An Era of Unprecedented Opportunity?

The world is experiencing a dramatic rise in food prices. It began gradually in 2006 and has now escalated into a massive surge. It has caused hunger, protests, riots and even fears for international security. Low-Income Food-Deficit Countries have been hardest hit but the problem is global. Reports of the impact of dearer food on the poor in many developing countries have led to calls for international action to reverse the slide towards increasing poverty and malnutrition. Aid agencies have encountered difficulties in meeting the higher costs of purchasing food for distribution and have appealed for additional funds.

Almost all agricultural commodities have been affected. The most dramatic increase is in the cost of wheat and maize, which more than doubled in the last year, as well as of rice, and to a lesser extent, of dairy products, tropical products and agricultural raw materials. These current high prices should, in principle, be good news for farmers around the world, but the cost of key agricultural inputs, such as seed, fertilizer and power, have also surged, making it difficult for farmers to reap the benefits of selling food at higher prices. Subsistence farmers in developing countries even stand to lose. They face higher input prices without producing a marketable surplus that would earn them higher revenues. Urban dwellers have to cope with price surges on several fronts, not just for food but also for fuel, electricity, and transportation.

The food crisis raises important and urgent questions:

How can we swiftly address the problems of the most needy in order to avert a deeper and more widespread crisis? What can be done to allow subsistence farmers to weather high input prices and reap the benefits of higher food prices?

How can we improve food security and lessen the adverse impacts of high prices on nutrition?

How can we restrain food price inflation and achieve lasting improvement in national food security while maintaining incentives and creating a favourable market for producers?

We also need to understand fully what factors have caused the surge in prices and whether food prices will remain high for years to come. Sustainable solutions can only work when the causes of these problems have been properly understood.

These questions will be discussed in this paper, which will first take stock of the main manifestations of the crisis and report on the magnitude of price surges and their impact on hunger, poverty and inequality; it will then discuss the main causes of these surges, distinguishing between supply and demand factors, as well as long-term trends and short-term swings; and finally, it will present possible actions that would help to ease the most urgent and grave consequences, eventually putting the world food market back onto a more sustainable path.

Taking stock of a global shock
Food prices highest in 50 years: During the first four months of 2008, international prices of all major food commodities reached their highest levels in nearly 50 years while prices in real terms, i.e. actual purchasing capacities after removing the effect of inflation, were the highest in nearly 30 years. The Food and Agriculture Organization of the United Nations (FAO) food-price index rose, on average, by 12 per cent in 2006 compared with 2005, and accelerated to 24 per cent in 2007. The increase in the average of the index for the first four months of 2008, compared with the same period in 2007, stands at 52 per cent. The continuing surge in prices is led by vegetable oil, which showed an overall increase of over 94 per cent during the same period, followed by grains at 80 per cent and dairy products at 49 per cent.

Prices for some commodities, notably maize, continued to rise over the entire first half of 2008. By mid-June, maize prices had risen more than 70 per cent, approaching a record level of nearly $8 per bushel. Likewise, prices for soybeans and soybean oil, after a short retreat, returned to record or near-record levels in mid-2008. Meat prices also rose but not to the same extent. Recent large increases in some commodity prices also point to increased uncertainty in the market. According to a joint report by FAO and the Organisation for Economic Co-operation and Development, although food markets differ from commodity to commodity and country to country, and although the future remains highly uncertain, best projections suggest that food prices are likely to remain high in the next few years and high prices are expected to affect most developing country markets.1

Looking at prices in real terms, the increases are not quite so dramatic, although they are still significant. Real prices have shown a steady, long-lived downward trend, punctuated by typically short-lived spikes. There is some suggestion of a flattening out since the late 1980s, with a gradual recovery beginning in 2000 before the sharp increase in 2006. The average annual growth rate of 1.3 per cent over the 2000/05 period has jumped to 15 per cent since 2006. It is an interesting question whether the current sharp increases are fundamentally different from earlier price spikes, and another whether the long-term decline in real prices already noted has halted, signalling a structural change in agricultural commodity markets.

It is too early to decide, but I will revisit these questions later.

The current high prices are in sharp contrast to the downward trend and the prolonged slump in commodity prices from 1995 to 2002, which had even prompted calls for the revival of international commodity agreements. However, the question of whether the current price levels are consistent with past price behaviour -- sharp but short-lived peaks and prolonged slumps -- or whether they represent a break with past behaviour patterns is difficult to assess. However, some features of the present situation, notably the historically low levels of cereal stocks and a strong demand for biofuels suggest the current high prices, far from being short-lived, could persist for some years.

Costly seed, fertilizer and power: Since 2006, prices of inputs such as seed, fertilizer and animal feed have risen by 98, 72 and 60 per cent, respectively. For some inputs, these increases rose even higher in 2008. On average, the FAO input-price index doubled in the first four months of 2008, compared with the same period in 2007. The United States dollar prices of some fertilizers more than tripled. Small farmers in developing countries have always been particularly hard hit by soaring input prices: they have to pay much more for seeds, fertilizers and diesel without being able to benefit from much higher output prices.

Rising inflation -- erosion of purchasing power: The rise in food prices hit the poorest consumers and countries the hardest. As poorer consumers spend a larger share of their disposable incomes on food, they are particularly vulnerable to dearer food.

What makes individual consumers vulnerable to rising food prices renders entire countries susceptible to inflationary economic pressures. In places where food consumption accounts for a large share of overall expenditures, dearer food translates into an overall inflationary pressure. In poor countries, food expenditures often account for two thirds of the overall consumer price index -- loosely translated as the cost of living index -- whereas food has a weight of merely 15 per cent or less in rich countries. The effects are already highly visible: in Sri Lanka, for instance, where food accounts for 62 per cent of the consumer price index, rising food prices have boosted food price inflation by 26 per cent and overall inflation rose by 19 per cent. In South Africa, by contrast, food accounts for only 23 per cent of consumer price index so that food prices translated into a 14-per cent increase in food price inflation and 9 per cent overall inflation.

