THE DEVELOPMENT OF THE GLOBAL FOOD PRICE CRISIS

In the past two years, basic foods like maize and rice have experienced rapid price

increases. Food price inflation is wreaking havoc on the incomes of people in the

developing world. The problems with this crisis are primarily related to demand rather

than supply. This crisis has not been caused by failed food crops, as in previous, more

localized food crises. The increasing demand comes from developing world consumers

and the burgeoning biofuel programmes which convert cereals into fuel. Rising demand

has not been met by increased supply from farms around the world. This is because

farmers take a while to respond to respond to market signals. For example, increasing

production involves at least the passing of one growing season. Governments have also

softened price signals and reduced incentives for farmers by subsidizing local production

and capping exports. “The transition to a new equilibrium is proving costlier, more

prolonged, and much more painful than anyone had expected” (Economist, 2008b).

Figure 3.1 shows the rapid rise in grain prices from January of 2007 to April of 2008.

 

Figure 3.1: The first wave of food price increases

Source: Economist, 2008b

The food crisis is not just affecting isolated regions and countries. It is instead affecting

poor people all over the world. “In El Salvador, the poor are eating half as much food as

they were a year ago. Afghans are now spending half their income on food, up from a

tenth in 2006” (ibid.).

Josette Sheeran, the head of the United Nations (UN) World Food Programme, says,

“For the middle classes, it means cutting out medical care. For those on $2 a day, it means cutting out meat and taking the children out of school. For those on $1 a day, it means cutting out meat and vegetables and eating only cereals. And for those on 50 cents a day, it means total disaster.” (ibid.).

The poor are having to sell their assets, including animals, tools, and even homes,

setting up the developing world for a difficult recovery, whenever it comes.

New farmland is not generally readily available to meet the higher demand for basic food

crops, especially in small developing countries whose agricultural production is primarily

driven by small landholders. “Because of population growth and the loss of farmland, the

average farm size in China and Bangladesh has fallen from about 1.5 hectares in the

1970s to barely 0.5 hectares now; in Ethiopia and Malawi, it fell from 1.2 hectares to 0.8

in the 1990s” (ibid.). Since more farmland is not available immediately, the food price

crisis requires an increase in crop yields that has been slow to develop due to a lack of

funding for research and development and the hesitation of developed markets to adopt

genetically-modified food technology.

The food crisis hit hardest in 2007 and 2008, pushing hundreds of millions of people into

poverty. The crisis seemed to ebb a bit in the second half of 2008 as yields increased

slowly. The sharp fall in the price of oil during that time also diverted cereal crops away

from biofuels like ethanol and back to food markets. However, the recent resumption of

high oil prices has once again made biofuels an attractive option. Between December

2008 and June 2009, food prices rebounded by a third (Economist, 2009b).

This ‘second wave’ of food prices is contributed to a combination of cyclical and long-

term factors. Cyclical factors include features of the farm cycle and world economy that

fluctuate from season to season. The long-term factors harbor more dire implications for

the developing world as population growth, urbanization, and changing preferences for

meat rather than grain in developing countries show no sign of slowing down. The Food

and Agriculture Organisation (FAO) (as cited in Economist, 2009b) estimates that in

order to keep up, “the amount of food in developing countries will have to double by

2050, equivalent to a 70% rise in world food production.”

The food crisis has been several years in the making, and its effects had already begun to

take a toll when the economic crisis began sweeping over the developing world. Now,

developing countries are facing multiple negative impacts at once and are struggling to

cope. The next section will cover policy responses that have been suggested to help these

countries weather the storm.