65647 Food Price Watch POVERTY REDUCTION AND EQUITY GROUP POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK THE WORLD BANK SEPTEMBER 2010 Summary: In the first six months of 2010, global staple grain prices were on a downward trend. While in many countries staple food prices remained stable, staple prices still increased sharply in some countries with high levels of poverty. Since mid-June, global grain prices have been rising with a 56% rise in global wheat prices and knock-on impacts on other commodities such as rice, maize, and sorghum. The risks of price spikes in countries with a high burden of poverty and malnutrition will therefore need to be even more closely monitored and managed in the coming months. In the first six months of 2010 staple grain prices declined flooding in Pakistan. In Nigeria, where 43% of under-five on global commodity markets followed by a more re- children are stunted, sorghum prices rose by 20% be- cent upward trend. Between January and June 2010, the tween April and July due to weather-related shocks and World Bank’s grain price index declined by 16% (see figure greater cross-border demand from Niger. Rice prices in 1). During this period Thai rice prices declined by 22%, US Mongolia and Nepal also increased by 12% and 9% re- wheat prices fell by 20%, and sorghum and maize prices spectively during this four month period. These examples declined by 9%. A sudden reversal of this trend between show that local food prices are often determined by do- June and August drove the grain price index up by 16%, mestic or regional factors unrelated to global commodity due largely to a sharp increase in wheat prices which we market trends. discuss further below. There are also a significant number of countries In spite of these global price declines in the first half of where staple food prices have declined in line with the year, price spikes of key staples continue to affect global price trends in the months leading to July some countries with already high levels of poverty and 2010. For instance, there has been significant price de- malnutrition. Table 1 uses FAO data on national food pric- clines of the main staple food, maize, in East and South- es to rank countries with the highest percentage changes ern Africa (table 1). In July, maize prices in Kenya were in the price of key staples. In the four months leading to July less than half its December 2009 levels, while maize pric- 2010, wheat prices rose by 27% in Afghanistan partly due to es in Tanzania and Uganda declined by 25% between April and July. Malawi and Zambia have also had good Figure 1: Food Price Index maize harvests and food inflation is not a concern. Data from several Asian countries suggest a similar pattern – with stability in the price of the main staple ranging from India, China, Vietnam and Cambodia. Overall, out of 42 countries where we have staple price data until July, more than half had lower staple prices in July relative to April. Wheat prices rose by 56% between June and August 2010. Weather shocks and lower projections of wheat pro- duction for major exporters such as Russia, Ukraine, Kazakhstan and Canada fueled the rally in prices. Market confidence was further affected when Russia, whose wheat crop is expected to be around one-third less than last year and whose exports constituted 13% of global wheat ex- ports in 2009/10, announced an export ban in early August. These market jitters occurred despite ample world wheat stocks and good output prospects for the other large wheat producers – the EU region and the United States. Source: DEC-PG Note: Wheat prices are US$/MT for US HRW wheat. All other prices are weighted indices. Food Price Watch produced by the Poverty Reduction and Equity group at the World Bank is a series which aims to draw attention to trends in domestic food prices in low and middle income countries and their policy implications. Contact person – Hassan Zaman (hzaman@worldbank.org) Global maize, rice and other food prices have also risen between July and August and pressures on foreign ex- over the past two months. The current rise in wheat prices change reserves could result in the coming months. In Ban- is affecting the price of other staples due to increased de- gladesh wheat flour prices went up by 20% during the month mand for substitutes. This substitution effect, and a lower of August while coarse rice (the main staple) prices remained projected US harvest, has led to sorghum and maize prices virtually unchanged. On the other hand, several other East rising by 8% and 7% respectively between July and August. European countries have remained insulated from the wheat Rice prices which declined about 20% between January and price hike – August Consumer Price Index data for