In addition to the direct burden on the cost of living, there are other mechanisms through which rising food prices can become increasingly harmful. For example, they may raise non-food prices through a wage response to higher food prices -- higher wage demands have been at the core of several recent protests.

Protests and riots: In many developing countries dependent on international markets, substantial increases in food prices and the cost of living have posed a threat to the overall economic growth. The most visible and immediate consequences were social unrest and riots that have taken and continue to take place on most continents. In some cases, soaring food prices even acted as a trigger for protests against wider economic and political problems.

In countries heavily dependent on food imports, and when food takes up a large share of spending, high prices erode the purchasing power of urban consumers who are caught in a social unrest. There is also growing evidence that rural populations have been adversely affected. While high agricultural prices are normally good news for farmers, higher input prices have allowed only commercial producers to benefit significantly. Subsistence farmers have been squeezed by soaring costs without being able to recoup losses from higher output prices.

Soaring import bills: The combination of rapidly rising food prices and higher transport costs has resulted in sharply higher food-import costs. Globally, food import bills surged to $820 billion in 2007, the highest in history.2 Costs are projected to reach an all-time high of $1,035 billion in 2008. The Least Developed Countries and the Low-Income Food-Deficit Countries are likely to bear the highest burden in the cost of importing food, with total expenditures anticipated to climb 40 per cent from 2007, after rising by 30 and 37 per cent, respectively that year. In 2008, the annual food-import basket in these countries could cost four times as much as it did in 2000.
Rich-poor gap is widening: Soaring food prices, in conjunction with soaring fuel prices, have deepened poverty and inequality.3 A recent World Bank study suggests a surge in poverty levels due to rising food prices, even though those results are based on only eight countries and may be subject to revision. Extrapolating these results globally, and focusing exclusively on the impact of higher prices would translate into an increase in the total number of the poor worldwide -- between 73 million and 105 million people. In Africa alone, the food price crisis may have pushed nearly 30 million more people into poverty. The study also suggests that the impact of rising oil prices on poverty is generally lower, since a smaller share of household consumption goes to fuel and energy-related products. But as a crucial intermediate input, higher energy costs also affect the prices of an enormous range of goods, especially those related to transport.

A few national examples help illustrate how the food crisis has worsened. In Liberia, the cost of a food basket for a typical household increased by 25 per cent in January alone and, as a result, the poverty rate has risen from 64 to over 70 per cent. In Yemen, the doubling of the price of wheat and bread has resulted in a 12 per cent loss in real income for the poor. In Honduras, the rise in food prices is estimated to have increased poverty from 51 to 55 per cent, while in Sierra Leone the crisis has raised poverty by 3 percentage points, to 69 per cent. In Djibouti, the high food prices over the past three years are estimated to have led to an increase in extreme poverty, from 40 to 54 per cent. The World Bank warns that such setbacks may reverse the gains made in reducing poverty over the last seven years.

There is also growing evidence that higher food prices have heightened inequality within countries. In Bangladesh, for instance, surging food prices have not only increased the level of absolute poverty but also raised the Gini index of inequality by 5 per cent. This is due to the benefit to larger farmers, relative to smaller farmers and the urban poor. Similarly, the effective rate of inflation faced by the poor in Latin America is 3 percentage points more than the official rate, implying that rich-poor gaps are widening. In Viet Nam, while a significant number of those near the poverty line are net sellers of rice and benefit from rising prices, the poorest in the rural areas benefit least and those in the urban areas are worst affected. As a result, inequality across and within regions in Viet Nam is likely to increase.

Hunger: With rising poverty, it should come as no surprise that hunger -- the most fundamental manifestation of poverty -- is also on the increase. The FAO State of Food Insecurity in the World 2008 report shows that the number of hungry people rose by about 75 million in 2007.4 The FAO analysis shows that the lion's share of this increase can be attributed to high food prices. It warns that the numbers may rise further in 2008 since countries have drawn down their budgetary reserves and households have exhausted their savings. With such buffers eliminated, many more people could go hungry.

FAO is also monitoring the effects of rising food prices particularly on vulnerable groups. This shows that children exposed to conflict, instability or HIV/AIDS are especially affected. In East and Southern Africa, 12 million aids orphans are among those most vulnerable to rising food prices. In Somalia, 2.6 million, approximately 35 per cent of the population, of which more than half are children, are already affected by a nutrition crisis caused by drought and prolonged conflict. As a result of the rising food prices, many are either skipping meals or switching to cheaper and lower-quality cereals. It is estimated that the number of people needing humanitarian assistance in Somalia could reach 3.5 million, or half of the country's total population, by the end of 2008.5

The World Bank and FAO poverty and hunger estimates have been supported by other studies. The United Nations Children's Fund, for instance, estimates that 1.5 million to 1.8 million more children in India are currently at risk of malnourishment, as households cut back on meals or switch to less nutritious foods due to rising food prices. In Viet Nam, where nearly 80 per cent of the caloric intake of the poor comes from rice alone, the increases in prices could significantly affect the nutritional status of the rural and urban poor alike. If even stable, high-growth countries are not immune to the damaging effect of escalating food prices, the risks in other less dynamic economies must surely be even greater.

High price of food: What caused it
Price changes stem from changes in supply and demand. In food and agricultural markets, supply and demand depend chiefly on the time frame in which these shifts take place. In the short run, since supply and demand for agricultural products are inelastic and do not respond much to price changes, irregularities of supply and demand can produce considerable swings in prices. The most frequent shocks in agriculture are caused by the weather. The effects of these shocks are particularly pronounced on small farmers. Gains in productivity result in long-term shifts in supply, while growth in population, income, urbanization or changes in food consuming patterns result in long-term changes in demand.

