Rising Food Prices Intensify Food Insecurity in
Developing Countries
The combination of rising
energy prices, use of feed crops for biofuel, greater
world food demand, and stagnant food aid may undermine
the food security of low-income countries.
Stacey
Rosen and Shahla
Shapouri
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The use of food crops for biofuels,
coupled with greater food demand, has
reversed the path of declining price
trends for several commodities. |
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For
highly import-dependent or highly food-insecure
countries, any decline in import capacity
stemming from rising food prices can
have challenging food security implications.
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Food
aid, a key safety net source, has stagnated
during the last two decades, and its
share has declined relative to total
food imports of low-income countries. | |
This
article is drawn from . . . |
Energy
Price Implications for Food Security in Developing
Countries by Birgit Meade, Stacey Rosen, and Shahla Shapouri, GFA-18, USDA, Economic Research
Service, June 2007.
|
You
may also be interested in . . . |
“The
Future of Biofuels: A Global Perspective,”
by William Coyle, in Amber Waves,
Vol. 5, Issue 5, USDA, Economic Research Service,
November 2007.
ERS
Briefing Room on Global Food Security.
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Recent hikes in oil prices have
raised serious concerns in low-income countries,
both because of the financial burden of the higher
energy import bill and potential constraints on
imports of necessities like food and raw materials.
Higher oil prices also have sparked energy security
concerns worldwide, increasing the demand for biofuel
production. The use of feed crops for biofuels,
coupled with greater food demand spurred by high
income growth in populous countries, such as China
and India, has reversed the long-term path of declining
price trends for several commodities.
Worldwide agricultural commodity
price increases were significant during 2004-06:
corn prices rose 54 percent; wheat, 34 percent;
soybean oil, 71 percent; and sugar, 75 percent.
But this trend accelerated in 2007, due to continued
demand for biofuels and drought in major producing
countries. Wheat prices have risen more than 35
percent since the 2006 harvest, while corn prices
have increased nearly 28 percent. The price of soybean
oil has been particularly volatile, due to high
demand growth in China, the U.S., and the European
Union (EU), as well as lower global stocks.
The Food and Agriculture Organization
of the United Nations (FAO) estimated that the high
food prices of 2006 increased the food import bill
of developing countries by 10 percent over 2005
levels. For 2007, the food import bill for these
countries increased at a much higher rate, an estimated
25 percent.
Price Rises Will Have
Greatest Impact on Import-Dependent Countries
The 2006 ERS Food Security Assessment
report for developing countries projected a slight
increase in food availability during the next decade,
mainly because of improvements in Asia. This increased
availability is projected to lead to a 5-percent
drop in the number of food insecure people in the
70 low-income countries included in the ERS analysis.
But, with the recent surge in food prices, prospects
are not so bright for many of the lowest income
countries. Projections of food availability consider
both domestic production and food imports. Changes
in import capacity have direct implications on the
food security of low-income countries where food
import dependency has increased because of greater
demand stemming from income and population growth,
as well as slow gains in domestic production. For
highly import-dependent or highly food-insecure
countries, any decline in import capacity stemming
from rising food prices can have challenging food
security implications.
Food Price Hikes in 2006
Offset by Record Crops and Higher Export Revenues
In 2006, higher food and oil prices
resulted in an estimated decline in total commercial
imports by the 70 developing countries. However,
most of the expected impact of higher oil and food
prices on food security was offset by favorable
weather leading to record or above-average crop
production, as well as higher export earnings of
some of the low-income countries. Higher prices
for copper and aluminum brought significant financial
gains to some of the poorest countries, such as
Zambia, Tajikistan, Guinea, and Mozambique. Increased
construction in China, which accounted for 50 percent
of the growth in consumption for copper and aluminum
metals, prompted the rise in metal prices, according
to an International Monetary Fund (IMF) report.
Strong demand growth for labor
in industrial countries and emerging markets also
helped offset the impact of food and fuel import
price increases in several countries. In Central
America, remittances (transfers of money from foreign
workers to their home countries) grew to account
for 10-20 percent of Gross Domestic Product (GDP)
in 2005, supporting growth in consumption. Asia
is the largest recipient of remittances, accounting
for 45 percent of the world total; IMF estimates
that remittances contributed to about 10 percent
of GDP in the Philippines and Nepal. Sri Lanka benefited
from the economic boom in oil-exporting countries
because more than 80 percent of its migrant workers
were working in the oil-exporting Gulf States.
But will export prices for less
developed countries continue to grow in the medium
term, preventing an erosion in terms of trade for
low-income countries? The 2006 IMF Outlook report
argues that prices of metals will decline because
the reserves of metals are more plentiful than oil
reserves. The price trend for agricultural raw materials
is less predictable because weather-related shocks
will continue to create annual price volatility.
