating short term demand and supply discrepancies. Stocks can be drawn down in response to a supply or demand shock, but once they have been depleted, supply can no longer be increased until new production comes on board. However, when accessible stocks are low relative to use, as they currently are for coarse grains , price volatility may be high. Currently, many commodities experience an increasing trend in both production and consumption, but stocks remain relatively constant. A notable exception is rice, whose stocks have been growing in line with utilisation. This trend of rising stock levels is immediate apparent in the aforementioned example of rice being relatively stable compared to other commodities that did experience price increases.

Increasing global demand
A major driver of price volatility is increasing global demand. The inability of supply to keep pace with demand will lead to an upward pressure on commodity prices. The combination of globally rising per capita incomes and the increase in population of up to 9 billion by 2050, will likely increase food demand between 70 to 100%. A demand or supply shock in a situation where the supply-demand balance is already tight, can result in increased volatility around the upward trend, for the reasons explained above. Food demand will then become more inelastic such that larger price swings will be necessary to affect demand.

Energy prices
Finally, energy prices, linking to agriculture in the form of inputs such as fertiliser and transportation, for example, are transmitting price volatility from the energy markets to the agricultural markets. In addition, an increase in energy prices encourages the use and increases the attractiveness of biofuels. Biofuels directly compete with (cash) crop production for cultivable land, labour and other resources and as such diminishes the scope for food production and can as such affect food prices.

Domestic versus global markets
Although rising food prices in global markets represent a serious threat to vulnerable people in developing countries, it is domestic food price inflation and volatility that determine the poverty and food security impact of international food crises. The consequences of international food price volatility on food security can be very different both across and within countries depending on the degree of transmission of world food price hikes in domestic markets. Figure 3 depicts that the national price index for the developing regions did not drop as sharply as did the international prices after July 2008. Therefore, considering the drivers and possible mitigation options of food price volatility should take this distinction into account.

Figure 3: Local food prices by region, January 2007–November 2010 or latest available (January 2007 = 100)

Source: Ortiz et al.
Note: LAC = Latin American Countries, CEE = Central Eastern European, SSA = Sub-Saharan Africa

Recent trends and past action
Commodity prices in the agricultural sector have hardly ever experienced large fluctuations. And indeed, over the long term there is little evidence of increasing food price volatility in international agricultural commodity prices. However, recent short-term trends indicate that the market values of traditional agricultural commodities, such as wheat, rice, maize and soybeans have been steadily increasing and point to a problem unprecedented in history.

The post 2006 period has gives even greater cause for concern and is characterised by extraordinary volatility: prices rose sharply in 2006 and 2007, and for several products, in particular rice, even several hundred per cent compared to the average of 2005. The price raises caused grave hardship among the poor and were a major factor in the increase in the number of hungry people to more than one billion. In the second half of 2008, prices dropped back to their previous levels before the price increases. The market tensions seen in the run up of the 2006-2008 price spikes have been witnessed again during 2010 and the FAO’s Food Price Index was already reaching the heights of the 2008 peak by the spring of 2011. It should be noted also that while the index of prices for cereals has come close to its 2008 level on average, contrary to the 2007/2008 situation the price rises have not affected rice. As rice is the staple food of many millions of the world’s most vulnerable consumers, this means that the incidence of current price increases is somewhat different. Nevertheless, there are serious risks to food security and the situation needs to be kept under close review by national governments, and by international organisations and non-governmental agencies.
Almost all agencies, NGO's and INGO's concerned with development are nowadays also focusing on food security, since food-security has proven to have such a tremendous impact on development. The most important organization focusing specifically on food are the Rome based Organizations: The World Food Program, The Food and Agricultural Organization and the International Federation for Agricultural Development. The recent price-shocks and the on-going food crisis, let the Secretary General to set up a special Task Force on Food Security and the Global Food

Crisis: the High Level Task Force on the Global Food Security Crisis.
World Food Summits were organized in 1996 as a forum for all stakeholders and various summits on food security followed. On food price volatility in particular, the last major conference was held on the 22nd and 23rd of June 2011, the Group of 20 Agricultural Ministers convened to address the issue of food price volatility with the ultimate objective to improve food security. At this summit, they reaffirmed “the right of everyone to have access to safe, sufficient and nutritious food, consistent with the progressive realization of the right to adequate food in the context of national food security.”

Although everyone recognizes the importance of food security, taking measures to secure the basic human right to food and take measures to ease the hardship of food price volatility proves harder. Although the drivers of food price volatility are clear, to counter the adverse effects has larger political implications and is therefore up for debate. The key-dilemma's that lay at the heart of this debate revolve around issues as protectionism versus liberalization, exporting- vs. Importing countries, low-, middle- and high-income countries, and the question whether food is a commodity or a basic human right.

Protectionism versus Liberalization in the world food market
Within the world markets and the world trade system, the aim is to create free markets. These will reduce transaction costs and lead to increased competition and thus lower prices. This goal is promoted by the WTO through its agreements. The project of liberalization of the food market, however, is now increasingly being questioned. In the light of increasing food prices and food price volatility, countries wish to protect their markets and their citizens. As pointed out here above, the consequences of food price volatility are especially harmful when price-spikes trickle down to the domestic market. At the same time, however, the protectionism will in the long run lead to higher transaction costs, disturbed market mechanisms, and even higher food prices.

Exporting versus Importing Countries
Food-exporting and food-importing countries have opposing interests in price-cycles. Furthermore, food-exporting countries (and countries that have to import little) experience less adverse effects of price-spikes, by trade measures they can provide their own population with sufficient supply. On top of that, the current WTO-scheme is modelled on an exporting and supply-driven market. Food importing countries, at the same time need the world food market and trade to level food shortages. It is in their interest to push for an open market and change for a follow-up on the current WTO-scheme. In general, though, unpredictable price-spikes are harmful to the market for both parties.