It is important to separate the long-term changes from the short-term shocks. Long-term changes typically cause trend developments, while the shocks are responsible for swings around those trends. The analysis presented here provides a clear distinction between shock and shift factors, as well as demand and supply factors. While no attempt will be made to measure the precise impacts of the various factors, it will present the main facts and figures that characterized the shifts and shocks. The analysis will also endeavour to debunk some of the myths and misperceptions that have emerged in discussion of the recent market turbulence.

Short-term factors
Low food stocks and high prices: Adequate food stocks play a key role in smoothing price variations. If stocks are low and food consumption is high, then prices rise. The level of food stocks, mainly cereals, has been falling since the mid-1990s. Since the last occurrence of high prices in 1995, global stock levels have declined by 3.4 per annually. As consumption of food rose, the ratio of stocks to total consumption has fallen even faster and reached a historic low in 2008.

This low is a result of a number of policy changes. They include: the reform of support policies, particularly in the European Union and the United States and the departure from intervention purchases by public institutions; the development of less costly risk management; demand for biofuels; and improvements in information and transportation technologies that have reduced the need to hold large amounts of stocks.

The relatively calm market situation at the beginning of 2000 made these lower stock levels seem a sufficient market buffer. But as they continued to decline and new demand emerged, stock levels eventually became too small to buffer the more pronounced shortfalls in supply. Wide swings in prices in 2007/08 ensued, and continuing low stock levels will keep prices high and volatile for some time. By the close of the harvest seasons in 2008, world cereal stocks are expected to decline a further 5 per cent from their already reduced level at the start of the season, reaching their lowest level in 25 years. The world cereal stocks-to-utilization ratio is expected to fall to 18.8 per cent, down 6 percentage points from the previous low in 2006/07. In parallel, the stock situation for oils/fats and meals/cakes began to deteriorate in mid-2007 after the spill-over effects from developments in the wheat and coarse grains markets, with the stock-to-utilization ratio expected to fall from 13 to 11 per cent for oils/fats and from 17 to 11 per cent for meals/cakes by the end of the 2007/08 harvest.

Climate change: While low stocks are not per se an independent factor for high prices, they have made markets more sensitive to shocks. A typical example for a short-term supply shock is a sudden deterioration in weather. Directly measuring a change in average global weather conditions is difficult, if not impossible. But changes can be measured indirectly by examining global yield trends and measuring deviations from this trend. All other yield-affecting factors such as fertilizer and pesticide applications and irrigation are likely to remain unchanged.

In recent years, global wheat yields have indeed fallen below their past averages. For instance, Australia suffered two consecutive droughts and subsequently yield dropped sharply in 2006/07; Morocco suffered an outright wheat crop failure in 2007; and Ukraine had a very low wheat harvest. In a market with low stocks, these shortfalls certainly contributed to the recent price spike, culminating in futures prices for wheat of over $13 per bushel by the end of March 2008.

While the weather seems to be one factor behind peak prices for wheat, no such effect is seen for coarse grains (cereal grains other than wheat and rice). On the contrary, average global coarse grain yields remained above their long-term trend over the last four years. Whether these higher yields are due to good weather is still unclear, but anecdotal evidence of good growing conditions in the main growing areas would support the good weather hypothesis.

Low food stocks, wafer-thin markets, influential suppliers: One of the idiosyncrasies of agricultural markets is that international trade accounts for only a small fraction of world consumption or production. Wheat trade, for instance, accounts for less than 18 per cent of production, maize trade less than 12 per cent, and rice trade less than 8 per cent. In addition, trade is often controlled by only a handful of exporters. For maize, one single country accounted for more than 60 per cent of world exports in 2007, while the share of the top three countries was 90 per cent. In the case of rice, the top exporter controlled nearly 30 per cent of the world market in 2007 and the top three suppliers nearly 60 per cent. Thin markets and a high concentration of trade in the hands of a few countries make these commodities very susceptible to exogenous shocks, particularly if a main international supplier is affected. In fact, in the tight conditions of 2007/08, even the mere announcement of a possible change was enough to send shock waves through the market. Probably the most striking example was the market reaction to the announcement by an important wheat exporter on 25 February 2008, that it was considering imposing a tax on its exports for the rest of the year. When the announcement was made, wheat prices leaped by 25 per cent in a single trading session -- the largest-ever recorded price rise in a single day.

The oil price shock: Another major shock was the dramatic increase in oil prices beginning in 2003. Essentially all economic sectors were affected, agriculture in particular. Average input prices have doubled and prices of some fertilizers, such as triple superphosphate and muriate of potash, have increased by more than 160 per cent in the first few months of 2008 compared to the same period in 2007. Overall, the increase in energy prices has been rapid, steep and comprehensive, with the Reuters-CRB energy-price index more than tripling since 2003.

The oil price shock also affected agricultural markets via the transportation sector. Average freight rates doubled within a one-year period beginning February 2006. Ocean freight rates for grains from the United States to Europe almost tripled, surging from about 34 to nearly 90 Euro per tonne. This effectively re-regionalized international agricultural markets, particularly for bulk commodities. It also created substantial regional price variations, which meant that trade could no longer fully play its vital role in international food security by matching regional deficits with regional surpluses.

Short-lived benefits: As prices on the international markets surged during the second half of 2007, many countries became increasingly concerned about the security of their domestic food supply. Costly food became an increasingly worrisome burden for entire national economies and hurt the poorest in particular. In some countries, concerns about possible physical shortages of foodstuffs emerged, even compromising the availability of subsidized supplies through safety nets. Protests, riots and general social unrest ensued.