Grains and Oilseeds Crucial
in Developing Country Diets
Price increases for grains and
oilseeds are of particular concern to low-income
countries as these commodities constitute a large
share of their citizens’ diets. Low-cost grains
historically have been a dietary staple in the poorest
countries. In low-income Asian countries, grains
account for an average of 63 percent of the diet;
in North Africa and Commonwealth of Independent
States (CIS—11 former Soviet republics), about
60 percent. In Sub-Saharan Africa, the region most
vulnerable to food insecurity, grains account for
nearly half of the calories consumed. The share
of grains in the diet is lowest—about 43 percent—in
lower income Latin America. In all regions, the
situation varies by country. For example, in Bangladesh,
the share is 80 percent, while in Eritrea and Ethiopia,
both among the most food-insecure countries in the
world, the share is around 70 percent.
The vegetable oil share of diets
in low-income countries has risen as higher incomes
made processed foods more accessible. For example,
in Sub-Saharan Africa, the share of vegetable oil
increased from less than 8 percent of the diet in
1980 to 12 percent in more recent years. In lower
income Asian and Latin American countries, the share
is now roughly 10 percent, up from 5-7 percent in
1980.
Dependence on Imports
Rises in Many Developing Countries
Food import dependence in many
developing countries has grown during the last three
decades, leading to improved and more diversified
diets. This trend can be attributed to higher incomes,
slow growth in domestic food production, and trade
liberalization. For lower income, highly import-dependent
countries, however, higher food prices and a larger
import bill can be a challenge, particularly for
countries with limited foreign exchange availability
and high vulnerability to food insecurity.
To identify countries that are
highly sensitive to increases in grain prices, ERS
ranked the 70 low-income countries by grain import
dependence and daily calorie consumption. Six of
the low-income countries (Eritrea, Liberia, Haiti,
Georgia, Burundi, and Zimbabwe) depend on grain
imports for more than 40 percent of their diets
and consume an average of less than 2,200 calories
per day. Eritrea, for example, is highly dependent
on food imports: 87 percent of grains, 51 percent
of vegetable oils, and 100 percent of sugar. Export
earnings cover only 25 percent of Eritrea’s
import bill; the remainder is filled by external
assistance. Eritrea’s daily calorie availability
of 1,465 in 2005 was among the lowest in the world.
Therefore, higher prices and the possibility of
a cut in imports could result in a food crisis in
Eritrea.
In the world’s least developed
countries (50 countries, as defined by the United
Nations’ FAO, 32 of which are in Sub-Saharan
Africa), the import share of production for wheat
jumped from 93 percent in 1980 to more than 130
percent in 2005. For sugar, the share soared from
only 4 percent in 1980 to more than 65 percent in
2005. A similar pattern is seen for vegetable oils,
with the share rising from about 6 percent to 80
percent.
High Prices and Rising Import Dependence
Lead to Widening Food Gaps
Using the ERS Food Security Assessment
model, ERS researchers estimated the impact of higher
2007 prices on food security in the 70 low-income
countries. The food gap (the amount of food needed
to raise consumption of all income groups to the
nutritional requirement of roughly 2,100 calories
per person) by 2016 was first estimated under the
assumption that food prices would rise 1 percent
annually from 2007 to 2016. This baseline scenario
results in a projected food gap of 25.2 million
tons by 2016.
ERS then estimated the food gap
under a price shock scenario, which assumed a nearly
28-percent increase in grain prices for 2007, (based
on actual price movements through July 2007), followed
by increases of 1 percent per year through 2016,
as projected in the 2007 USDA baseline. In this
scenario, the food gap increases 8 percent from
the baseline scenario to 27.2 million tons. This
result may overstate the price impact because no
allowance is made for commensurate increases in
export earnings, but recent trends suggest that
prices for commodities exported by these countries
are not growing as fast as grain or vegetable oil
prices.
Responses to the 2007 price shock
vary considerably by region and country. Estimated
food gaps increase the most in Latin America and
the Caribbean—24 percent—compared with
less than 9 percent in Asia and 6 percent in Sub-Saharan
Africa. Food gaps in Guatemala, Honduras, and Peru
are projected to jump more than 20 percent by 2016.
Peru has always relied heavily on imports of grain,
and grain imports in both Guatemala and Honduras
have risen 10 percent per year since 1990. In fact,
in 2006, grain imports exceeded domestic production
in Honduras by 30 percent, and Guatemala by 55 percent.
In Sub-Saharan Africa, countries
most susceptible to economic shocks are often those
suffering from political instability, which stifles
domestic production. The price shock is projected
to have the greatest impact in Cote d’Ivoire,
where the food gap jumps an estimated 58 percent
by 2016. This country has been experiencing political
problems during the last decade, with grain production
virtually stagnant between 1990 and the early 2000s.
To maintain grain supplies for a growing population,
grain imports rose, and have been virtually equal
to production for the past 5 years or so. The 28-percent
price shock is projected to significantly weaken
the country’s commercial import capacity,
worsening food security.
Zimbabwe’s grain output
has fallen by nearly half since 2000 due to a government-imposed
land redistribution program. To compensate for the
shortfall, imports have grown and, just as in Cote
d’Ivoire, import dependence has risen. The
price shock is projected to result in a 38-percent
increase in Zimbabwe’s food gap.
