Impact of High Food Prices on Farmers in the Near East Impact of High Food Prices on Farmers in the Near East Prices on Farmers Impact of High Food

Food and Agriculture ISBN 978-92-5-107126-7 Organization of the

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I2565E/1/01.12 2012 Impact of High Food Prices on Farmers in the Near East

Edited by

Ibrahim El-Dukheri Nasredin Hag Elamin Mylene Kherallah Aysen Tanyeri-Abur The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations (FAO) concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The mention of specific companies or products of manufacturers, whether or not these have been patented, does not imply that these have been endorsed or recommended by FAO in preference to others of a similar nature that are not mentioned.

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© F AO/RNE 2010 Contents

Abbreviations i Acknowledgements ii Executive Summary iii

Farmers’ Response to Soaring Food Prices in the Near East Region

1. Introduction 1 1.1 The context 1 1.2. Scope and methodology 2 2. Arab Agriculture: Small Farming and Vulnerability to Price Changes 3 2.1 Small farmers in the six countries 3 2.2 Scarcity of water resources and vulnerability to changes in global food markets 4 3. Governments’ Response to the Price Changes 5 4. Changes in World and Domestic Food Prices 6 4.1 Magnitude of change in domestic food prices 7 4.2 Transmission of international prices to domestic markets 9 5. Farmers’ Response to Price Changes 11 5.1 Farmers perception of food price changes 11 5.2 Changes in cropped area and cropping mix in response to price changes 13 5.3. Change in access and use of inputs 14 5.4 Change in marketing outlets 15 5.5 Change in investment 16 5.6 Summary of farmers’ responses to price changes 16 5.7 Impact on Livelihoods 17 6. Conclusions and Key Policy Recommendations 17 References 19 Annex 1 21

Country Case Studies 23

Egypt

Executive Summary 26 1 Introduction 27 2 The Context of Soaring Food Prices 28 2.1 Changes in border food Prices 28 2.2 Changes in Domestic food prices 29 2.3 Government intervention 30 3 Smallholders in Egyptian Agriculture 31 3.1 Government support and services introduced to small farmers 32 3.2 Changes in the economic environment surrounding small farmers 32 4 Direct Impact on Small Farmers and their Reaction 33 4.1 Methodology 33 4.2 Farmers perceptions on impact of rising food prices: informal interviews 34 4.3 The impact of price changes on farmer decisions: formal survey results 35 5 Total Impact on Livelihoods, Changes in Farmers` Wellbeing 36 5.1 Impact on production 36 5.2 Impact on consumption 36 5.3 Impact on productivity 37 5.4 Impact on agricultural labour 37 5.5 Impact on income 37 6 Conclusions and Recommendations 37

Jordan Executive Summary 40 1 Introduction 40 2 The Context of Soaring Prices 42 3 Agriculture - Smallholders in Jordan 43 4 Characterization of Farmers and their Responses 44 4.1 Research methodology / data collection 44 4.2 Characterization of the sample 44 4.3 Impacts on consumption 45 4.4 Expansion in land area 46 4.5 Use of agricultural inputs 47 4.6 Government intervention 47 5 Conclusions and Recommendations 47

Morocco Executive Summary 50 1 Introduction 51 2 The Context of Soaring Food prices 53 2.1 The magnitude of the food price shock at domestic market level 53 2.2 Change in input prices at farm level 55 3 Smallholders in Morocco 55 4 Farmers Response to Price Changes: Outcome of Survey Questionnaires 56 4.1 Main characteristics of the population surveyed 56 4.2 Source and use of income 57 4.3 Effect of price increase 58 4.4 Farmers behaviour under sustained high prices 58 4.5 Impact on the livelihood of small farmers 59 5 Outcomes of Focus Group Discussions 59 5.1 Inventory of common problems rose during the focus groups discussion 59 5.2 Focus group : Abda region 60 5.3 Focus group : Chaouia and Saïs regions 60 6 Conclusions and recommendations 62

Sudan Executive Summary 66 1 Introduction 66 2 The Context of Soaring Food Prices 67 2.1 Domestic prices 68 2.2 Government intervention - macroeconomic and sectoral policies 69 3 Results of the Farm Surveys 71 3.1 Demographic and socioeconomic characteristics of farmers 71 3.2 Marketing of produce 72 3.3 Awareness about agricultural finance 72 3.4 Livestock 73 4 Farmer responses to Soaring Food Prices 73 5 The Underlying Causes of High Food Prices (Temporal Analysis of Prices) 74 6 Conclusion and Recommendations 76

Syria Executive Summary 80 1 Introduction 81 2 World Food Price Increases Between 2000 and mid 2008 82 2.1 Domestic food prices in Syria 82 2.2 Actions to curb the impact of prices increases in 2008 84 2.3 Recent developments on inputs and crops prices 84 3 Smallholders in Syrian Agriculture 85 4 Farmers’ responses to soaring food prices 86 4.1 Methodology 86 4.2 Description of survey regions and summary of Participatory Rural Appraisal 86 4.3 Formal Survey Results 92 5 Conclusions and Recommendations 97

Yemen Executive Summary 100 1 Introduction 100 2 Price Increases and their Impacts at National level 103 2.1 Soaring food prices and farmers’ perceptions on prices 103 2.2 Changes in food and agriculture supply and demand 103 2.3 Poverty and Vulnerability 104 2.4 Government measures 104 3 Farmers’ Responses to Price Increases 106 3.1 Methodology 106 3.2 Interview with key groups 106 3.3 Survey questionnaire 107 4 Conclusions 109 Annex I. Interview Responses 110 Annex II. Group Discussion Results 116

Abbreviations

ACB Agricultural Cooperative Bank, Syria CACB Cooperative Agricultural Credit Bank, Yemen CBoS Central Bank of Sudan CBS Central Bureau of Statistics, Sudan CPI Consumer Price Index FAO Food and Agricultural Organization of the United Nations FAO-RNE Food and Agricultural Organization of the United Nations, Regional Office for the Near East FDI Foreign Direct Investment GCC Gulf Cooperation Council GDP Gross Domestic Product GECPT General Establishment for Cereal Processing and Trade, Syria GNI Gross National Income GNP Gross National Product GOE Government of Egypt GOJ Government of Jordan GOM Government of Morocco IFAD International Fund for Agricultural Development LE Egyptian Pound MAD Moroccan Dirham MDG Millennium Development Goals MENA Middle East and North Africa MFT Ministry of Foreign Trade, Sudan PBDAC Principal Bank for Development and Agricultural Credit, Egypt PPP Purchasing Power Parity SDG Sudanese Pound SP Syrian Pound SRC Strategic Reserve Corporation, Sudan USD United States Dollar YEC Yemeni Economic Corporation YR Yemini Rial

Impact of High Food Prices on Farmers in the Near East i Acknowledgements

This publication is a result of the project on Understanding the Impact of Rising Food Prices on Farming Communities, funded by the International Fund for Agricultural Development (IFAD). We gratefully acknowledge the valuable inputs of many people from both within FAO, IFAD and externally, the effort of all the case study authors and particularly the efforts of Shihab Al-Shami and Abdelwahab Shehata for their role in data analysis. We would also like to thank Nadim Khouri, Director of Near East, North Africa & Europe Division at IFAD and Mohamed Barre, FAO, for their contribution to the review process. Thanks go to Dahlia Radwan and Mona Mohamed who provided assistance with the publication process. Finally, we would like to acknowledge the assistance of Machal Karim in reviewing and editing the final version of this publication.

ii Impact of High Food Prices on Farmers in the Near East Executive Summary

High food prices have become an increasingly important global issue over the past four years. Since 2007, commodity prices and particularly prices of cereals have soared to levels much higher than those in the past. Domestic markets across the Near East region have been affected, specifically with negative impacts on the poor. Small farmers in many countries have an important role in their country’s food systems, including those in the countries of the Near East. Smallholder production significantly contributes to household food security, but can also contribute to national food security by producing marketable surplus that feeds the urban and rural markets and even international markets through trade.

Though food prices in general may have subsided in 2009 - 2010, cereal prices especially have remained above the pre-2007 levels. More recently in 2010 - 2011, another peak in sugar and vegetable oil prices has affected food and agricultural markets and high volatility is expected to continue in the near future. The recent socio-political upheavals in the region will also most likely have resonating effects on both consumers and producers alike, but the studies undertaken for this publication were conducted prior to recent events.

Five country case studies funded by the International Fund for Agricultural Development and a sixth funded by the Food and Agricultural Organization of the United Nations, under the project Understanding the Impact of Rising Food Prices on Farming Communities in the Near East and North Africa (GCP/RAB/006/IFA_ IFAD Grant No.1066-FAO), have attempted to trace and contextualize the response of small farmers in the region to the price hike of 2007 - 2008, as well as the related impact on their livelihoods. Through surveys covering more than 1000 rural households in Egypt, Jordan, Morocco, Sudan, Syria and Yemen, the results have documented the responses and behavior of smallholders with respect to the new economic environment at the country level. It specifically examines government responses to the price hike, price transmission from international to local markets, and the specific farmers’ production decisions in response to the price hanges.c

Overall, the results show that higher international prices were transmitted to domestic markets in all six countries, though it was immediate and higher in countries with least intervention in food markets. Countries that have more interventions in imports and/or domestic food prices experienced a weaker price transmission from international markets. The study also finds that the ability of smallholder farmers to benefit from higher domestic prices was limited by various factors such as incidence of drought, higher input prices (especially fertilizer), and the timing of the price increase relative to their crop production cycle.

Several recommendations have been made to enable smallholder farmers to better respond to market signals. They include: better timing in the announcement of policy decisions regarding price supports, better access to credit, safety nets to

Impact of High Food Prices on Farmers in the Near East iii protect the poorest households, improved management of water resources and simple financial instruments to protect against price volatility. This initiative expects to help countries in understanding domestic farming sector response and how best to support the agricultural sector to improve its supply response, in face of impending future changes.