Ukraine, July rose by about 10% in August (see Figure 2). Aside from Belarus, Kazakhstan, and Estonia show hardly any changes the wheat substitution effect, this increase in rice prices also in domestic wheat prices. Table 1: Price changes of key staples A. April 2010- July 2010 Increase Decrease Afghanistan (Wheat) 27% Kenya (Maize) a/ -43% Nigeria (Sorghum) 20% Uganda (Maize) a/ -25% Rwanda (Beans) 13% Tanzania (Maize) a/ -25% Mongolia (Rice) 10% Zambia (Maize) -22% Mali (Millet) 10% Zimbabwe (Maize) -21% Nepal (Rice) 9% Burundi (Beans) -18% B. Average annual change: 12 months preceding July 2010/12 months preceding July 2009 Increase Decrease Sudan (Sorghum) 32% Zimbabwe (Maize) -52% Costa Rica (Rice) 19% Democratic Republic of Congo (Cassava) -44% Pakistan (Wheat) 13% Afghanistan (Wheat) -35% Mali (Millet) 13% Uganda (Maize) -27% Mongolia (Rice) 12% Bolivia (Rice) -27% Tanzania (Maize) 12% Somalia (Sorghum) -25% Source: FAO/GIEWS Data reflects the impact of weather-related shocks in Pakistan and Food price volatility remains a key issue. Both global com- China - recent reports suggest that Pakistan’s rice exports modity market swings and country level examples reflect the may be 35% lower than the previous year. Despite these volatility of food prices, which appears to have increased projected output reductions, global rice production is expect- since the 2008 food price spike2. For instance, the recent ed to be at a record 454 million tons. Hence prices in the spike in prices in Afghanistan comes on the heels of a steady months ahead ought only be affected if large exporting coun- decline in wheat prices over the past year. Maize prices in tries impose export restrictions or due to panic-buying from Tanzania had also risen by 22% in the year leading up to large importing countries. Soybean output losses due to February 2010 prior to the subsequent decline. drought in the EU and the Black Sea and concerns over next year’s production in South America has driven a 9% increase in the fats and oils index between July and August. Figure 2: Rice Prices Limited data for August prices suggests that the impact of the wheat price rally on national food prices has var- ied significantly. In light of the lags in transmitting global price changes to local markets (see Box 1 for a recent analy- sis of the speed and extent of price transmission in Indone- sia), and the limited country-level data we have for August prices, it is too early to make conclusive statements on the impact of the very recent global wheat price spikes at the na- tional and household level. A few countries have seen a sig- nificant increase in wheat related items and in others, it ap- pears that the impact has thus far been muted. For instance in Russia the price of buckwheat, an important staple, in- creased by 33% on average nationally in August while wheat flour has increased by 11%. Panic buying and hoarding are considered important factors in driving this price up. In Mauri- tania the imported price of wheat has gone up by 55% Source: http://www.thairiceexporters.or.th/price.htm. Note: Weekly export quote price of rice (fob Bangkok) POVERTY REDUCTION & EQUITY GROUP * WWW.WORLDBANK.ORG/POVERTY 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK THE WORLD BANK GROUP Box 1: The Transmission of International Price Shocks on Indonesian Food Prices A recent World Bank report shows that the Indonesian markets for rice, sugar, cooking oil, soybeans and maize are well integrated with world markets. Over a period of about one year, a one percent increase in world prices leads, on average, to a one percent increase in domestic prices. However the different commodities differ in their speed of adjustment to world prices. In general, the speed of adjustment to world price shocks is fastest in the sugar and cooking oil markets and slowest for soybean and maize. The speed of transmission of an international price shock to the domestic economy also varies between the different provinces. For instance, in the case of rice, simulations indicate that the adjustment to a change in global rice prices is fastest in the capital Jakarta. The main factors determining the extent of market integration between the various provinces are remoteness and the quality of transport infrastructure in that province. The analysis also shows that those commodity markets with the highest degree of integration across provinces have smaller price differences: in the sugar and rice markets, the average price differences across provinces is 5% and 12%, respectively, while in the maize, soybean and cooking oil markets they are 16% and 22%, respectively. Up to 70% of price differences across provinces can be explained by differences in the degree of remoteness, transport infrastructure, amount