Food Prices: Drivers and Welfare Impacts in Emerging Market Economies - a new SIEMS research

Growing protests against high food prices in both the developing and developed world have elevated food prices to one of the top issues in the international agenda. Global food price increases in recent years have been astronomical. However, if unabated, these price increases threaten to erase much of the gains in poverty reduction that have been achieved in the last decade and reduce the growth rate of the most dynamic emerging market economies.

In their new Research «Food Prices: Drivers and Welfare Impacts in Emerging Market Economies» SIEMS experts offer a preliminary diagnostic of some of the important factors which may have contributed to the immediate crisis. Some of these factors are more immediate and possibly short-term in nature while other factors will impact countries’ food security in the medium- to longer-term.

The Figure below summarizes the content of this article and illustrates a preliminary “anatomy” of the present global food crisis.

Food Price Drivers

Short-term external factors: 


FINANCIAL SPECULATION. There is suggestive evidence that there is indeed a speculative bubble at least in some commodities. It is difficult to reconcile such abrupt volatility and sharp increases in some commodities with changes in fundamentals. The role of index investors has increased substantially, bringing a new class of investor and a new way of investing into commodity markets.

HIGHER OIL PRICES. The higher price of petroleum has helped raise the costs for producing agricultural commodities (namely the costs of fertilizers, some of which are petroleum-based), thus creating add-on effects to the cost of production and productivity.

GOVERNMENT POLICIES. Authorities have responded in a variety of ways to meet the challenges related to the recent increases in food prices. Some of these policies are meant to secure a country’s food stocks and keep domestic prices affordable, including applying taxes on exports, export ceilings or bans.

Medium- to long-term external factors:


RISING AND CHANGING PATTERNS OF FOOD CONSUMPTION. Global demographic changes and changing patterns of income distribution over the next fifty years are expected to lead to an increased general demand for food, as well as different patterns of food consumption. It is predicted that global cereal demand will increase by 75 percent between 2000 and 2050, while global demand for meat is expected to double during that same period. The increase in demand for the latter also implies a concurrent increase in feedstock demand. It is expected that more than three-fourths of this growth in demand for both cereals and meat will be accounted for by developing countries, notably China and India.



BIOFUEL DEVELOPMENT. Rising global energy demand has prompted growing interest and policy emphasis on alternative fuel sources. One of these sources, biofuels, could also affect the supply of food in at least two important ways. First, certain food crops like maize, sugar, and cassava could be directly used in biofuel production, and there is a potential trade-off between food versus fuel in terms of the use of the final output. Second, to the extent that land area devoted to biofuels as opposed to food production might become an increasingly binding trade-off, this might also exert possible pressure on resources critical to food production. Countries’ policies, notably biofuel subsidies, will also be a factor to consider here, given that biofuel production receives considerable subsidies.

CLIMATE CHANGE AND AGRICULTURAL PRODUCTIVITY. Some of the major suppliers and some large consumers of agricultural crops in the world markets have suffered lackluster or poor harvests, notably because of recent bad weather and droughts. The combination of weak supply and strong demand has thinned the world export markets for key agricultural crops, thus contributing to the consequent increases and volatility in prices.

NATIONAL AND INTERNATIONAL FOOD MARKET STRUCTURE. The practice of high mark-ups on imported goods, as well as possible hoarding at various points of the supply chain, has also possibly exacerbated the rise in food prices. In addition, the structure of the international food supply chain could also play an important role in precipitating or amplifying the transmission of shocks related to food. Only a fraction of total global food production is actually traded

Welfare implications in emerging market economies

To better understand consequences of food price increases, it is important to consider a situation in a particular country, keeping in mind that it is not only population of net food-importing countries that is vulnerable to food shocks. About the way price increases influence different countries, read in the report.

A roadmap for food policy

Based on the analysis SIEMS experts have singled out the following lines of activity and areas for political intervention (For a detailed explanation of each factor please see Chapter 5 of the full version of the report)

1. Demand for agricultural commodities will continue to grow over the next several decades, but at a slower pace
2. Current high prices will produce a strong supply-side response in the coming years
3. Countries will remain vulnerable to idiosyncratic food shocks
4. Achieving food security requires addressing important distributional issues across and within countries
5. Investments in agricultural productivity could be timely and effective in boosting food supplies and reducing poverty and inequality
6. Countries need to take important steps, but unilateral action is likely to be insufficient
7. Policy coherence is essential in order to address complex and evolving food, water and energy issues.

The research describes all problems in detail, traces trends and prospects, gives an analysis of the current situation in various food markets and shows new business models, which will appear successful in the future.

The full text of SIEMS research report is available here.