V Impact of High Food Prices on Farmers in the Near East Farmers’ Response to Soaring Food Prices in the Near East Region1 Ibrahim El-Dukheri2 Nasredin Hag Elamin Mylène Kherallah

1. Introduction

1.1 The context

Prices of agricultural commodities soared during the period 2007 - 2008, with impacts on food security and poverty felt around the globe. Small farmers3 are a major player in the production systems of developing countries, including countries in the Near East region. Smallholder production contributes significantly to household food security and can also contribute to national food security by producing a marketable surplus that feeds rural markets, urban markets and even international markets through trade.

Depending on the context under which small farmers operated, the price hike of 2007 - 2008 resulted in increased risk and vulnerability, but also opportunities for greater profitability in farming. Despite widespread concern about the impact of higher food prices on poor people and small farmers, little evidence appears to be available regarding actual impact on the poor and small farmers (Ivanic & Martin 2008).

This paper attempts to trace and contextualize the response of small farmers in the region to the price hike of 2007 - 2008, and the related impact on their livelihoods. The publication covers six countries in the Near East region: Egypt, Jordan, Morocco, Sudan, Syria, and Yemen. The analysis is based on a rapid rural assessment in the six studied countries.

1 This paper is based on a study undertaken by IFAD and FAO to assess the impact of rising food prices on farming communities in six Arab countries. A different version of this paper has been published in Food Security, Volume 3, Supplement 1, February 2011, pp. 149162-. Springer.

2 Ibrahim El-Dukheri, is a policy consultant for the FAO- Regional Office for the Near East (RNE) and Research Scientist at the Center for Economic Studies and Policy Analysis of the Agricultural Research Corporation, Sudan; Nasredin Elamin is Senior Policy Officer at the FAO-RNE; and Mylène Kherallah is regional economist in the Near East and North Africa division of IFAD.

3 Although the definition of “small farmers” varies from country to country, they all have small holdings of about 2 hectares (except in Sudan, where small farmers in rainfall areas may own an average of 1015- hectares), use traditional production methods, have limited access to modern technologies, and produce for both home consumption and the market. Mixed farming (crop production and livestock raising) is also a common feature of small farmers.

Impact of High Food Prices on Farmers in the Near East 1 Five central questions guided the study: • How have governments responded to the soaring food prices? • What has been the nature and extent of price transmission from international to local markets? • How have farmers perceived these price changes, and what have been their responses in terms of production decisions? • What has been the impact of higher food prices on their consumption and investments? • What could be done to ensure that small farmers benefit from new opportunities of higher food commodity prices?

In addressing these questions, the study attempts to inform discussions on two central policy issues in agriculture and food security in the region: i) the extent to which small farmers react to higher food and input prices in the context of existing structural rigidities and policy constraints; and ii) the extent to which government policies have been driven by the short-term needs of urban consumers rather than by the long-term needs of the agricultural sector and food security.

The paper is organized as follows. Section 1 presents the context and describes the study’s scope and methodology. Section 2 provides a brief overview of the agricultural sector and small farming in the six countries, followed by Section 3 which describes government policy responses to the rise in food prices. Section 4 analyzes changes in world and domestic food prices, and the extent to which international prices were transmitted to domestic markets. Section 5 assesses the qualitative response of small farmers as an indication of their potential supply response and the impact of the higher prices on their livelihoods. The paper concludes with some policy recommendations.

1.2 Scope and methodology

The study used three different methods to collect primary and secondary data in the six study countries.

Farmers’ Survey: a survey of mostly small cereal farmers was undertaken between May and July 2009 in the selected countries using a semi-structured questionnaire. The questions were mostly related to the 20082009- growing season. In each country, about 120 - 150 cereal farmers, covering at least three different regions or governorates were interviewed using the prepared questionnaire. The farmers represented the main existing production patterns and systems (e.g. irrigated, rainfed, or mixed systems), although the most dominant farming system in each country was more heavily sampled. Depending on the country, the main cereals grown were wheat, barley, sorghum, maize, or rice.

Group discussions: at least six focus group discussions were held in each country. A set of standard questions was developed and utilized to reinforce and complement the questions presented in the semi-structured survey questionnaire. Secondary information sources: secondary information was collected, including

2 Impact of High Food Prices on Farmers in the Near East data on prices from different sources, nature of production, inputs and trade. Reports describing responses and behaviours of small farmers and farming in general in each country were also consulted.

The analysis presented in this paper is based on simple statistical and econometric analyses of the primary and secondary data described above. The paper recognizes that the farmers’ surveys’ sampling methodology is based on a rapid assessment and is not entirely a probability sampling, which reduces the samples’ representativeness. However, the rapid assessment gives a flavour of what has happened at the farm- level following the food price crisis of 20072008-. To our knowledge, no other work has been done to look at the impact of the food crisis on small farmers and the rural poor in the Near East region. Further work is needed to conduct a more in-depth analysis of the data, and this will be presented in separate country studies in the near future.

2. Small Farming and Vulnerability to Price Changes

Agriculture plays a major role in the economic development and food security of many countries in the region. In addition to providing food, the agricultural sector provides fibre and raw material for the processing industry, and provides livelihood for the majority of the population in Sudan (about 80 percent), Yemen (66 percent), Egypt (55 percent), Morocco (50 percent), Syria (25 percent) and Jordan (20 percent).

2.1 Small farmers in the six countries

Small farming constitutes the major source of agricultural production in most, if not all, of the six countries and remains the focus of the agricultural development strategies and plans of these countries. Production is mostly rainfed in all countries except Egypt, which depends fully on irrigation. Egypt’s irrigation system has allowed for crop intensification, which reaches 185 percent in some cases (the same piece of land is used more than once per year). In almost all countries, rainfall has been variable, both in quantity and quality, and erratic rainfall has often been cited as the main cause of poor production.

In general, small farmers in the six countries are broadly involved in production of food and cash crops, although a sharp distinction between the two is always difficult to make. The range of crops includes field crops, such as wheat, rice, maize, barley, sorghum and pulses; cash crops such as cotton (Egypt, Sudan, Syria), coffee and qat (Yemen); fruits and vegetables; and medicinal, aromatic and ornamental plants. Cereal production dominates agricultural land in Syria (90 percent), Sudan (75 percent), Morocco (70 percent), Yemen (60 percent) and Egypt (40 percent of production). In spite of their own production, small farmers depend considerably on the market for accessing their food requirement, either because of their limited output or because of the seasonality of agricultural production.

Prior to the reforms and structural adjustment programmes of the late 1980s, most

Impact of High Food Prices on Farmers in the Near East 3 of these countries had an agricultural production and marketing system which was heavily controlled by the state. Most interventions centred on subsidizing both input and output prices; controlling production, processing and marketing of food commodities; investing in infrastructure; and managing the entire food supply chain through parastatals. In spite of the achievements made through this strategy, the economic inefficiencies it generated and the burden it placed on fiscal balance proved unsustainable. The strong movement into liberalization and privatization since the mid- to late-1980s in almost all countries has presented small farmers with both opportunities and challenges. They have become more proactive, interacting with market forces including price signals, but also more exposed to market shocks. As such, price volatility has become an issue in shaping farm decisions regarding what to produce, how to produce and how much. High production risk due to adverse climate conditions, mainly rainfall shortages and fluctuations, presents another inherent challenge.

2.2 Scarcity of water resources and vulnerability to changes in global food markets

In most countries of the region, the potential for increasing cultivable land is constrained by continuous urbanization and limited water resources for irrigation. Rainfall is variable, affecting the large number of small farmers engaged in rainfed farming and particularly in cereal production (up to 90% of wheat farmers in Jordan and 80% of agricultural land in Morocco). Most irrigated production in the region has stabilized after expansion in the last two decades. The expansion was made possible through government interventions, such as producer price supports and infrastructure development (Syria, Egypt and Morocco) as well as improved well irrigation (Yemen).

The performance of the agricultural sector has been improving in recent history and most farmers have enjoyed higher yields. However, some countries are now facing severe water deficits (especially Jordan and Yemen), partly due to larger variations in rainfall, but also the decreased availability of underground and surface water resources due to overuse. Some countries in the region are better off than others when it comes to availability of resources. Sudan, for example is a comparatively resource-rich country among the countries in the region, in terms of land and water. It has land available for potential expansion of production: of its total area of 251 million ha, about 84 million ha are suitable for agricultural production, of which about 34 million ha are rangelands that support about 130 million head of various livestock species. There is also a wide range of climatic differences and production environments that support production of different crops. Water availability in the Sudan is mainly from annual precipitation and supports production in both the traditional and mechanized rainfed farming systems. Irrigated cereal production complements the rainfed production. However, rainfall has been highly variable and is considered a major production risk.

In general, the six countries are net importers of cereals. The ratio of cereal imports

4 Impact of High Food Prices on Farmers in the Near East to total food supply during 20002004- was about 49 percent for Morocco, 36 percent for Egypt and exceeded 80 percent in Jordan and Yemen. In Sudan and Syria the import dependency is relatively less; in the range of 2025- percent. This import dependency renders these countries particularly vulnerable to changes in international food prices, and accentuates their national food security concerns. As a result, food security continues to be emphasized in a number of the agricultural strategies of these countries. Although most countries have shelved the goal of food self-sufficiency, there is still great uneasiness of having to depend on world markets for their food security. It is this concern which has pushed for example, the Gulf countries into investing in farmland in Sudan and other countries with greater agricultural potential.