To ward off deeper and more serious consequences, many governments resorted to trade policy measures to curtail price increases and ensure adequate supplies in domestic markets. In the case of the food-exporting countries, the measures ranged from export taxes to export restrictions, and outright export bans. For the importing countries, measures included the reduction of tariffs and, in a few cases, even the outright subsidy on imports, i.e. negative import tariffs.

FAO surveyed policy reactions in 77 individual countries. We found that more than 50 per cent of them had reduced import tariffs on grain and about 25 per cent had imposed export controls of some kind, either in the form of taxes, bans and quotas.

Export restrictions -- good for some not for others: From a short-term domestic food security perspective, export restrictions may make perfect sense: they are cheap, easy to implement and generally help achieve the stated objective of stabilizing the domestic food supply. From an international perspective, however, they are highly counterproductive. They aggravate international supply shortages, make markets more volatile and push up prices even further. De facto, they transfer a domestic food security problem to the international market and shift the problem onto those countries that depend heavily on imports and cannot afford the higher prices. In general, these are the low-income food-deficit countries, typically those countries already suffering from very high levels of undernourishment.

The FAO survey also indicates that the benefits of these measures may be short-lived. While export taxes initially raised additional revenues, a number of exporting countries have reported that lower domestic output prices, coupled with high input prices, have actually resulted in decreased cropping and may soon cause a further deterioration in food security. Likewise, reducing import tariffs has incurred revenue losses, which often make an important contribution to the overall national development budget.
Changes in demand are difficult to know: The demand factors contributing to the recent rise in world food prices are more difficult to spot. Unlike supply, changes in demand are seldom rapid or unexpected. The main reason is that demand in food markets is mainly driven by population and income growth, and both evolve gradually rather than abruptly. In general, the situation during the years of the recent price surge does not depart from this trend. Neither food nor feed demand has exhibited a sudden or unexpected increase that would have explained the kind of price rises witnessed recently.

A thirst for biofuels: The only discernable exception is the rapid expansion of demand for biofuel feedstock. It marks a clear departure from the demand and growth of food and feed, and therefore warrants closer inspection. Among all major food and feed commodities, additional demand for maize (a feedstock for the production of ethanol) and rapeseed (for the production of biodiesel) saw the steepest increases and thus probably had the strongest impact on prices. For example, out of nearly 40 million tonnes increase in total world maize utilization in 2007, almost 30 million tonnes were absorbed by ethanol plants alone. Most of this expansion occurred in the United States -- the world's largest producer and exporter of maize -- where maize-based ethanol represents about 30 per cent of total domestic utilization. Globally, only some 12 per cent of total maize production was used for ethanol in 2007.

In the European Union, the biodiesel sector is estimated to have absorbed about 60 per cent of member countries' rapeseed oil output in 2007, which amounted to about 25 per cent of global production and 70 per cent of global trade in the commodity. For both products, the rise in demand for biofuels was sudden and massive, and helps explain the steep rise in international prices observed since the beginning of 2007.

From a longer-term perspective, rising energy prices may mean that agriculture becomes an increasingly important provider of bioenergy. The energy market is so large and the demand for bioenergy is potentially so high that the energy market could completely tilt the traditional agricultural market equilibrium.

This may introduce a new paradigm into world agricultural markets. If energy prices remain high and feedstock production for the energy market remains an economically viable activity, this will spell the end of the long-term downward trend in real prices and create a vast demand outside the traditional food markets. In economic terms, demand for bioenergy could create perfectly elastic demand for agricultural output at break-even price levels to the energy market.6

For the long-term outlook, it means that food will remain expensive as long as oil prices remain high.

Are speculators responsible? Recent discussions on high food prices have included a growing interest in the possible effects of speculators and large institutional investors buying into agricultural commodities on futures markets, where contracts are bought and sold though deliveries take place on a future date. Indeed, the share of non-commercial traders taking long-term positions in the commodity markets has been going up. In the years 2005/08, non-commercial traders almost doubled their share of open interests in the corn, wheat and soybean futures markets, while their share in the sugar futures market remained largely unchanged. Global trading activity in futures and options combined more than doubled in the last five years. In the first nine months of 2007, this activity grew 30 per cent against the previous year. The renewed general interest in commodities as an investment class, the theory runs, was sparked by the downturn in the global equity and property markets.

This high level of speculative activity in agricultural commodity markets in the last few years has led many analysts to associate increased speculation with the recent increases in food prices. The situation, however, is not very clear: Is speculation on agricultural commodities driving prices higher or are increasing prices driving speculation? A recent study by the International Monetary Fund (IMF) concluded that it was the high prices which were encouraging inflows of investment funds into agricultural futures markets.

There is, nonetheless, little doubt that speculators can play an important role in setting the price for agricultural commodities. But when speculators bet large sums of money on higher prices, they can be assumed to do so based on solid analysis of future trends in supply and demand. If they indeed manage to push prices up to unexpected heights, it can also be assumed that demand would contract and supply expand. Eventually, this would produce unsold supply and absorbing it would require actual buying and increased holding of stocks. Higher stocks, however, are impossible to spot in the current market situation.

This may still mean that speculators have caused or at least exacerbated short-term intra-seasonal price swings in futures markets, but there is little evidence that they have driven up inter-seasonal price trends on the spot markets, where goods may be bought and sold at spot prices and deliveries take place immediately.

Have changing diets caused high prices? As the world population has grown, food demand has risen. Consumption has grown even faster than population, leaving room for more supplies and a change in diets. Initially, this dietary change represented a move away from roots and tubers to cereals, then from starchy staples to meat and other livestock products. In general, these changes have been gradual and are thus unlikely to have caused the sharp and sudden spike in prices witnessed over the last years. But in rapidly growing economies like India and China, it is claimed7 that dietary changes have come about so swiftly that they caused an abrupt change in the demand for food. Such changes have been observed in demand for many industrial products, notably for metals and ores, coal, gas and oil. But whether they really exist for food warrants a closer examination of the relevant facts, figures and trends.