of locally-produced output, land productivity and income per capita. Remote provinces pay more unless they have good transport infrastructure. For people in West Kalimantan, being remote implies paying about 133 Rp/kg more for rice than in the other provinces. The data show that the transmission of price volatility from global markets to domestic markets is incomplete. Exchange rate variations matter more than world price variations as a determinant of domestic price volatility. After controlling for exchange rates and world prices, remote provinces appear to have a higher level of price volatility than central provinces. The analysis has some important policy implications. It shows that the constraints created by geography and remoteness to the transmission of price signals can be alleviated by improving the quality of infrastructure. This has important implications for food security. Policies that aim at decreasing transportation costs by improving infrastructure or by eliminating bureau- cratic impediments to transport will enhance integration within Indonesia and contribute to a reduction in price differentials between provinces. These may in turn be more effective than any government policy to reduce price volatility. The study also highlights the importance of improving agricultural productivity as a way to reduce prices for consumers while at the same time increasing incomes for farmers. Source: “Commodity Price Shocks and Market Integration in Indonesia� by Gonzalo Varela, Enrique Aldaz-Carroll and Leonardo Iacovone, included as Chapter 3 of forthcoming World Bank (2010) report Boom, Bust and Up Again? Evolution, Drivers and Impact of Commodity Prices: Implications for Indonesia. Several countries are using active government are equally important for a nutritious diet and these prices intervention and budgetary resources to ensure staple also need to be monitored and their consumption encouraged price stability. Egypt, which like most Middle East and for a balanced diet. For instance, while grain prices have re- Northern African countries subsidizes the price of bread, mained stable in China, egg and meat prices have gone up by moved quickly to source wheat from Western Europe and 9% and 14% between early July and early September. the US following the Russian wheat ban as it had relied These recent global staple price increases raise the risk on Russian wheat for more than half its imports in 2009. of domestic food price spikes in low income countries The fiscal impact of the increased cost of wheat imports, and its consequent impacts on poverty, hunger and oth- assuming there is no change in the subsidized price of er human development goals. As discussed earlier, global bread and that global wheat prices remain at current lev- prices of key staples can decline at the same time as local els, is estimated to be around 0.5% of GDP in 2010/11. staple food price spikes. However, a sudden increase in glob- Both India and China have actively released food grain al staple prices adds to the risk of more widespread price in- stocks and used procurement pricing over the past few creases of staples affecting larger numbers of people in months in order to ensure staple grain price rises are kept more countries. The consequences of these price increases in check. Following widespread riots, the Government of for the poor and malnourished depend on a number of factors. Mozambique decided to introduce bread and rice subsi- These include whether the household is a net buyer of the dies in early September along with reductions in VAT and main staple, the relative price changes and availability of al- import tariffs on other food items. ternative staples and other nutritious food items, the extent In some countries stability in staple grain prices has public policy and safety net support structures cushion these been accompanied by increases in prices of other spikes, and a household’s initial conditions. The existing evi- food items essential for a nutritious diet. When govern- dence shows that food price spikes typically increases pover- ments attempt to stabilize food prices they tend to focus on ty, lowers the dietary intake of nutritious foods, and can have domestic staple grain prices as they constitute the largest adverse consequences on an individual’s education and share of household consumption. Yet non-starchy staples health goals. Notes 1. United States Department of Agriculture, World Agriculture Supply and Demand Estimates, September 10, 2010. 2. See Food Price Watch May 2010 for further details on changes in the extent of food price volatility over the past few years. POVERTY REDUCTION & EQUITY GROUP * WWW.WORLDBANK.ORG/POVERTY 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK THE WORLD BANK GROUP