3. Governments’ Response to the Price Changes

Almost all governments in the study countries intervened in response to the food price crisis. As expected, the focus of the majority of the countries had been on short term economy-wide measures mostly to secure immediate availability of adequate and affordable food supplies. As indicated in Table 1, the measures have included: increased quantities of subsidized basic food items (mostly wheat flour and bread); strengthening consumer price controls and imposing price ceilings; expanding the coverage and quantity of food rations; reducing grain import tariffs and taxes; banning certain food exports (e.g. rice in Egypt) to curb domestic prices; and raising public sector wages. Four countries (Egypt, Morocco, Sudan and Syria) have also taken measures to increase levels of guaranteed farm prices for cereals (mostly for wheat) in order to boost local production.

Some countries have also taken measures to deal with the medium/long term implications of rising food prices. Initiatives in this regard include: i) taking a more serious look at measures to build up and use strategic (national or regional) reserves and as mentioned above, ii) some rich countries with limited land and water resources have moved strongly into encouraging investments in food production abroad.

Impact of High Food Prices on Farmers in the Near East 5 Table 3.1: Countries used various economy-wide policies and existing social protection programmes to address the recent price shock

Economy-wide policies Existing social protection programmes Country Reduce Increase Export Price Cash Food for Food School tax on supply using restrictions controls/ transfer work ration/ feeding food food grain Consumer stamp grains stocks subsidies The study countries Egypt √ √ √ √ Morocco √ √ √ √ Syria √ √ √ √ √ √ Yemen √ √ √ √ Jordan √ √ √ √ Sudan √ √ Other Arab countries WBG √ √ √ √ Iraq √ √ √ √ √ √ Djibouti √ √ √ √ Tunisia √ √ √ √ Lebanon √ √ √ Source: World Bank/FAO/IFAD, 2009

4. Changes in World and Domestic Food Prices

International prices of staple foods, such as wheat and rice, increased by more than twofold between 2007 and the first or second quarter of 2008 (Figure 1). However, since June 2008, prices have retreated approximately 50 percent, driven down in part by strong production gains in developed countries (FAO 2008a), decline in world oil prices, and the world financial and subsequent economic crises resulting in lower global demand. International fertilizer prices also increased dramatically during 200708- (Figure 4.2) driven by high oil prices and strong global demand outstripping production capacity.

Figure 4.1 World commodity prices, January 2006-December 2009

World commodity prices, January 2006-December 2009

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0 Jul- 06 Jul- Jul - 07 Jul - 08 Jul - 09 Jul Jan - 06 Jan - 07 Jan - 08 Jan - 09 Jan Sep - 06 Sep - 07 Sep - 08 Sep - 09 Mar - 06 Mar - 07 Mar - 08 Mar - 09 Nov - 06 Nov - 07 Nov - 08 Nov May - 06 May - 07 May - 08 May - 09 May

Source: International commodity prices database of the FAO

6 Impact of High Food Prices on Farmers in the Near East Figure 4.2 International prices of fertilizers, April 2007- January 2009

International prices of fertilizers, April 2007- January 2009

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0 Jul- 06 Jul- Jul - 07 Jul - 08 Jul - 09 Jul Jan - 06 Jan - 07 Jan - 08 Jan - 09 Jan Sep - 06 Sep - 07 Sep - 08 Sep - 09 Mar - 06 Mar - 07 Mar - 08 Mar - 09 Nov - 06 Nov - 07 Nov - 08 Nov - 06 May - 07 May - 08 May - 09 May 4.1 Magnitude of change in domestic food prices

International cereal prices increased in 200708-, but it is domestic prices that affect national food consumption and production. This section analyzes the magnitude of changes in domestic prices of basic food commodities and the extent to which they are connected to changes in international prices.

In general, the six selected countries experienced a rise in their domestic consumer and producer food prices following the spike in international food prices of 2007- 08, but the magnitude and speed of the increase in these prices varied by country and commodity.

Figure 3 shows movement in domestic retail prices and international prices of wheat in the six countries during the period January 2006 to December 2009, all expressed in US Dollars. Two observations are worth noting:

• Taking transportation costs into account, domestic retail prices in all the countries, apart from Egypt, were higher than international prices by significant margins. The margin of difference was particularly high after April 2008, when world wheat prices started to decline; • The levels of retail prices across countries vary quite considerably. The difference between the highest and lowest retail prices across countries averaged $390 in 2006 and exceeded $400 in 2007- 08.

Comparing average changes in domestic retail prices of wheat during 2006 - 08, shows significant differences between countries. On average, changes in domestic retail prices in Jordan and Morocco were more or less of the same magnitude as those in international prices, in the range of 60 - 65%, while in Yemen the average change was only about 43%. Changes in retail prices were exceptionally high in Egypt and Syria. It is important to note that the magnitude of changes in domestic prices were closer to those of international prices in the case of countries that are generally characterised by less regulatory interventions in wheat markets (e.g. Jordan and Morocco).

Impact of High Food Prices on Farmers in the Near East 7 Due to lack of monthly or quarterly data for producer prices, a comparison was made for annual averages of retail and producer prices for the years 2006 and 2008. The comparison shows that producer prices have increased in the six countries, but they differ widely in comparison to retail prices (Figure 4). The average annual increase in producer prices was higher than the increase in retail prices for Egypt, Jordan and Morocco, while in Syria and Yemen the increase was far lower than retail prices. Thus, domestic markets in these countries do not fully transmit price changes between farmers and consumers. This runs counter to the case of several Asian countries, where during the price hike of 2007 and early 2008 period, producer prices changed by approximately the same percentage as consumer prices (Dawe, 2008).

Comparing countries in terms of variability in domestic prices vis-à-vis international prices show that in all six countries the coefficient of variation (CV) of domestic prices is considerably higher than that of international prices. While the CV of monthly international prices of wheat during the period 20062008- ranges between 10–17 percent, the CV of monthly wheat domestic prices is as high as 3147- percent in Sudan; 31 percent in Egypt; and 2025- in Syria. For some cereals such as sorghum in Sudan, the CV of domestic prices exceeds 130 percent.

Figure 4.3 Wheat monthly retail prices (US$/Ton), January 2006 – December 2010.

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0.0 Jan - 06 Mar - 06 May - 06 Jul - 06 Sep - 06 Nov - 06 Jan - 07 Mar - 07 May - 07 Jul - 07 Sep - 07 Nov - 07 Jan - 08 Mar - 08 May - 08 Jul - 08 Sep - 08 Nov - o8 Jan - 09 Mar - 09 May - 09 Jul - 09 Sep - 09 Nov - 09 0.0 Jan - 06 Mar - 06 May - 06 Jul - 06 Sep - 06 Nov - 06 Jan - 07 Mar - 07 May - 07 Jul - 07 Sep - 07 Nov - 07 Jan - 08 Mar - 08 May - 08 Jul - 08 Sep - 08 Nov - o8 Jan - 09 Mar - 09 May - 09 Jul - 09 Sep - 09 Nov - 09

Figure 4.4 Changes in consumer and producers prices of wheat: annual averages for 2006 - 08. 200 180 Consumer price Producer Price 160 140 120 100 80 60 40 20 0 Egypt Syria Yemen Sudan Marocoo Jordan International

8 Impact of High Food Prices on Farmers in the Near East 4.2 Transmission of international prices to domestic markets

The above analysis shows that during 200608- changes in domestic prices of cereals have followed different patterns in the six countries and they are not consistent in their movements vis-a-vis international prices. This section examines the relationships between domestic and international prices. Monthly data from January 2006 to December 2009 of international prices and domestic retail prices of wheat, rice, maize and sorghum for the six countries were analysed using an econometric framework based on the estimation of an Auto Regressive Distributed Lag model. Annex 1 provides a brief description of the Auto Regressive Distributed Lag model (ARDL) used; estimates of correlations coefficients between international and domestic prices; and the results of the ARDL analysis.

Table 4.1 summarizes the information produced in Annex 1 for the six countries. The results indicate that the transmission of international prices to domestic prices for wheat varies between countries in terms of magnitude and speed. The transmission is fastest in Yemen and Morocco, but its magnitude was moderate where a one dollar increase in the world price/ton results in 44 and 22 cents increase in domestic wheat price in Yemen and Morocco respectively. In contrast, the transmission is quite high in Sudan, with about 94 cents increase in domestic prices, but it takes place with a lag of one month. The transmission occurs after a two-month period in Jordan with a magnitude of 36 cents. A lag of three months has impact on local prices by 41 cents in Egypt and 46 cents in Morocco. For rice and maize, domestic prices seem to be connected with international prices only in the case of Syria (rice and maize) and Morocco (maize), while for sorghum (Sudan) domestic prices follow those of international prices with a one-month lag.

The analysis also suggests the presence of long run equilibrium between the domestic and the world reference prices in most of the countries. The analysis of simple correlation between international and domestic prices, as reported in Table 4.2, suggests the existence of a strong to moderate relationship between domestic and international prices for wheat in Morocco, Jordan, and Yemen; rice in Syria, Egypt, Jordan and Sudan; and maize in Syria, Yemen and Morocco. These results imply that even in the case of strongly regulated markets, government interventions take into account both world market price trends and past domestic price levels in managing domestic markets. Past domestic prices (lagged by one month) in particular seem to be the key reference point for governments in managing domestic prices.

Impact of High Food Prices on Farmers in the Near East 9 Table 4.1 Regression coefficients of wheat retail prices against world wheat price of various lags and its own lag price Statistically significant coefficients1/ World price World price World price World price Own price t-1 t-1 t-2 t-3 (lagged Wheat retail price) Syria 0.79 Egypt 0.41 0.60 Yemen 0.44 0.64 Morocco 0.22 0.29 0.47 0.90 Jordan 0.36 0.73 Sudan 0.95 0.59 Notes: - Reported regression coefficients show changes in domestic price in US$ per one US$ change in the dependent variable. - Coefficients are significant at 5% or less, except for Jordan (14%) and Sudan (6%); Own lagged prices (t-1) are significant at 1% or less.