Long-term factors
After having examined possible factors responsible for the supply and demand shocks, and after inspecting trends in demand, we may now turn to the factors determining the long-term trends in supply. The basic drivers are well known: long-term supply is determined by the amount of available productive land, water and genetic potential measured in terms of land yields and cropping intensity. Both the amount of resources and their productivity is crucially dependent on the level and quality of investments. For developing countries, assistance from abroad plays a vital role in such investments.

Investing in agriculture: Investment in developing countries' agriculture lies at the heart of the long and impressive expansion of production in the latter half of the twentieth century. In 1961, the world used about 1.4 billion hectares of land for crops, while it farmed only 1.5 billion hectares in 1998 to get twice the amount of grain and oilseeds. Farmers managed to feed almost twice as many people far better from virtually the same cropland base. This success was the result of far-sighted public investment in agricultural research in the 1960s and 1970s, the backbone of the green revolution and the main driver of the rapid expansion in agricultural output of several developing countries.

Where have all the altruists gone? Unfortunately, the success of public investments in agriculture was taken for granted. Investments in agricultural research began to level off in the 1990s, and overseas development assistance (ODA) to developing countries' agriculture collapsed outright: aid to agriculture fell from $8 billion in 1984 to $3.4 billion in 2004, representing a reduction in real terms of 58 per cent. Agriculture's share in ODA fell from 17 per cent in 1980 to a mere 3 per cent in 2006. In addition, international and regional financial institutions saw a drastic reduction in resources allocated to agriculture that constitutes the principal livelihood of 70 per cent of the world's poor. This long-term lack of support held back growth in production in developing countries and contributed to their growing dependence on imports. The effect was most visible for the least developed countries, which now import twice as much agricultural produce as they export.

Rich-country farm subsidies: Another important factor that affected the longer-term trend of agricultural supply was the massive support and protection afforded to farmers in the countries of the Organisation for Economic Co-operation and Development (OECD). Since 1986, when the systematic measurement of these transfers became available, the support and protection of OECD countries to their farmers equalled $300 billion annually with transfers higher in some years. Recent efforts to reduce this level of support and protection are acknowledged, so are policy reforms that helped to make these policies less trade-distorting. But it must also be recognized that the measures have done considerable damage in the past. High protection in OECD countries made it difficult for developing countries to sell their produce abroad, and OECD export subsidies even made their agriculture uncompetitive at home. Lower prices at home held back investments in agriculture, discouraged production and made developing countries increasingly dependent on food imports.

The precise impact of the lack of agricultural investment in agricultural pricing is difficult to gauge. It must be remembered that these measures have affected longer-term price trends more than temporary price spikes. It would therefore even be harder to attribute a certain portion of such price spikes to either of these developments. Clearly, however, the downward trend in investments needs to be reversed if we wish to rise to the challenges that agriculture has to meet in the next 50 years. It is equally clear that more investment in agriculture is required urgently to overcome the current food crisis. Without additional assistance, prices of seed, fertilizer and power will remain too high, agricultural markets and supply chains too weak, and food safety nets too meagrely funded to lessen the present crisis. FAO has put in place an action programme that helps address these needs. Initiated in December 2007, the Initiative on Soaring Food Prices (ISFP) has already become a catalyst in addressing the global food crisis.
Making markets work for the poor
The basic case for action rests on the vast benefits gained by making agricultural markets work for the poor. In the context of the current food insecurity, it also rests on the urgent need to prevent an even deeper crisis and the general recognition that higher prices alone may not be sufficient to stimulate production in the short run. No doubt, in the medium and long run, higher prices are a necessity for higher productivity and stable food supplies. They provide producers with the necessary incentives to enhance productivity, expand production and fully realize existing supply potentials. In the short run, however, significant impediments can hinder farmers from exploiting the opportunities created by higher prices. These impediments include the often widespread lack of access to finance and credits, lack of appropriate technology and inputs, functioning supply chains, inadequate transportation and market information.

There are, in principle, numerous measures that can help address these problems, including an overall reversal in the decline of official development assistance to agriculture; a further reduction in OECD support and protection and a decoupling of remaining measures; an urgent and comprehensive conclusion of the Doha Development Agenda;* and immediate balance-of-payments support for countries hardest hit by the double burden of surging oil and food prices. Very specific measures include increasing the food aid to address the most urgent needs, stepping up budgetary means to finance safety nets, or revisiting the issue of a global facility for financing food imports. In the list of possible actions, we will focus on two aid initiatives that FAO has recently implemented or proposed: the Initiative on Soaring Food Prices, as an example of an immediate action, and the Anti-Hunger Programme, as a package proposed for a strategic reorientation of agricultural development efforts.

The Initiative on Soaring Food Prices
Launched in 2007, the initiative aims to reduce as quickly as possible food insecurity caused by soaring food prices and prevent a deeper and widespread crisis. With a seed budget of $1.7 billion it was conceptualized as an emergency aid package with six priority areas. Table 1 provides an overview of these areas, followed by a more detailed description.

1. Policy analysis, technical assistance, and advice: The objective is to ensure that measures taken by governments in response to rising food prices contribute to the long-term reduction in food insecurity. Regular updated information on food security and agricultural markets at the national and global levels should be made available. Also, regional market synergies should be promoted through coordinating agricultural and trade policies and better understanding the policy measures initially adopted to address soaring food prices. This requires a thorough examination of the agricultural policies on a country-by-country basis and a dialogue on good agricultural practices.

