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Potential food security impacts of rising commodity prices in the Sahel: 2008-2009

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EXECUTIVE SUMMARY

International cereal prices have experienced an unprecedented increase over the past five or six months. These increases have translated into higher food prices on many local markets in Africa, Asia and other parts of the world, causing concern that the numbers of food insecure will rapidly rise over the coming months while the cash resources made available to address hunger and food insecurity will translate into fewer tons of humanitarian assistance due to the rising costs of food commodities.

Rising food prices are always a concern due to their potential for diminishing the food security of the poor as well as their potential for creating political instability. With 45 percent of the Sahelian population living on less than $1/day and spending from 50-75 percent of their income on staple foods, analysts have expressed particular concern for the poor in countries that are highly dependent on the market for food, especially those dependent on the international market. Also adding to the concern are memories of the 2004/05 food security crisis in Niger and fears that a similar crisis will reappear this year.

What has many concerned is the evidence that this is a different kind of food security crisis than that typically faced in the Sahel-more driven by inflation and declining purchasing power than by crop failure. Also, as already demonstrated by civil unrest, the crisis could be potentially more urban than rural in nature. As a result, many are asking if the standard tools used by Sahelian famine early warning systems and humanitarian assistance agencies will be adequate for dealing with the evolving food security situation during the 2008/09 cropping season and beyond.

A whole suite of monitoring activities and analysis plans are being developed throughout the region in an effort to understand the evolution of supply and prices over this season as well as make some predictions and provide early warning. A parallel discussion involves the balance that needs to be struck in: (a) protecting consumers in the short-run and (b) using the present crisis to encourage investment in agriculture in the medium-term. In an effort to synthesize what is currently known and contribute to systematic analysis of appropriate responses to the evolving situation, this paper:

- Reviews the current thinking about key determinants of recent cereal price trends and what they imply for future trends;

- Provides a description of the policy and program options available for mitigating the negative food security impacts of rising prices;

- Describes various scenarios that might unfold in the Sahel during the 2008/09 cropping season;

- Reviews policies and programs for dealing with each scenario in the short-term (e.g., humanitarian measures); and

- Briefly discusses policy and program options for improving the likelihood that the short-term humanitarian efforts will stimulate medium-term investments to increase food supplies in a more permanent manner.

Concerning trends in world prices, there is general agreement on the following points:

- Current price increases are not typical of past increases

* Food prices are rising at an unusually rapid rate;

* Volatility is greater, particularly for oilseeds and cereals;

* Duration of the price increases is likely to be longer;

* Breadth of products affected is much greater-nearly all major food and feed prices are rising as well as fuel, transport, manufactured goods and fertilizers.

- Factors driving price increases include: o Unfavorable weather and production (particularly for wheat in Australia):

* Declining cereal stocks around the world.

* Rising fuel costs that increase production, processing and transport costs

* Changing structure of demand (more meat and dairy, hence more grain demand for animal feed)

* Increased demand (encouraged by subsidies) for biofuel feedstocks

* Expansion of derivative markets based on agricultural commodities, which is increasingly thought to be contributing to price rises and volatility

* Export restrictions imposed by major exporting countries such as China and India

* Some substitution in production of maize for soybeans, in response to biofuel feedstock demand

* Panic buying in the face of price increases, which, in the short run, drives prices even higher.

The key points to retain about current drivers of higher cereal prices in the Sahel include:

- West African regional coarse grain production is adequate to supply regional coarse grain needs in most years;

- Sahelian cereal markets are highly integrated among themselves and with coastal countries in West Africa;

- Nigeria is the giant in the region, with enormous influence on trade flows, aggregate demand, supply and prices in other countries of the region;

- Impediments to satisfying regional needs with regional production include: o Poor transport, communications, and market infrastructure o Government restrictions on markets when prices rise (export bans); o Taxes (official and unofficial) on both domestic and cross-border trade and burdensome regulations;

- World prices for rice and wheat are extremely important in import-dependent countries;

- World prices for rice and wheat are also important to urban consumers in countries that are not dependent on imports;

- The relation between domestic cereal prices and imported cereals is not well understood;

- Generalized increases in the overall cost of living are reducing purchasing power and are likely to increase the negative impact of rising food prices;

- Food consumption habits in West Africa are changing, with increased demand for meat, poultry, and dairy products putting pressure on coarse grain prices through increased demand for animal feeds;

- The CFA F/US$ exchange rate can soften or harden the blow from rising prices of rice and wheat, which are denominated in US dollars in international markets;

- The CFA F/Naira and CFA F/Cedi exchange rates influence regional trade flows with Nigeria and Ghana-appreciating values of non-CFA currencies will increase demand for cereals from UEMOA countries.