Table 4.2 Correlation between domestic and international prices Wheat Rice Maize Sorghum Syria Weak Strong Strong - Egypt Weak to average Average Weak - Yemen Strong - Strong - Morocco Strong - Strong - Jordan Average to strong Strong - - Sudan Strong Strong - Weak Notes: - weak = correction coefficient less than 0.4; - average = correction coefficient between 0.4 - 0.7; - strong = correction coefficient more than 0.7.

A number of factors may explain differences between countries in terms of transmission of international prices to domestic prices (both producer and consumer prices) in response to changes in international prices. For many countries, local factors are as important as international factors in forming domestic prices. Local factors include rainfall conditions (especially in rainfed areas); government price policies and other public interventions; local supply and demand conditions; infrastructural constraints; and structural rigidities related to production and market conduct and performance.

Government interventions or policies have a direct bearing on local prices, often over-riding the influence of world prices. Egypt sets producer prices in order to influence production of certain cereals, especially wheat. During the price crisis, and in order to reduce local consumer rice prices, Egypt also imposed a temporary ban on rice exports. While this policy resulted in lower domestic retail prices, it also depressed the supply incentives of rice growers. Until recently, Morocco had protected domestic wheat production through high import tariffs, which have

10 Impact of High Food Prices on Farmers in the Near East rendered local producer prices artificially higher than international ones. In Sudan, the government pre-announces a purchasing price for wheat and sometimes for sorghum which facilitates procurement of strategic reserves. During the period of high prices the Government imposes a restriction on sorghum exports. Syria has consistently maintained a producers’ price above the international price also to encourage cereal production.

In sum, there were increases in domestic consumer and producer prices in the six sample countries as a result of higher world prices. The transmission of international prices to domestic prices was found to be high and immediate in countries with the least intervention in food markets (e.g. Morocco and Yemen, and to some extent Jordan). In countries with relatively more interventions on imports and/or domestic food prices, such as Egypt and Syria (for wheat), the connection between international and domestic prices was generally low.

5. Farmers’ Response to Price Changes

This section analyzes the qualitative response of small farmers to the changes in domestic grain price movements of 20072008- on the basis of data obtained through the farmers’ survey questionnaires and the farmers’ group discussions. As mentioned in Section 4 above, international price movements were not always fully and timely transmitted to local prices, hence the nature and magnitude of farmers’ responses may differ from country to country. In addition, the high grain prices were also accompanied by a dramatic increase in input prices (especially diesel and fertilizer), which may have resulted in a net positive or negative change in profitability, depending on the crop, the intensity of input use, and the final input- output price ratio. Furthermore, given that agriculture is a seasonal activity, the timing of the price movement and the expectation of future price changes are also very important in determining planting and marketing decisions. The conceptual framework for understanding the causes and consequences of changes in food prices is presented below.

5.1 Farmers perception of food price changes

As explained in Section 4 both producer and consumer prices of cereals increased in the six sample countries following world price increases. How have these changes been perceived by small farmers?

Farmers were asked if they had felt a noticeable increase in prices, and when this increase was felt (only last year, i.e. in 2008; two years ago; or long time ago). More than 80% of interviewed farmers noted that prices had increased, and in Egypt and Syria, the price increase was mostly felt in 2008. In contrast, in Jordan, Morocco, Sudan and Yemen, 60 to 90% of interviewed farmers felt that prices had already increased two years ago.

Impact of High Food Prices on Farmers in the Near East 11 Conceptual framework for understanding causes and consequences of changes in food prices

Change in livelihoods (welfare change) New investment in food production (farm investment )

Consequences or effects Change in food Adjustment in quality production pattern on consumers cropping pattern & Change in pattern of crop sepuence food consumption Change in marketing strategies Changes in calorie intake Area increase of crops w/high prices

Increased use of production inputs Demestic Consumer prices Domestic producer prices Constraintss to & influence of price transmission

Markets, trade and institutional setup

Change in local food supply & demand

Government Policies

Changes in World food prices

In Sudan, farmers in group discussions indicated that local prices are higher than international prices but farmers rarely receive these prices because sometimes they are announced so late that the produce is no longer in the hands of the original producers. In Morocco, while 80% of farmers felt a noticeable change in prices of cereals during 2007 - 2008, they claim that they did not take advantage of it because of severe drought in their respective regions. Furthermore, group discussions in Morocco noted that the timing of the price increase did not coincide with the agricultural planting cycle, and therefore farmers’ response was muted. In Yemen,

12 Impact of High Food Prices on Farmers in the Near East farmers perceived increase of input and output prices as the major change in their environment in recent years. They felt the recent price hike of input prices much more than the increase in output prices. Some 58 percent felt that price changes had influenced farming in general and cereal production in particular.

5.2 Changes in cropped area and cropping mix in response to price changes

In deciding what to plant and how much, aside from the structural constraints of land and water, farmers will base their decision on current and expected future prices, their own consumption needs, access to inputs and markets, as well as profitability of the various crops in terms of their input-to-output price ratios. There has been a gradual increase in cereal areas in all six countries, especially wheat area since the 1980s. In Egypt such expansion has increased by 67 percent compared to the 1980s, in Syria it increased 50 percent and in Sudan by more than 60 percent. This expansion is induced by the need for food security and price support programs enjoyed in, at least, Egypt, Syria, and Sudan.

To determine the response of farmers in terms of crop area and crop mix during the 20082009- season and in the future, the survey questionnaire included several questions related to crop area increase and crop mix. Table 4 summarizes these responses.

Farmers who planned to increase their cropping area, were also asked whether land was available (either own or through rental arrangement) to expand production if they wished to. The percentages that said yes included 38% in Syria, 43% in Sudan, 46% in Morocco, 58% in Yemen, 73% in Egypt, and 92% in Jordan. By and large then, land does not seem to be a limiting factor for area expansion; water, on the other hand, is a limiting factor.

The responses to price increases were mixed in the six countries. Some farmers responded to the recent price increases by expanding areas of crops whose planting times matched the peak of high prices (whether in the international or local contexts). The anticipation or expectation of expanding cereal area – if prices were to remain as high as those of early 2008 – was overwhelming, with more that 60 percent of farmers anticipating area expansion. Comparative cost advantage due to changes in prices of inputs has affected crop profitability and hence crop selection and area commitments. Prevalence of production risk due to adverse weather and sensitivity of crops to such risk also seems to play an important role in crop selection and area expansion.

Impact of High Food Prices on Farmers in the Near East 13 Table 5.1 Changes in cropped areas in response to price changes

Country Expansion of Decrease in Overall financial Is there an If prices crop area in crop area in gain from price intention to were to 2008 - 2009 2008 - 2009 increase (from expand the remain high, season season focus group area of certain would you discussion) crops in the expand future? If yes, cropped why? area? Egypt Wheat, barley, Maize and rice Little gain for 52% yes; mostly 85% yes; clover small farmers due because of high mostly wheat, to use of cereals prices/profit; followed for household mostly for wheat by rice and consumption. maize Medium and large farmers better off Syria Barley (mostly Wheat (replaced Syria was hit by 41% yes; mostly 70% yes; because it is by barley) a severe drought because of high mostly wheat more drought- during the past 2 prices/profit; followed by tolerant than years; barley wheat) farmers in certain areas reduced input use and irrigation frequency to lower input costs Morocco Both soft and Fallow land and 80% of farmers felt 74% yes; ease of 77% yes; hard wheat food legumes change to higher marketing and mostly wheat prices but no better returns immediate reaction due to drought and the timing of the planting season, which did not coincide with the price changes. Sudan Wheat,sorghum, 77% yes; mostly 89% yes; legumes to secure family mostly food sorghum Some farmers cut 63% yes; 69% yes; Yemen Wheat, and Maize, lentils sorghum production due mostly to secure mostly wheat to increased input family food and barley costs. and because of higher profits/ prices Jordan Barley, wheat Drought was a 47% yes; mostly 65% yes; major factor during because of mostly wheat the 2008 -2009 higher profits and barley agricultural season

5.3 Change in access and use of inputs

Regarding access to and use of inputs, the majority of farmers noted that they did not have affordable access to all the inputs they need, especially fertilizers. The most frequent issues are related to the delay in delivery and lack of funds to finance the inputs. Almost all farmers noted that there had been a noticeable increase

14 Impact of High Food Prices on Farmers in the Near East in input costs starting in the 2007- 2008 growing season, and since most farmers finance their inputs from their own resources, this had an impact on their input use. For example, in Syria, focus group discussions have noted that high input prices have resulted in reduction of areas growing wheat, vegetables, and other crops. Farmers pointed out that increased crop prices did not compensate for increased input prices, resulting in break even or negative return.

5.4 Change in marketing outlets

The findings of the study tend to suggest that marketing outlets in the six countries have not changed as a result of the increase in the magnitude and volatility of cereal prices. In general, selling to traders through the closest rural market is common in all countries, mainly due to ease of access and quick cash payment (93 percent in Egypt, 79 in Sudan and 48 in Yemen). Prices in these nearby markets might not be the best, but reaching higher level markets has extra costs, incurs risks and is time consuming. There were two exceptions to this finding. In Syria, where wheat marketing is still controlled by the state, farmers were forced to sell most of their wheat to government outlets at pre-announced fixed prices. In Jordan, 65% of farmers sold their wheat to the government simply because government was offering subsidized prices which were higher than the market’s price. However, 35% still preferred to sell to traders in the market because of easier delivery and access, and because traders pay immediately in cash. In Sudan, the Government announced sorghum floor prices when there is a bumper crop to prevent post-harvest prices from declining significantly. In such case the Strategic Reserve Authority purchases more of the crops on behalf of the Government.