Low-Income, Middle-Income and High-income countries
The division of countries in these crude income groups allows us to see the different interest different countries may have depending on their economic prosperity. Low-income countries, especially when they are food-importing countries, suffer the most from volatile food-prices. For the Lowest Income Countries as the Sahel countries and the countries in the Horn of Africa, aid, emergency stocks and direct interference in the case of severe price-swings are necessary. Middle-Income countries, have more resources to counter the most severe shocks in food-prices by food-subsidies to control the domestic markets. Furthermore, the demand for food and higher-quality foods (as meat) is rising in these countries, contributing to the constant rising food prices. High-income countries have usually high- inelastic demands. At the same time, these countries have the resources to subsidize their agricultural sector and intervene in the market directly when necessary. There interest lays in keeping the world food market open and liberalized, to keep transaction costs low in the long run.

Finally the question to frame this debate, are food-markets normal markets or should food deserve a different status due to food as a human right. Food is both a commodity, a basic need and a human right. These different aspects of food should be all taken into consideration in the discussion whether one should act upon food-price volatility and how.

Measures that could ease food-price volatility concern aid, food-stocks and international reserves, market-measures, market-players and investments. On all these concrete policy-areas, the above mentioned dilemma's become clear: what protects some in the short run, may harm the market in the long run. Here below, some policy options and their dilemma's are highlighted. This is by no means a definite list of policy option, new measures and fresh thoughts during the debate are still much needed.

Famines and immediate food scarcity caused by rising food prices can be combated by humanitarian aid and loans. The practice of giving direct food-aid, however, should be reconsidered because it disturbs the domestic food market. The problem with other measures is that public security stocks, food-for-work programs, and social safety nets can be best organized nationally. The countries most in need often lack the capacity to organize this effectively.
On the International Level, some plea for a special position of the International Food Program, in order for the WFP to be able to deliver food to the most vulnerable at reasonable prices.

Currently the precise size of the global food-stocks is unknown. Historically, the US served as the world grain warehouse, it is questionable if they can and are willing to continue to play this role in the context of continuous rising food prices. An international food stock reserve might be able to serve a similar role: releasing food-commodities when prices are suddenly rising, and buying food-stocks in case of price-drops. Such an international food reserve could also reduce the delivery time in case of emergencies. On one hand, such a regulation system raises questions on the freedom of the market. More concrete, is such a system feasible in the light of the trend of rising food prices.

Currently policy proposals for the world food market consist of trade liberalization back by International Safety Nets. It is questionable whether these suffice in times of rising food prices. Price-elasticity lowers for high-income countries. This makes food markets inherently unfair for low-income countries. Safety nets have proved to be insufficiently effective to counter these effects. Further reaching measures are special rights for Least Developed Countries, bandwidths, different-price-settings, and even separate markets. These measure, however, may harm market mechanisms and clash with current WTO-rules.

There are three different kind of market players: nation-states, buyers, speculators, and producers. The market-players cannot go unmentioned when discussing standards and market policies. The producers are often large cooperation, with significant market-power. Lower prices can be reached by creating more efficiency through economies of scale, or through increased diversification, promoting more smaller sustainable producers to increase competition.

Speculators usually have a stabilizing effect on markets, correcting prices when they peak. On the food market, with its low elasticity of demand and its dependency on natural circumstances for production, these mechanisms work differently. Over the last years, the number of speculators on the food market has risen to such an amount that it has become disruptive. Transparency and oversight are key-words to counter the disruptive influences of speculators and speculators could be asked to distinguish themselves from other market-players.

In the long run, the agricultural sector should reform and become more sustainable. The productivity of agriculture is the highest it has been in 50 years. The problem is the unsustainability of the current agribusiness. It is not the productivity that is in need of change, but the entire set-up of the agribusiness. The focus should be on changing the large-scale agribusiness back to sustainable small-scale farmers and make their resilience priority. This requires new investments to transform the entire sectors. Finally, food-security is closely entangled with development; therefore, we should pursue a holistic approach to food security involving all aspects of development.

This background paper provides an introduction to food price volatility and its effects on the local and global market. Food prices have been rising since the beginning of the millennium and have spiked in 2008 and 2011. The richer people and countries are hardly affected by the price volatility, since the share of their income spend on food is moderate. For the poor, however, half of their budget is spend on food, and high-food prices have a direct impact on their consumption. In addition, food price spikes may drive people in middle income countries back into poverty.
Climate change, stock levels, energy prices, and increasing global demand drive high food prices. High global food prices, however, do not directly have to hit the poor. It is the volatility of the domestic market that determines their vulnerability. The volatility on the domestic market is influenced by international trade regulations, the world market and national policies. If nation-states have safety nets and market-regulation mechanisms in place, they are able to control the adverse effects of global food price volatility.
The problem is, of course, that the poorest nations are often fragile nations, without the ability to install either safety nets or regulate the market effectively. This calls for policies on the international level. The ECOSOC of TEIMUN 2012 can make recommendations on this policy-framework.

5Questions for debate
How to ease the hard-ships of food price volatility?

Which measures can be taken to ease the hardships now, without that do more harm to the price in the long run?

How to protect the domestic market in the short-run, without harming the market in the long-run?

How to mitigate the different interests of low- middle- and high-income countries?

Should the food-market have a different status due to the different status of food as both a commodity and a basic need?

Are international food-stocks feasible and how should these be designed?

How to mitigate different market-players and market-power?

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