DEVELOPMENT COMMITTEE (Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries)
Attached for the April 16, 2011, Development Committee Meeting is a document entitled “Responding to Global Food Price Volatility and Its Impact on Food Security,” prepared by the staff of the World Bank.
International food prices are spiking again for the second time in three years, igniting concerns about a repeat of the 2008 food price crisis and its consequences for the poor. In February 2011, the World Bank Food Price Index reached its 2008 peak, after rising by 47 percent since June 2010.
In addition to higher prices, the variability of international grain prices (around its mean) doubled during the period between 2005 and 2010 relative to the period between 1990 and 2005, sugar price variability tripled, and rice variability is four times higher. Price volatility is now back to similar levels experienced in the 1970s. Variability in prices is problematic when variations are large and unpredictable, as they pose fundamental food security risks for consumers and governments, while discouraging needed investment in agriculture for development through increased financial risks for producers and traders They are . occurring now in a period when expanding the supply of food is if anything more difficult than in the period following commodity price volatility in the 1970s.
The current global food price situation has both similarities and differences with 2008. It is similar in four respects. First, global grain stocks are low. Second, higher oil prices have impacted agricultural commodity prices, and the recent events in the Middle East and North Africa add to the current uncertainty. Third, depreciation of the dollar in 2008 against most currencies led to the perception of a larger increase of US$-denominated food prices compared to prices in other major currencies. Fourth, financial investment in agricultural commodities remains high. Yet the current situation differs in several critical respects. First, recent international price increases are more widespread across agricultural commodities than in 2008. Second, weather induced production shortfalls are also more of a factor now.
Third, policy responses have further raised the amplitude of the grain price spikes in 2011, but not nearly as much as in 2008 when policy greatly exacerbated shortages.
The drivers of food prices have become more complex, extending beyond traditional factors of supply and demand. The average levels of food prices are driven by long-term demand (population expansion, income growth, and changing diets) and supply (resource use and technology). Short-term variations in prices are influenced by weather variability, trade policies, more volatile oil prices (including through biofuels based on agricultural feedstock), macroeconomic policy, financial investments, and short-run market sentiment influenced by all of the above. These short-term factors, as discussed in the paper, are manifesting themselves more frequently and are likely to continue to produce short-run food price volatility, especially when global food stocks are low. Even though these short-term factors are likely to persist, a key message is that actions to mitigate both short-run food price volatility and sudden rises in average food price levels that produce hardship and unrest need to focus on long-term fundamental drivers of food prices; this is fundamental to addressing the growing underlying problems.