It is not uncommon for farmers to sell at lower prices than the market prices that would prevail at the peak or maturation of marketing activities. This is mainly due to lack of capacity to store produce and wait for prices to improve. In addition, farmers have time limitations and usually must repay financial obligations immediately after harvest, which also influences their ability to store crops and sell later at a better price. Sometimes farmers might be compelled to finance their harvest operations by selling part of the produce, and in this case prices would be extremely low. Most farmers discovered output prices from traders at the market, except for Jordan and Syria, where wheat prices were pre-announced by government. In Jordan, wheat prices were only announced 2 weeks before the harvest. Most farmers complained that the price information they obtained was not timely enough to efficiently influence their farming and marketing decisions.

The survey results also confirm that even very small farmers interact with markets on a frequent basis. Even if they produce enough food for their own consumption, they will buy some foods from the market at certain periods of the year, while selling to the market during other periods. The perception that small farmers are purely subsistence farmers with little relation to markets is therefore not true. Furthermore, in Jordan, farmers indicated that they sold most of their wheat after harvest as baking bread at home was no longer done, and most rural households bought their bread from grocery shops or supermarkets.

Impact of High Food Prices on Farmers in the Near East 15 5.5 Change in investment

Farm investment is possible when there are farm surpluses or savings, or when credit is available. The survey questions regarding changes in farm investment asked farmers to discuss their previous two or three seasons rather than just the previous season of high prices.

Investment in agriculture assets was lowest in Sudan with only 4% of the respondents having invested in agricultural assets during the previous two years in order to realize profit from farming. In Egypt and Jordan, 12 to 15 percent of farmers made agricultural investments, but a large portion was on operating expenses rather than capital investments. In Syria and Morocco, re-investment was slightly higher (25% to 30% of respondents respectively).

5.6 Summary of farmers’ responses to price changes

Based on the above findings, the study shows that while farmers did respond positively to a rise in crop prices in order to maximize their returns; several factors have affected the extent and magnitude of this response. The most significant factors include the following:

- Access to water was a key structural constraint to further area expansion, intensification, and/or choice of crop mix. Drought and bad weather conditions were important determinants in the restrained supply response in Jordan, Morocco, Sudan and Syria, because of their heavy dependence on rainfed agriculture.

- Government policies have also had an impact. For example, in Egypt, the temporary rice export ban has dampened the supply response of rice growers, while the high support prices for wheat encouraged local wheat production.

- The concomitant rise in input prices has reduced the potential profitability of higher commodity prices; in some cases the relative change in the input-output price ratio was negative.

- Price variability and timing of announcements of price changes have also had an impact on the production decisions of farmers. Farmers exhibit high risk aversion to price volatility, especially when they have no access to financing or risk-reducing tools such as weather-based insurance.

- There are also some rigidities in the crop mix to meet household food and feed needs. For example, in Egypt, some small farmers indicated that they always maintain a specific area devoted to fodder production to meet livestock feed requirements. In winter, this fodder area competes with wheat, sugar beets, broad beans and vegetables.

16 Impact of High Food Prices on Farmers in the Near East - Input prices also affect choice of crops. Difficulties in accessing or financing inputs, coupled with intensity of input use tend to force farmers to expand certain crops and reduce others.

- Higher input prices also resulted in reduction in the quantities of inputs used such as fertilizer and irrigation frequency (Yemen and Syria).

5.7 Impact on Livelihoods

A noticeable change in farmers’ livelihoods might take a longer time to materialize, depending on the magnitude and timing of the price shocks. The impact depends also, among other things, on the position of the farming unit as a net producer or net consumer. In general, food expenditures comprise a large share of the poor’s total expenditures. Therefore, they are the hardest-hit by food price increases. In the survey sample, between half and 90% of the farmers interviewed spent over 50% of their income on food purchases, confirming this general fact. In terms of cereal consumption from their own farm, percentages ranged from 18 percent in Jordan to 72 percent in Yemen. This confirms that all farmers buy some food from the market for their own consumption, in addition to relying on their own production.

Farmers were also asked about changes in prices of consumption items and how it has affected them. The majority of farmers noted that there had been a high increase in consumer prices and they responded to this by consuming less or by consuming the same amounts but purchasing lower quality items. In Egypt and Syria, farmers reported that governments did have social support programs to help poor people, and most of them did participate in such programs. This included subsidy on some consumer goods, input subsidies, and other support for schooling and health services. In contrast, in Jordan and Sudan, the majority of farmers either noted that there were no such programs, or if they did exist, very few participated in them.

6. Conclusions and Key Policy Recommendations

The study found that the overall effect of high food prices on the potential supply response of small farmers varied across countries, depending on the speed of farmgate price adjustments, the change in the ratio of input to output prices, government policies, local structural constraints, and rainfall conditions. More than 60 percent of farmers would anticipate expanding the area of cereals if prices were to remain as high as those of early 2008, but the subsequent sharp reduction in prices in 2009 had created an added complexity and blurred farmers’ decisions. Price volatility is perhaps the greatest impediment to small farmers’ sustained supply response.

To boost farmers’ supply response in the future, this paper makes the following key recommendations:

- If government price support to small farmers is deemed necessary in times of food price shocks, then the timing of the announcement of their price subsidies

Impact of High Food Prices on Farmers in the Near East 17 (whether for inputs or outputs) is crucial if a maximum supply response is desired. More generally, timely dissemination of economic, price and climate data would help farmers make more informed decisions and will increase the efficiency of the farm planning process.

- Access to agricultural finance remains an important ingredient for a more effective supply response. All farmers noted that lack of access to input financing reduced their ability to respond to the positive output price increases. The timing and affordability of these financial resources are critical.

- Direct and well-targeted safety nets and social support programmes to protect the poor against high food prices are needed in most of the countries, particularly for the poorest segment of the small farmers. However, using economy-wide policies (such as border trade measures) to protect consumers, distorts production incentives and has a negative impact on long-term national food security.

- The farmers’ surveys showed that drought was a key factor in the weak response of farmers to higher food prices. Therefore, better management of existing water resources through water harvesting and supplementary irrigation would greatly enhance the production-response of all rainfall-dependent farming units, which form most of the production units in the region.

- Small farmers are risk-averse in the face of high price volatility. In countries where crop prices are market-driven and volatile, simple financial instruments (such as long-term or forward contracts with traders) could be developed to allow farmers to hedge against price swings and increase their production response.

- The production response of small farmers to price changes is limited by their own household food and feed consumption needs. Therefore, their ability to respond to higher crop prices is mitigated by those needs and should be taken into account when assessing local supply response.

18 Impact of High Food Prices on Farmers in the Near East References

Abdel Aziz H. and Abbass El-Sir. 2009. “The Impact of Soaring Food Prices on Farmers’ Responses and Livelihood in Sudan”. A report submitted as complement to FAO-IFAD Project (GCP/RAB/006/IFA), FAO-RNE, Cairo, Egypt. Abyad I. 2009. Understanding the Impact of Rising Food Prices on Farming Communities -Case of Jordan. A report submitted under FAO-IFAD Project (GCP/RAB/006/IFA), FAO-RNE, Cairo, Egypt Agbari T. 2009. Understanding the Impact of Rising Food Prices on Farming Communities -Case of Yemen. A report submitted under FAO-IFAD Project (GCP/RAB/006/IFA), FAO-RNE, Cairo, Egypt. Dawe, D. 2008. “Have Recent Increases in International Cereal Prices Been Transmitted to Domestic Economies: the Experience in Seven Large Asian Countries” ESA Working Paper No. 0803-, FAO Demeke M., Pangrazio, G. & Maetz, M. 2008. Country responses to the food security crisis: Nature an preliminary implications of the policies pursued. Rome, FAO. El Hindi A. 2009. Understanding the Impact of Rising Food Prices on Farming Communities - Case of Syria. A report submitted under FAO-IFAD Project (GCP/RAB/006/IFA), FAO-RNE, Cairo, Egypt and NAPC-Syria Dickey D.A. and W.A. Fuller 1979. “Distribution of the Estimator for Autoregressive Time Series with a Unit Root, Journal of the American Statistical Association, vol. 74, pp.427431-. See also W. A. Fuller, Introduction to Time Series, John Wiley & Sons, New York, 1976. FAO. 2008a. Food Outlook: Global Market Analysis. Rome, FAO. FAO. 2008b. State of Food Insecurity. Rome, FAO. FAO. 2008c. The State of Food and Agriculture - Biofuels: Prospects, Risks and Oopportunities. Rome, FAO. IFAD/FAO. 2007. The Status of Rural Poverty in the NENA. Rome, IFAD. IFPRI. 2008. “Projections for the Middle East and North Africa Region: Outlook for Food and Feed to 2030.” IFPRI Research Note, September 30. Gujarati D. 1995. Basic Econometrics, third edition McGraw-Hill, Inc, New York, Singapore Ivanic M. & Martin W. 2008. “Implications of Higher Global Food Prices for Poverty in Low-Income Countries”, Policy Research Working Paper 4594, the World Bank Jones R. H., Freeman, A. & Lo Monaco, G. 2002. “Improving the access of small farmers in Eastern and Southern Africa to global pigeon pea markets.” Agricultural Research & Extension Network paper No. 120. Overseas Development Institute (ODI). Kimenye L. 2006. “Research-Extension-Farmer Linkages for Market Orientation” A paper presented at the second networking symposium on innovations in agricultural advisory services in Sub-Saharan Africa, 2427- September 2006, Kampala, Uganda. Pingali P. 2006. “Agricultural growth and economic development: A view through