Rising Prices Raise the Cost
of Food Aid
Low-income countries, in general,
do not have domestic safety net programs to deal
with economic shocks and therefore often rely on
external assistance for support. However, in many
cases, this assistance is not sufficient to compensate
for production shortfalls brought about by higher
import costs. For oil-importing developing countries,
the $137-billion increase in the energy import bill
in 2005 far exceeded the $84 billion of official
development assistance they received. Food aid is
often critical in mitigating the impact of strict
financial constraints and reducing food availability
in low-income countries. However, the volume of
food aid worldwide has stagnated during the last
two decades, and its share has declined relative
to both total agricultural exports from food aid
suppliers and total food imports of low-income countries.
During 1990-2005, food aid received by the 70 low-income
countries declined by 2 percent (in volume) annually.
In 2002-05, food aid accounted
for about 9 percent of grain imports for the 70
low-income countries. The highest share—17
percent—was in Sub-Saharan Africa, and the
share was 10 percent in lower income Asian countries,
6 percent in the CIS, and 3 percent in the low-income
Latin American countries. Some low-income countries—like
Ethiopia, Sierra Leone, Malawi, and Niger—are
so poor that they were financially unable to import
grain even under historically lower prices and relied
heavily on food aid to augment their food supplies.
But food aid quantities fall as prices rise, since
the U.S., the major donor of food aid, sets an annual
budget for food aid allocations. For many recipient
countries, reductions in food aid are more of a
problem than higher prices for food imports.
Food
gap, 2016: Baseline vs. price shock scenario |
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Asia |
3.62 |
3.94 |
8.67 |
Latin America and Caribbean |
1.42 |
1.76 |
23.67 |
Sub-Saharan Africa |
20.15 |
21.36 |
6.01 |
Total 70 countries |
25.24 |
27.22 |
7.84 |
Source: USDA,
ERS |
Between 2004 and 2006, global
food aid donations averaged around 7.5 million tons
per year. This amount was equal to nearly a third
of the food gap estimated by ERS. Assuming that
average grain prices increased nearly 28 percent
in 2007, followed by increases of approximately
1 percent per year, as projected in the 2007 USDA
baseline, the quantity of global food aid—given
a constant 2006 budget—would fall to under
5 million tons by 2016. This amount of food aid
would cover only 17 percent of the projected distribution
gap in that year. Global food aid donations covered
25 percent of the gap in 2006. To maintain the 2006
level of food aid (8 million tons), the global food
aid budget would need to rise about 35 percent over
the next decade.
This scenario might actually be
understating the severity of the potential price
hikes. The ERS model assumed annual increases in
grain prices of around 1 percent from 2008-16. However,
as more countries invest in biofuels and if food
demand continues to rise in India and China, prices
might rise even more steeply. If food aid budgets
do not rise in accordance with these price increases,
even larger declines in food aid supplies may occur—with
severe implications for the most vulnerable countries.
Is There a Silver Lining?
The ERS food security projections
are based on several strict assumptions of commodity
price trends. But the long-term food security impact
of commodity price trends is uncertain because of
differences in commodity composition among donor
and recipient countries and varying price prospects
for exports versus imports. In the long term, high
food prices could boost domestic production in developing
countries and improve food security. However, net
results depend on the magnitude of supply response
to the price increases and supporting economic policies,
including technology adoption.
While rising energy prices have
tightened the budgets of importing countries, they
have also encouraged advances in biofuel technology,
which could help fill the growing energy needs of
developing countries. Investment in biofuel production
by low-income countries could promote rural development,
since large shares of their populations depend on
agriculture for employment and livelihood. Countries
such as Colombia and India have adopted production
targets for increasing the share of biofuels in
their transportation fuel supplies. Other countries
are examining alternative biofuel sources appropriate
for their particular environment and resource availability.
Researchers in Asia, Latin America, and Africa have
pointed toward the potential of several indigenous
plants, such as jatropha, which grows wild and requires
little water or nutrients, and has a relatively
high oil yield. Agricultural research in low-income
countries has been marginalized by national governments,
as well as international development institutions
such as the World Bank. However, the interest in
biofuels could reverse this trend.
Currently, traditional biofuels
such as wood account for about a third of all energy
consumed in developing countries. These fuel sources
are inefficiently used, however. For example, a
kilogram of wood generates only about one-tenth
of the heat of a kilogram of liquid petroleum gas.
The new sources of biofuels could improve energy
efficiency, increase the supply of energy, and boost
farm incomes and rural employment where poverty
is pervasive.
Success, however, depends on increased
investment in new technology consistent with the
agricultural sectors of low-income countries. Most
low-income countries have poor market infrastructure
and weak financial systems. This raises costs of
production, particularly for newly introduced biofuel
commodities that require dedicated production and
distribution facilities. Finally, the financial
capacity for investment in low-income countries
is limited, so increased investment in biofuel production
could distract from food production, thereby intensifying
food insecurity.
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