2. Productive safety nets: Enhancing farm productivity, particularly smallholdings, is one of the most sustainable ways of reducing food insecurity in rural areas. A higher quantity and quality of food will have a direct impact on food available to farm households. But it will also have an indirect impact by expanding food supplies in rural markets, creating income for landless households and diversifying the income-earning opportunities for the rural poor. To achieve this, access to improved inputs and extension services such as on-farm demonstrations and pest control have to be strengthened.

Improved access to inputs can be provided in a variety of ways that include direct distribution to farmers, vouchers, credit schemes, etc. Inputs can also be obtained along with food rations to help ensure their use for production purposes. High-quality seeds should be available from local sources to ensure that they are adapted to local conditions and tastes. The use of existing input supplies and output marketing practices are integral elements for any productive safety net to support sustainability. To ensure an effective marketing of outputs, an improvement in rural infrastructure is necessary. In the short run, this could be achieved by extending current food-for-work programmes. In this way, the incomes of the most vulnerable could be directly supported, while building or rehabilitating rural infrastructure that links smallholders to the market.

3. Modern farm practices: A key factor in boosting agricultural production is the adoption of modern seeds and management practices. Farmers' access to quality seed, for example, will be improved through the strengthening of national seed distribution systems, registration and labelling of seeds, promotion of local seed enterprises, public-private partnerships and better communication between seed producers and farmers. Another challenge is to find ways to enable increased fertilizer use and access to food and output markets. Both public and private stakeholders need to be involved in the process. Boosting production requires not only a better access to agricultural inputs but also better crop management practices. To achieve higher yields, on-farm demonstrations to increase productivity, minimal soil disturbance, permanent soil cover, crop rotations and integrated pest control should be provided.

4. Improving agricultural markets: This essentially contributes to food security by bringing products faster to the market. To better achieve this, infrastructure to support agriculture, for instance, rural roads, are required. In addition, interventions could include collective marketing via farmers' associations, investments in agro-processing, or the facilitation of contractual arrangements between farmers and companies. Investments should also be made in improving communication in rural areas by better radio and television connectivity. If market prices of agricultural products are clearly broadcast, farmers will be able to respond quicker and better to fluctuations in market prices.

5. Reducing crop and livestock losses: This programme has two parts. The first focuses on reducing crop losses associated with crop-handling, storage and processing. Communicating knowledge on how to reduce crop losses to farmers, traders, processors and distributors, and improving available drying and storage facilities are essential to reduce often considerable losses. The second part deals with promoting the development of crops that are more drought or flood-tolerant, encouraging cultivation methods that reduce the risks associated with crop failures (e.g. intercropping, crop diversification) and managing irrigation efficiently.

6. Technical assistance and coordination: To address soaring food prices quickly and in the most efficient way, coordination of activities and outreach to all partners is essential. Yet, placing responsibilities on a large number of shoulders also challenges governments, regional economic organizations and development partners to collaborate in the analysis, design, targeting and monitoring of a more nuanced and coherent set of actions. These actions must effectively address the major constraints of chronically food-insecure populations. As a knowledge-based organization, FAO has a fundamental obligation to provide information on the evolution of food prices and analyse their impact. In addition, it has considerable expertise in the development of early-warning and food information systems.

So far, $40 million has been disbursed to agriculture in 57 heavily affected countries. All measures of the Initiative on Soaring Food Prices essentially provide start-up funds since it is, above all, designed to play a catalytic role in securing more international assistance. In its present form, the initiative can only cover the most immediate needs, focus on the poorest countries and aim to enable poor producers to step up agricultural production in the coming planting seasons. The time frame for proposed actions is short, i.e. approximately 18 months until the end of 2009.

When implementing the Initiative on Soaring Food Prices, emphasis is placed on integrating new measures into existing programmes, scaling them up and harmonizing all efforts with the World Food Programme, the International Fund for Agricultural Development, United Nations and Bretton Woods institutions, the African Union, the New Partnership for Africa's Development (NEPAD) and the Consultative Group on International Agricultural Research (CGIAR). Most importantly, the initiative is integrated into the Comprehensive Framework for Action, under the auspices of the United Nations High-Level Task Force on the Global Food Security Crisis, on which I serve as Vice Chair.

The Anti-Hunger Programme
While the speed and severity of the current crisis was hard to predict, the lack of progress in achieving food security for all has been clear. FAO has repeatedly pointed to that problem.9,10 We have made proposals to enhance progress, one of which was the Anti-Hunger Programme -- conceptualized as an aid package to meet the 2002 World Food Summit target of halving the number of undernourished by 2015.

When the Anti-Hunger Programme was prepared in 2003,11 it was estimated that an annual overall investment envelope of nearly $24 billion would be needed to accomplish the goal of halving hunger by 2015. This amount, allocated over five distinct areas to improve agricultural productivity and access to food in developing countries, was estimated to generate an overall benefit of $120 billion. We have just updated these estimates and, by adjusting them for inflation only, the annual total increased to $30.5 billion.

Improve agricultural productivity in poor rural communities ($2.9 billion per year): Boosting the performance of small farms in poor rural and peripherally urban communities by increasing the quantity and improving the quality of local food offers one of the best and most sustainable avenues for reducing hunger. It also provides a foundation for equitable economic growth. At the very least, better farm performance improves access to food and nutrition to rural families, thereby increasing their capacity to enjoy a full life, learn and work effectively, and contribute to the general good of society. It also increases and diversifies local food supplies, expands and diversifies farm output into tradable products, throws open employment opportunities and slows rural-urban migration.
Starting such a process requires an initial injection of loans or matching grants to enable small farmers to build up productive farms. The average cost of investments required to kick-start a sustainable on-farm innovation may be estimated at about $600 per family. Typically, this start-up capital would finance improved seed varieties, plants, manure or fertilizers, small-scale, on-farm, works and equipment such as land levelling and treadle pumps; breeding poultry, cattle or goats, or contributions towards community-led measures to improve food security, such as school gardens and paralegal services. To ensure sustainability, farmers who take part in such programmes would repay the initial capital to savings and loans associations or community-run revolving funds, thereby allowing reinvestment of the benefits accruing from higher production.