Impact of High Food Prices on Farmers in the Near East 19 the globalization lens.” A paper presented at the Presidential address to the 26th International Conference of agricultural Economists held in Gold Coast, Australia, 12- 18 August, 2006. Sabaa, M. 2006. Literature Review of Supply and Demand Elasticities in Egypt for Commodities in ATPSM. Report for study commissioned by the USAID, Ministry of Trade and Industry, Egypt. Sabaa M. 2009. Understanding the Impact of Rising Food Prices on Farming Communities -Case of Egypt. A report submitted under FAO-IFAD Project (GCP/RAB/006/IFA), FAO-RNE, Cairo, Egypt Sabi A. 2009. Understanding the Impact of Rising Food Prices on Farming Communities-Case of Morocco. A report submitted by TARGA-AIDE under FAO-IFAD Project (GCP/RAB/006/IFA), FAO-RNE, Cairo, Egypt. Sheeran J. 2007. “High Global Food Prices: The Challenges and Opportunities” available at http://www.ifpri.org/pubs/books/ar2007/ar07essay02.pdf). World Food Programme (WFP). 2008. “Rapid Assessment on the Effect of Soaring Food Prices on the Poor Segments of the Yemeni Population.” Draft Presentation. Rome, WFP. World Bank. 2006. Sustaining Grains in Poverty Reduction and Human Development in the Middle East and North Africa. Social and Economic Development Group, Middle East and North Africa. Washington, DC: World Bank. World Bank. 2008a. Yemen Economic Monitoring Note. Washington, DC: World Bank. World Bank. 2008b. High food prices: a harsh new reality http://econ.worldbank. org/WBSITE/EXTERNAL/EXTDEC/0,,contentMDK:216658837%EpagePK:641 654017%EpiPK:641650267%EtheSitePK:469372,00.html World Bank/FAO/IFAD. 2009. Improving Food Security in Arab Countries. Washington DC: World Bank.

20 Impact of High Food Prices on Farmers in the Near East Annex 1

The assessment of price transmission involved examining correlation coefficients between domestic and international prices lagged twice and a regression analysis to see how local prices are informed by international prices and past own prices.

Monthly consumer prices of main cereals in the six countries as well as international prices covering the period January 2006 to December 2009 were used in assessing the nature of price transmission from international to local levels. The international prices were that of soft and hard US wheat, maize of Argentina, rice of Bangkok, and US sorghum (source: http://www.fao.org/es/esc/prices/pricesServlet.jsp?lang=en)

The analytical framework adopted in the regression is based on testing the dynamic nature of monthly price series at country and international levels (Gujarati, 1995) in order to understand if the price pairs are integrated to the same order by testing for the presence of unit roots (non-stationary time series) using the Augmented Dickey- Fuller (ADF) test (Dickey & Fuller, 1979).

The set of prices were all tested for stationarity where it appeared they all have unit roots, meaning they are non-stationary and accordingly the use of normal “t” and “F” statistics for testing hypotheses about parameters is not appropriate. The theory suggests that if the two series are co-integrated (on the same wavelength) then the regression of such series is meaningful.

A very popular method of modelling stationary time series is the autoregressive integrated moving averages, which is used in this paper to analyze the price data and to study the relationship between international and domestic prices of cereals. The series co-integration test (through testing for stationary residuals) was conducted using an Auto Regressive Distributed Lag (ARDL) model as shown in equation (1) below.

Where PC are the countries’ consumer price, which is country reference price in time t, PW is the world reference price ,_ is an intercept, TR is a time trend, is the error term, and t is the period index.

The residuals of all individual countries and for all crops were found to be stationary; meaning that the two series are moving on the same wavelength negating the assumption of spurious regression. Therefore, hypotheses on regression coefficients can be tested using the normal “t” test.

Impact of High Food Prices on Farmers in the Near East 21 22 Impact of High Food Prices on Farmers in the Near East Country Case Studies

Impact of High Food Prices on Farmers in the Near East 23 24 Impact of High Food Prices on Farmers in the Near East EGYPT

Views expressed in this paper are solely those of the author and do not reflect the views of the Food and Agriculture Organization of the United Nations

This paper has been revised and condensed from its original form

Impact of High Food Prices on Farmers in the Near East 25 Executive Summary

Dramatic changes in the international food grain prices occurred during 2008- 2009. World prices for some cereals more than doubled during the first half of 2008 alone, with widespread global impacts. The objective of this case study is to understand the direct and indirect impact of the global rising food prices on Egypt’s small farmer communities. Here, the indirect effect on the small farmers refers to the reactionary government policy intervention, small farmers supply response, and the consequences involved.

The study has focused mainly on the wheat-producing small farmers. Data and information were collected in three selected regions of Egypt from structured questionnaires, rapid rural appraisal, and secondary data.

The majority of Egyptian farmers are classified as small farmers, holding less than 2.1 hectares, and are usually vulnerable to the changes in prices, yields, supports, and all others factors that may affect farm income. Over 80% of Egyptian farmers (holders) involved in the cultivation of wheat, rice, corn, cotton, and sugar beet, are small farmers. Farmers explained that the rise in grain prices, inputs, and food prices in 2008 had been sudden and was different, in nature and degree, from the gradual increase in annual prices over the last fifteen years. As a response to price increases, there was an increased focus by small farmers on crops such as wheat, rice, and sugar beet during the 2008 season. Small farmers reported that they had not benefited much from higher prices, as most of their rice and wheat produce was retained for family consumption, clearly indicating that small farmers rely on wheat and rice mainly as a food source. Contrarily the large and medium scale farmers mentioned that they had benefited from the 2008 increase in grain prices. Also, many small farmers did not benefit from the government policy, and in some cases were negatively affected.

The Government of Egypt (GOE) responded to the price shock with the following policy tools: banning of rice exports to try to shield domestic consumers from high world prices; maintaining price control on wheat, flour and bread; expanding food subsidies by increasing the quantities delivered through rations of sugar, food oil, rice, and tea; maintaining and increasing bread subsidies to support the poor; increase in government and public sector salaries by 30% in 2008, as a compensation for both higher energy and food prices.

In light of the research carried out with the Egyptian farmers, the study presents some policy recommendations to support farming and small holder farmers’ livelihoods. This includes: (i) establishing a crop price stabilization fund to compensate farmers in case of price fluctuations; (ii) continuing and increasing support to small farmers by providing them with subsidized production inputs; (iii) reactivating the role of cooperatives in crop marketing, to create good marketing channels; (iv) ensuring that farmers follow the recommended crop rotation to avoid soil deterioration that may occur otherwise; (v) increasing farmers’ access to official sources of credit,

26 Impact of High Food Prices on Farmers in the Near East particularly small farmers; (vi) declaring farm-gate prices (floor prices) for crops and the price of production inputs prior to crop cultivation in order for the farmer to make the appropriate decision; (vii) ensuring that all farmers are covered by the Social Security Programs currently implemented in Egypt, and that subsides go to the poor and needy in the rural areas.

1. Introduction

The objective of this case study is to study the direct and indirect impact of the rising food prices on the Egyptian small farmer’s livelihood. Direct impacts include not only the unobstructed effect of world food prices on the Egyptian small farmer, but also other factors that are outside of their control, such as, domestic food prices and government intervention. The indirect impact implies the effect on small farmer livelihoods, taking into consideration their supply response. The Egyptian economy has traditionally relied heavily on the agricultural sector for food, fibre and other products. The agricultural sector provides the means of livelihood for about 55% of the country’s inhabitants. Further, it employs, on a full and/or part-time basis, 34% of the total labour force in primarily agricultural production and around 15% in the food processing and related industries. The population of Egypt is estimated at over 80 million people in 20084, spread over only about 5% of the national territory, the rest being desert. Of the main challenges that Egyptian planners face, is the rapid increase of the population in Egypt, exacerbated by the limited availability of resources, particularly land for cultivation and water. The crop production system includes field crops, vegetables, fruits, medical, aromatic and ornamental plant crops. The total cropped area for the agricultural year 2007 was estimated at 6.8 million hectares with a cropping intensity of about 185%. The major field crops were corn, rice and cotton in the summer season and wheat and berseem clover in the winter season. Cereal crops, including wheat, maize, rice, sorghum, and barley, occupied around 40% of the total cropped area.

The study focused primarily on the smallholder wheat farmers in Egypt. Three regions were selected: Sharkia, Kafr ElShakh and Ismailia Governorates. Data and information were collected from three sources; (i) rapid appraisal techniques; (ii) structured questionnaires; and (iii) country secondary data. The study revealed that Egyptian agriculture and smallholders in particular, were affected by the increasing prices in 20072008-, through linkages with outside markets, as well as internal factors, such as policies and changes in demand.

The next section of the study will outline the global price fluctuations and how this translated into local food price fluctuations in Egypt, along with the government policy interventions it brought about. In section 3, Egyptian smallholders and their socio-economic environment is presented. This is followed by a description of the direct effects on small-scale farmers, the farmers’ response to those direct impacts and the total impact these factors ultimately had on farmers’ livelihoods.

4 FAOSTAT

Impact of High Food Prices on Farmers in the Near East 27 2. The Context of Soaring Food Prices

Agriculture in Egypt in recent years has seen many changes, which have to a large extent affected the returns of various agricultural crops. Therefore the area of crops has changed in general and particularly cereal crops. Cereal crops are strategic crops which occupy an important part of the attention of both the farmers and the state, and which in turn affected both the production of various crops and the migration of agricultural labor to other activities. Some of the most important changes that have occurred in agriculture during the recent period include the following: • Production under a high degree of risk and uncertainty. • The prices of agricultural crops increased in the last year (2008), which resulted in an increase in the area of some crops like wheat and rice. • The high price of production inputs, fuel and agricultural machinery which correlated with the increase in the prices of agricultural crops. • Land rent has increased significantly as a result of crop price increase. • Again, a decline in the prices of agricultural crops occurred in 2008/ 2009. • Despite the decline in the prices of agricultural crops there has been no decline in the price of production inputs (fertilizer, chemicals, fuel and agricultural machinery). • A reduction in the relative importance of agriculture, due to the high cost of production inputs and low prices of grains and consequently the net return to farmers. • Migration of many of agricultural workers, especially young people, either to other activities and/or outside the country.

