Franck Galtier
Franck Galtier

© FARM Foundation

Food price instability raises questions about development and food security

The instability of food prices in developing countries is usually very striking, as seen in Figures 1 and 2. Food price instability has three serious consequences.

First, price instability affects food security: when prices rise, some poor households must reduce their food consumption. Second, instability also hampers “green revolutions”: when prices are too instable, producers do not invest and agricultural productivity remains weak, compromising the entire economic development process (Timmer 1998; World Bank 2007). Third, food price instability can generate political and/or macroeconomic instability, in the form of urban riots, budget deficits and volatile currency exchange rates.

 

Millet pricesSource : Observatoire du marché agricole.

Food price instability may arise from internal causes: climate shocks and locust attacks affect harvests, and panics create massive buying and hoarding. Instability may also be brought on by international markets. Figure 2 shows how the retail price of imported rice in Bamako remained remarkably stable from 2000-2007, while the price of local grains proved very instable. Conversely, record-high international prices in 2008 generated a 33% increase for all types of grain, even though only 3% of the grain consumed in Mali comes from imports!

Market-driven volatility results in repeated price crises; countries in the Sahel region saw five such crises in just ten years – 2002, 2005, 2008, 2010 and 2012! Price instability will most certainly increase in the near future because of the effects of climate change, lower global grain stocks, biofuels development, and greater financialization of the agricultural futures market.

Grain consumer price in Bamako

Source : Observatoire du marché agricole.

 

The failure of the dominant doctrine for food price instability management

The idea that it is better to manage price instability through the market has dominated academic and political thinking since the 1980s, giving preference to trade and the development of risk-management tools. This doctrine recognizes that public interventions to protect poor consumers and basic foodstuffs are needed, but the prevalent idea is that such interventions must only occur during crises and only affect people exposed to food insecurity. This is called “the targeting of emergency food aid.”

This doctrine has failed. Free markets have rarely reduced price instability significantly; they have done even less to maintain prices within a range that producers and consumers find acceptable.

Furthermore, the eagerly-awaited development of risk management tools never appeared for basic foodstuffs; no futures market exists for millet, sorghum or manioc. Markets for wheat and corn often take place far from developing countries – in Chicago, for example. Commodities prices within poorer countries often remain largely disconnected from futures prices because of shipping costs and quality differences, directly and considerably reducing the protections provided by futures markets to developing-world producers and retailers.

Even though targeted food and money transfers have helped limit the extent of food insecurity, they have neither slowed the loss of economic resilience in the many households whose savings evaporated during successive crises, nor have transfers prevented chronic malnutrition. That was the main lesson learned from the 2005 crisis in Niger: violent shocks are less of a problem than is the ever-increasing economic fragility of households weakened by repeated crises (Michiels and Egg 2008). In this context, food aid distributed only during crises and restricted to the already food-insecure will not keep households from using up their savings and will not solve chronic malnutrition. Furthermore, a strategy of managing crises solely through targeted emergency food aid is not sustainable because the cost of dealing with crises rises over time as households’ resilience decreases. For example, in Niger, the cost of dealing with the crisis was twice as high in 2010 than in 2005 (see Michiels et al. 2011).

 

Is there an alternative strategy?

Permanent transfers of money or assets must be put in place to protect the most vulnerable. Security nets that use such transfers exist in some countries, following on Ethiopia’s “Productive Safety Net Programme.” However, such safety nets remain rare. Those that do exist often prove underfunded. In regions subject to repeated food price crises, such as the Sahel or the Horn of Africa, stemming households’ loss of savings may also require preventing extremely high foodstuff price rises.

Setting price floors will protect producers, stimulating investment. At least, that is what history teaches us: such systems have almost always accompanied greater agricultural productivity and work in Europe, North America and Asia (Demke et al 2012; Timmer 1989).

This leads us to the idea of stabilizing prices and maintaining them in a predetermined range. This could be done by absorbing surpluses and filling in deficits through the regulation of imports and exports or the use of public stockpiles. Various objections have been made about this policy: it would prevent prices from signaling scarcity and deprive producers from the “natural insurance” that results from high prices earned during poor harvests, and vice versa (Newbery and Stiglitz 1981). Some object to setting price ceilings because limits would discourage trade and commercial stockpiling.

The true reach of these objections must be put in perspective.  Preventing prices from extreme rises can sometimes stop them from becoming disconnected from reality, as happens during panics and speculative bubbles. Even if prices do reflect the real availability of foodstuffs, sometimes it is better for pricing decisions to be based on the medium term rather than a very short-term situation. As for producers’ “natural insurance,” it only matters if there is a negative correlation between prices and each producer’s individual harvest level; this is rarely the case, especially when the product is traded in international markets. The depressive effect of public intervention on trade and commercial stockpiling could be substantially reduced if the interventions were foreseeable, regulated by commonly understood rules, and used appropriately with sufficiently high price ceilings  (Jayne, 2012).

Price stabilization policies for basic foodstuffs can be costly because of a loss of import-duty revenues and public stockpiling expenses; price stabilization policies can also create distortions. However, they could also help the developing world make enormous gains in food security and development (Galtier 2012b ; 2013).

 

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