Success in on-farm development depends on a policy conducive to agricultural growth, supported by research and extension institutions that are responsive to local needs. In many cases, success also depends on developments beyond the farm gate, such as improvements in roads and irrigation.

Sustaining and scaling up this process require the emergence of self-reliant community institutions that can take the lead in ensuring the food security of all their members, plough back gains into new investments and develop linkages with other communities. This enables groups of communities with a common goal to place increasingly effective demand on the broadening range of services and types of infrastructure needed to allow them to develop greater resilience to economic, social and natural shocks, as well as earn more.

Develop and conserve natural resources ($9.5 billion per year): Land, water, plant and animal genetic resources enable agriculture, fisheries and forestry to contribute to food production and rural development. Combining them with appropriate technologies, financial capital, labour, infrastructure and institutions enhances their productivity. This combination of resources and human ingenuity has enabled global food production to outpace growing demand, despite the declining availability of per capita land and water resources, and depletion of genetic resources. If food demand is to be met in the future, increased outputs will have to come mainly from intensified and more efficient use of these limited factors of production. At the same time, action must be taken to arrest the destruction and degradation of natural resources. We estimated that an annual incremental public-sector investment of $9.5 billion is required in natural resources (e.g., land and water, plant and animal genetic resources, fisheries and forestry) to meet the 2002 World Food Summit target by 2015. Needless to say, this is likely to be a gross underestimate in view of the challenges of climate change and bioenergy.

Expand rural infrastructure and market access ($10 billion per year): Throughout the 1990s, many developing countries invested substantially in urban infrastructure. While such investments have done much to improve living standards and increase productivity, the rural areas of most developing countries still have inadequate levels of services and often deteriorating infrastructure. This infrastructure handicap has made agriculture of developing countries less competitive in domestic and international markets and has increased the costs of supplying the growing domestic market.

Reversing the decline in the share of developing countries in world agricultural exports, which is essential in improving rural incomes, will require increased efforts by many developing countries to reduce their domestic supply-side constraints. There is a danger that, unless infrastructure bottlenecks are addressed, these countries will miss the opportunities arising from high food prices and the new opportunities provided by freer markets and new production possibilities, such as bio-energy.

The highest priority must go to upgrading and developing rural roads and ensuring their maintenance, and to basic infrastructure to stimulate private-sector investment in the marketing, storage and processing of food. Investments in rural infrastructure to enhance market access will not only complement the projected increased levels of agricultural production but will also provide wider and more general socio-economic benefits.

The additional public investments required to meet the 2002 World Food Summit target was estimated at an annual cost of $10 billion at 2002 prices. This amount included new construction of rural roads ($6.6 billion) and market infrastructure ($1.1 million for transport facilities, storage capacity, cold storage chains, conditioning to meet standards of food quality and safety, slaughterhouses, fishing ports, etc.), as well as maintenance and rehabilitation ($1.8 billion and $40 million, respectively). Another $300 million would cover the cost of capacity-building, support policy assistance, institution strengthening and measures to improve plant and animal health. An additional $160 million would be required for measures to improve food safety.

These estimates referred to the medium term where input and output prices were much lower. As climate change will deteriorate the agricultural resource base in many developing countries, a much better infrastructure endowment will be necessary to ensure that lower local output can be supplemented by supplies from abroad. Better infrastructure will also be required to maintain and upgrade the resource base. This includes the provision of irrigation equipment, machinery, fertilizer, etc.

Strengthen capacity for knowledge generation ($1.43 billion per year): Success in promoting rapid improvements in livelihood and food security through on-farm investments depends on small-scale farmers having good access to relevant knowledge. This, in turn, requires effective generation and spread of knowledge to strengthen links among farmers, agricultural educators, researchers, extension workers and communicators. Agricultural research and technology development are likely to be dominated by the private sector, especially suppliers of inputs and companies purchasing farm products.

There remain, however, many areas of basic research where those who have not paid for research cannot be prevented from enjoying its benefits. Private companies are therefore generally unwilling to conduct research in, for example, pest management, measures to improve input use (e.g. fertilizer use) efficiency or conserve genetic resources. The responsibility for conducting such research must therefore rest with the public sector.

The experience of the Consultative Group on International Agricultural Research (CGIAR) which runs an international network of research centres, has been very positive. There is every reason to reverse the decline in funding from which the CGIAR system has been suffering. Incremental funding of $450 million per year would greatly strengthen and enable it to continue to play a vital role to support technology research in developing countries. International efforts should be accompanied by measures to strengthen national capacities. Upgrading national research systems requires additional investments in building staff capacities and improving facilities and equipment, estimated to cost about $450 million annually.

Improving the effectiveness of agricultural extension usually involves supporting the decentralization of services and making them more responsive to farmers' needs. It also requires creating conditions for the emergence of not only public-sector services but also those provided by non-governmental organizations and the private sector. The main investments will be in introducing institutional reforms, training of extension staff and particularly farmers who can assume much of the responsibility for facilitating group-learning processes in the medium term. Investments are also needed in the preparation of extension and training materials and in means of transport. Total incremental public funding needs are estimated at $400 million per annum. Other capacity-building measures include improving the communication infrastructure in rural areas and nutrition education; the total required has been estimated at $130 million per year.

Food safety nets for the neediest and other direct assistance ($6.6 billion per year): The need to ensure direct access to food by the poor arises not only from humanitarian considerations and the right to food but also from the fact that it is a productive investment that can contribute greatly to fighting poverty. The need for such assistance does not disappear with economic development, but changes its focus towards temporary assistance during crises.