Other factors have negatively affected various agricultural crops in general and grain crops, in particular, some of these factors are: • The disappearance of the role of agricultural cooperatives in marketing crops and the exploitation of farmers by traders. • A significant decline in the role of agricultural cooperatives in the provision of production inputs to farmers. • The disappearance of the agricultural crop rotation.

2.1 Changes in border food Prices

The initial increase in world food prices was seen as gradual and modest. However, by the beginning of 2007, increase in food prices had taken a more dramatic incline. The indexes of FOB prices of the main commodities that increased significantly between 2000 and 2007 were as follow: soft wheat 209%, durum wheat 226%, maize 189%, rice 163%, suger 123%, beef 135%, banana 161%, and soybean flour 160%; in addition to price increases of oil seeds and vegetable oil. Transportation costs also increased significantly, due to the increase in oil prices.

28 Impact of High Food Prices on Farmers in the Near East 2.2 Changes in domestic food prices

In general, an increase in food prices, crops and agricultural inputs occurred in the 2008 season. This was followed by a decline in the prices of grain, like wheat, rice, and other crops by the end of 2008 and at the beginning of 2009. As this study will reflect later on, these changes led to instability in farmers’ income, decision- making, choosing the type of crops to grow, as well as the impact on real consumer income and its pattern of consumption.

Consumer price for wheat was stable during the first six months of 2007, and was slightly over the long-term average prices. Prices started to increase during August- December, 2007, and the price level of December 2007 continued throughout January-February 2008. A significant increase in wheat consumer prices occurred in March 2008 and continued to August 2008. The price eventually decreased by September – December 2008, to reach a level below that of December 2007.

Figure 2.1 Changes in local consumer price of wheat, by month during 2007 and 2008, compared to the long term average

Consumer Price of Wheat - Egypt 700

600

500

400

300

200

100

0 January February March April May June July August September October November December

Long term average Prices 2007 Prices 2008

Consumer price for rice was significantly higher in 2007, compared to its long term average. It was nearly stable from January – May, however it started to increase slightly from June 2007 to January 2008. A sudden and significant increase in the rice consumer price took place in February 2008 and stabilized at that rate up until May 2008. Starting from June 2008 the rice consumer price decreased rapidly till December 2008 and reached a level below the rice price level of December 2007.

Impact of High Food Prices on Farmers in the Near East 29 Figure 2.2 Changes in consumers’ price for rice, by month during 2007and 2008, and the long term average

Consumer Price of Rice - Egypt

800 700 600 500 400

300 200 100 0 January February March April May June July August September October November December

Long term average Prices 2007 Prices 2008

This dramatic decline in prices between the two periods mentioned above, resulted in a decrease in wheat, rice, and fava bean prices of roughly 45%, 45%, and 60% respectively. Farmers who had initially witnessed the increase in cereal prices in 2008, grew more of those specific crops, (such as wheat and rice), for the next season. The world prices plummeting in 2009 directly translated to lower local producer prices. Along with the heavy reliance of local farmers on wholesalers, expected farmers’ incomes were not feasible for that year.

2.3 Government intervention

In the wake of the food price changes that led to a rise in the prices of major grains and food commodities, the Egyptian Government undertook certain measures, including: • The Minister of Trade and Industry announcing, and later renewing, a six- month ban on rice exports, due to the fact that previous tariffs did not slow exports, which were still profitable considering the high global demand. • Backing up the strategic reserves of wheat through contracting to import wheat from several countries, including Uzbekistan, Kazakhstan, Russia, France and others. • Increasing salaries by doubling the social premium from 15% to 30%, based on the directives of the President of Egypt. • Purchasing wheat crop produced during the agricultural season 20082009/, from farmers at remunerative prices, i.e., prices that cover the cost and are profitable to farmers in all cases. • Increasing agricultural investment over the coming years to achieve stability in the prices of food commodities in Egypt and maintain security and social stability. • Amending the competition law to prevent monopoly by enforcing deterrent penalties against monopolistic practices, and market division. • Discussion of a uniform law that allows the establishment of the National

30 Impact of High Food Prices on Farmers in the Near East Food Safety Association for monitoring the safety of food at various stages of the food chain.

3. Smallholders in Egyptian Agriculture

Land in Egypt is either operated by the owner with family and/or hired labour, rented for cash, or sharecropped. The average size of a holding was less than two feddans5 by the end of the 1990s. Over 80% of the farmers (holders) who cultivate cotton, corn, sorghum, rice, soybean, wheat, sugar beet, potatoes, garlic and strawberries are classified as small farmers (less than 5 feddans). Smallholders have been impacted in different ways, and have taken varied steps to respond to increased prices while minimizing the negative implications. This study will show how the fluctuations in prices in agricultural crops that occurred 2009in 2008 /, combined with the continuity of high production input prices, resulted in many changes in the agriculture sector such as farmers’ confusion and unclear decision- making regarding the allocation of areas to be cultivated with various crops. According to the agricultural census of 19992000/ (the census is conducted every ten years), the number of landless holders was around 821,000. According to the latest census, holders with less than 2.1 hectares represented around 90% of the total land holders (3.7 million holders), and they held approximately 47.5% of total lands. This means that the majority of Egyptian farmers are small farmers. As is reflected in Table 3.1 below, this pattern of small-scale farmers representing agriculture in Egypt has only solidified over the last decades.

Table 3.1. Farm holdings by class in the years 198990/ and 1999/ 2000

Class 1989 / 90 1999 / 2000 Holdings Area Holdings Area Feddan Number % Fed. % Number % Fed. % < 1 1,051 36 508 7 1,616 44 722 8 1- 714 25 941 12 881 24 1,117 13 2- 502 17 1,137 15 517 14 1,154 13 3- 239 8 777 10 239 6 769 9 4- 111 4 484 6 107 3 454 5 5- 140 5 771 10 169 5 920 10 7- 59 2 479 6 65 2 522 6 10- 43 2 495 6 57 2 655 7 15- 18 1 299 4 24 1 395 4 20- 17 1 387 5 22 1 493 6 30- 11 0 383 5 12 0 430 5 50- 5 0 288 4 6 0 357 4 100+ 2 0 910 12 3 0 941 11 Total 2,910 100 7,859 100 3,718 100 8,929 100 Source: Computed from: MALR, Agricultural Census.

5 1 FEDDAN = 0.42 HA

Impact of High Food Prices on Farmers in the Near East 31 3.1 Government support and services introduced to small farmers

The cropping system policy changed with the implementation of the Economic Reform and Structural Adjustment Program. Before the reform, the government intervened in the specification of the area and production of major crops including cotton, wheat, rice, sugar cane and onions. In the second half of the 1980s a liberalized cropping policy was initiated in the context of the overall reform program. The Government allowed farmers to make their own decisions on what to grow. Also during the 1990s further actions were taken in the introduction of more liberalized price and marketing policies. Considerable changes in the cropping patterns also occurred during the 1990s. For this period the areas grown with cereals, especially rice and wheat, increased while the areas under cotton have drastically decreased. Research and extension services have been introduced free of charge to all farmers. The government also directly and/or indirectly interferes with the distribution of production inputs, especially fertilizer. The intention is to reduce risks small farmers may face due to liberalization of the agricultural sector. In addition, water management costs are paid by the government and thus, all small farmers receive water free of charge. Concerning credit facilities, the Principal Bank for Development and Agricultural Credit (PBDAC) is the main source of agricultural and rural credit. PBDAC provides crop loans of six months at low interest rates (57%-), and loans for orchards of eight months. Credit available for Egyptian farmers through PBDAC mainly covers part of their short-term needs for farm inputs and operations. However, these rural formal credits do not cover other financial needs and studies have shown that most of the small farmers are restricted in their access to other commercial bank loans, by their inability to satisfy lender collateral requirements.

3.2 Changes in the economic environment surrounding small farmers

Agriculture in Egypt in recent years has seen many of the changes that have affected global agricultural markets, particularly regarding the returns of various agricultural crops, which affected the area of crops (specifically cereals) cultivated. These strategic cereal crops receive a significant amount of attention from both the farmers and the state. This in turn, affected both the production of various crops and the migration of agricultural labour to other activities.

Some of the most important changes that have occurred in agriculture during the recent period include: • Production under a high degree of risk and uncertainty. • Increase in the area of some crops like wheat and rice, due to the world price surge in these cereals.

32 Impact of High Food Prices on Farmers in the Near East • The high price of production inputs, fuel and agricultural machinery which correlated with the increase in the prices of agricultural crops. • Significant increase in land rent as a result of crop price increase. • Decline in the prices of agricultural crops in 20082009/. • Despite the decline in the prices of agricultural crops, there has been no decline in the price of production inputs (fertilizer, chemicals, fuel and agricultural machinery). • Reduction in the relative importance of agriculture due to the high cost of production inputs and low prices of grains and consequently the low net return to farmers. • Migration of many of agricultural workers, especially young people either to other activities and /or outside the country.

Other factors that have negatively affected various agricultural crops in general and grain crops, in particular, include: • The disappearance of the role of agriculture cooperatives in marketing crops and the exploitation of farmers by traders. • A significant decline in the role of agricultural cooperatives in the provision of production inputs to farmers. • The disappearance of the agricultural crop rotation.

4. Direct Impact on Small Farmers and their Reaction

The following section examines the direct impact of world food prices on small- scale farmers, through domestic prices and government intervention; followed by the strategies taken by farmers in reaction these impacts.