All governments committed to achieving the 2002 World Food Summit goal need to put programmes in place to ensure that, where the goal is not being met, people have access to adequate food through traditional extended family and community-coping arrangements, market mechanisms and the process of economic growth. Options include:

Targeted direct feeding programmes. These include school meals, feeding of expectant and nursing mothers, as well as children under five, through primary health centres, soup kitchens, and special canteens. Such schemes contribute to human resource development by encouraging children to attend school and improving the health of mothers and infants. They minimize nutrition-related illnesses and mortality among children, raise life expectancy and contribute to a decrease in birth rates. World Health Organization estimates show that approximately 30 per cent of children under five (about 200 million children) are more vulnerable to sickness and more likely to die early because of undernourishment.

Food-for-work programmes. In many developing countries, a significant number of rural people are subsistence or below-subsistence farmers, producing only enough food to feed their families for part of the year. Food-for-work programmes provide support to such households while developing infrastructure, such as small-scale irrigation, rural roads, health centres and schools.
Income-transfer programmes. These can be in cash or in kind, including food stamps, subsidized rations and other targeted measures for poor households, and are good for increasing food-purchasing power and improving diet. The updated estimates suggest that ensuring adequate access to food for 214 million of the most nutritionally deprived people in the world would cost an annual $6.6 billion, of which about $1.6 billion would be needed for a school-feeding programme targeting the most needy school children. If, as predicted, food prices remain high in the medium and long term, the funding for income transfer, food-for-work and direct feeding programmes has to be scaled up substantially.

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China and India : Debunking the Myth

No doubt, emerging economies, particularly China and India , are playing an important role in the global demand and supply of agricultural commodities. These two countries account for nearly 2.5 billion people, or 40 per cent of the world's population, and thus for a large share of global food demand. But there is no evidence that demand in either of these economies has grown faster than past trends. In fact, actual consumption estimates suggest that demand has grown below trend. Still, doubts could be raised about the reliability of domestic food consumption statistics, a problem that plagues food estimates even in countries with highly developed statistical systems. But much more reliable trade statistics also fully support the findings for consumption trends. Cereal imports by China and India have even been edging downwards by about 4 per cent per year since 1980, falling from an average of about 14 million tonnes in the early 1980s to roughly 6 million tonnes during the past three years.

The situation is somewhat different for oilseeds, where China has emerged as a major buyer over the past decade, particularly for soybeans. But while China has indeed become a major importer of oilseeds, vegetable oil and livestock products, its overall agricultural trade balance has remained largely in positive territory for most years since the mid-1990s. Likewise, the long-term development in India 's trade position also runs counter to the belief that India is one of the drivers of increasing food prices in world markets. India has been a major exporter of food and, in most years between 1995 and 2007, exported more wheat, rice and meat than it imported. Even its relatively large imports of vegetable oils need to be considered in the context of equally large exports of oilcakes. In fact, neither for China nor for India is there evidence that a sudden increase in imports of oilseeds, meals and oils has contributed to the price surge which began in mid-2007, after the spike in the prices of grains (maize in particular) a year earlier. In sum, neither China nor India can be held responsible for the sudden price spike in the oils complex. This is not to downplay their role or that of the long-term changes in consumption patterns, but FAO findings serve to debunk the notion that these countries caused the spike in prices.8

Act now! An era of unprecedented opportunity
Enough is known about the current crisis, its dimensions and causes. Enough is also known about its impact on hunger, poverty and inequality. And enough is known too about the future challenges when world agriculture will have to double output with more expensive inputs and fewer resources, while simultaneously battling climate change. But, at the same time, an era of unprecedented opportunity could open up for agriculture. Higher prices can make farming much more profitable for many years to come and turn agriculture into a key opportunity in the fight against hunger. But for this to happen, we have to create the circumstances that allow farmers to reap the benefits of high prices. FAO has made the proposals to accomplish this. If fully funded, the Initiative on Soaring Food Prices will help address the most acute and immediate needs, and the Anti-Hunger Programme would help us meet the long-term challenges. But the world has to act, and it has to act now.

(Inputs provided by Josef Schmidhuber, head of the FAO Global Perspective Studies, are appreciated.)

Notes 1 OECD-FAO (2008). OECD-FAO Agricultural Outlook 2008-2017. OECD, Paris; OECD (2008). Agricultural Policies in OECD Countries, Monitoring and Evaluation,Paris. 2 FAO (2008a). Food Outlook -- May 2008.Rome. 3 World Bank (2008). G8 Hokkaido -- Toyako Summit. Double Jeopardy: Responding to High Food and Fuel Prices. Washington , DC . 4 FAO. The State of Food Insecurity in the World 2008. Rome. 5 FAO (2008b). Food Security Analysis Unit Somalia. Quarterly Brief on Food Security and Nutrition. May 2008. Rome. 6 Schmidhuber, J. (2006). Impact of an increased biomass use on agricultural markets, prices and food security: A longer-term perspective. Paper presented at the International Symposium of Notre Europe, Paris , 17-29 November. 7 von Braun, J. (2007). The World Food Situation. New Driving Forces and Required Actions. International Food Policy Research Institute (IFPRI), Washington , D.C. 8 FAO (2008c). State of Agricultural Commodity Markets 2008. Rome. 9 FAO (2005). The State of Food Insecurity in the World 2005. Eradicating world hunger -- key to achieving the Millennium Development Goals. Rome. 10 FAO (2006). The State of Food Insecurity in the World 2006. Eradicating world hunger -- taking stock ten years after the World Food Summit. Rome. 11 FAO (2003). Anti-Hunger Programme. A twin-track approach to hunger reduction: priorities for national and international action. Rome.

* The Doha Development Round of trade talks ended inconclusively in July 2008 -- Ed.