4.1 Methodology

The study focused primarily on the smallholder wheat farmers in Egypt. Three regions were selected: Sharkia, Kafr ElShakh and Ismailia governorates. Data and information were collected from three sources; (i) rapid appraisal techniques (through conducting focus group meetings with knowledgeable farmers), (ii) structured questionnaires (120 farmers), and (iii) country secondary data. The following research questions were addressed:

(i) What is the nature of price changes, their extent over the last 3 years (crops and inputs)? (ii) How do farmers feel or have felt about the price hike and do they differentiate it from the general price increase? (iii) Is there a response to such price changes and to what extent (magnitude)…. Possible influential factors…government interventions, market structure, producers’ characteristics? (iv) Has there been noticeable price transmission from global to local level and

Impact of High Food Prices on Farmers in the Near East 33 at what pace? (v) Has the livelihood of small farmers improved or worsened, as the result of price changes, and to what extent?...income, consumption, safety nets. (vi) Is there expansion in the area of certain important crops, and at the expense of what? (vii) What informs the trade off, in terms of area and rotation among crops?

4.2 Farmers perceptions on impact of rising food prices: informal interviews

Farmers reported that they are aware about the general price increase, which started gradually, since the implementation of the economic reform program in Egypt during the 1980s, and that they differentiate it from the dramatic changes in prices during 20082009-. The majority of those interviewed (81%) reported that they were aware of an increase in prices during last year (2008). Farmers explained that a rise in grain prices, inputs, and food prices in 2008 had been sudden and varied in nature and degree, compared to the usual gradual increase in annual prices. As food prices began to decline at the end of 2008 and early 2009, farmers were surprised that the input prices did not decline, as in the case of crops. There had been no drop in the prices of production inputs like fertilizers and pesticides, nor in the prices of agricultural labour.

Small farmers reported that they have not benefited from higher prices, as rice and wheat are planted and stored for family consumption and it became clear that small farmers mainly rely on wheat and rice as food. This is in contrast to the large-scale and medium-sized farmers, however, who mentioned that they have benefited from the increase in grain prices in 2008. In 2009, farmers had to leave the land they rented and cultivated, because of the rise in rental value of land following the rise in crop prices in the 2008 harvest. Although with the fall in prices of grain in 20082009/, rental values are again declining. Some farmers said that their agricultural cooperative provides only 50% of their chemical fertilizer needs and pointed out that rise in prices of chemical fertilizers and lack of financing has caused some to reduce fertilizer use.

As a result of lower grain prices in the 2009 season some farmers, especially those with holdings of more than three acres and who are raising animals, had the intention to reduce the area of grains including wheat and rice by up to 30% in the next year. This is proof of the existence of the impacts and farmer responses to the price changes. Farmers reported that the price of sugar beet crop, which is an alternative winter crop for wheat in many parts of the Delta, is expected to decrease as a result of lower world prices for sugar. Farmers have contracts with the sugar factory, and although the price decreased by one third from 2008 to 2009, according to farmers the crop may become more profitable in light of low prices of wheat. Because of the significant decrease in wheat prices in 20082009/, some farmers had to store a quantity of wheat to be used and added to the animal feed. The main impacts on farmers’ decisions can be listed as follows:

34 Impact of High Food Prices on Farmers in the Near East • Farmers pointed out that if the price of agricultural outputs and production inputs continue fluctuating drastically, this will lead to confusion in their decisions on choosing the type of crops they should cultivate, as well as create instability in their income. • Farmers argue that the State has not helped compensate rice farmers, when the export of rice was banned. Exports in limited quantities may have helped increase the selling price of paddies, and therefore, may have preformed as a sort of compensation for the farmers and Egyptian grain growers. • Farmers expected possibly higher revenues from livestock production, but subject to the availability of labour. They also pointed out that the increase in the price of the land rent for the production of alfalfa (clover) in order to feed livestock, could be a determining factor for the raising of cattle. • Farmers reduced the amount of fertilizer used for crops because of the higher prices, thus lowering the productivity per unit area.

4.3 The impact of price changes on farmer decisions: formal survey results

In response to the initial prices increase, the majority of the interviewees (85%) reported that they would increase the area of wheat, rice and maize. 55% of them would increase the area of wheat, 30% would increase the area of rice, and only 13% would increase the area of maize. As reflected in the data, while the average cropped area (for the farms interviewed) in the current season (20082009/) had decreased by about 3% compared to the last two seasons (2006 / 2007 and 2007 /2008); the area devoted to wheat and clover increased by about 7% and 3% respectively, because farmers had taken their decision to expand the area of wheat at the time of high prices. The area of maize and rice decreased by about 30% and 9% respectively. With the price fluctuations during the last three years however, profitability of the main crops changed dramatically, as shown in Table 4.2, which indicates that Egyptian farmers lost a lot due to output price decline.

Table 4.1 Changes in the revenue per feddan of main crops cultivated in the study sample villages Crop Revenue during the Period Revenue during the Period Changes(L.E) of High Prices(L.E) of low Prices(L.E) Wheat 4600 1600 - 3000 Maize 3800 1500 - 2300 Rice 4800 2100 - 2700 Sugar Beet 4200 2200 - 2000 Broad Beans 3200 1500 - 1700 Source: Focus group discussion

Impact of High Food Prices on Farmers in the Near East 35 5. Total Impact on Livelihoods, Changes in Farmers` Wellbeing

One of the main questions raised by this study is: Has the livelihood of small farmers improved or worsened as the result of price changes and to what extent? In examining total impact on livelihood, we include both the socio-economic effects that world price changes had on the smallholders, along with their supply reactions. Farmers reported that the soaring prices of agricultural crops had various impacts on their income and consumption habits. The sudden rise in the prices of cereals, especially wheat and rice harvest in 2008, resulted in farmers needing to grow more wheat for the 20082009/ agricultural season, in order to obtain higher returns. Unfortunately however, the decline in wheat prices due to changing global conditions, directly translated to lower wheat prices in Egypt for the 2009 season; leading to a reduction in revenue compared to the farmers’ expectations.

5.1 Impact on production

For cereal crops, there was a substantial controversial point among farmers in the sample villages. This was the inevitable cultivation of areas adequate for producing the consumption requirements of grain crops for their family and farm animals, whether the prices were up or down. It is worth noting that the behaviour of the Egyptian farmer is characterized by ensuring sufficient stock of grain crops for his family and farm animals before taking any decision regarding the crops to cultivate on his land. The higher prices of grain crops resulted in farmers doubling the cultivated areas of these crops in the sample villages due to the importance and the easy marketing and storage of these crops. As for rice crop, the situation is utterly different. The GOE banned rice exports to ensure lowering its domestic market prices to mitigate the impacts soaring prices on Egyptian citizens. This resulted in the domestic market price of rice declining sharply, the use of the lower priced rice as feed for livestock and fish, and along with the continued suspension of rice exports, the eventual decreasing of rice cultivation by some farmers.

5.2 Impact on consumption

Small farmer communities have come to adopt some mechanisms to cope with the soaring prices. Such mechanisms include reducing spending on market commodities and increasing reliance on commodities produced at home or in the farm. Increase in food commodity prices resulted in negative impacts on consumption. In regard to cereal crops in particular, Egyptian farmers, especially the small, depend on cereal crops for their staple food and therefore cannot reduce their consumption of these crops no matter how the prices change. Some farmers therefore, sold their cereal crops for the high prices and instead turned to partially relying on subsidized bread. Some smallholder consumers were forced to either reduce the quantities consumed from some commodities like meat, poultry, fruit, etc, or purchase lower quality commodities.

36 Impact of High Food Prices on Farmers in the Near East 5.3 Impact on productivity

The decline in crop prices and the subsequent declines in their revenues resulted in lower productivity per feddan due to the following reasons. 1. Inability to use production inputs at the proper rates and times due to the inability of financing agricultural operations. 2. Inability to use improved seeds due to their high prices. Thus, farmers used home- stored seeds and could not finance agricultural operations. 3. For the same reason, soil services could not be performed properly due to the high cost of renting machinery and hiring agricultural labour.

5.4 Impact on agricultural labour

During the initial increase in prices of agricultural crops, agricultural wages increased by nearly 300% from the previous year. However, the eventual decrease in prices of cereal crops in particular and agricultural crops in general, resulted in: lower revenues from agricultural production leading young people from the small farmer communities to migrate towards work in factories and governmental posts; declining demand for agricultural labour as a result of farmers’ inability to finance soil services and weed control operations, due to the lower revenues earned from agricultural production combined with the higher wages of agricultural labour.

5.5 Impact on income

The lack of savings of farmers during the food prices increase, led to having to borrow in order to be able to perform the necessary agricultural operations. Also, due to the limitations of lending facilities offered to smallholders, many resorted to selling the animals, property, or land.

6 Conclusions and Recommendations

This study examined the behaviour of smallholders in Egypt in response to changing food prices, and documented the ways in which their livelihoods have been affected. Focusing on the three regions of Ismailia, Sharkia and Kafr Elshakh governorates, three main sources of information were used. The impact of soaring prices of agricultural crops on the production and consumption of cereal crops has been very apparent in Egypt due to the importance of these crops for Egyptian farmers and the State. Egypt depends largely on wheat and maize imports, while rice production covers domestic consumption and a surplus remains for exporting.

The changes that have occurred in farming in Egypt during the recent years have to a large extent affected the production, consumption, revenues of various agricultural crops, as well as the cropping pattern in general, and grain crops in particular. This directly affected small farmer consumer behaviour and livelihood. The drastic price fluctuations that occurred in agriculture during the period of 2006- 2008

Impact of High Food Prices on Farmers in the Near East 37 caused a high degree of risk and uncertainty. Higher prices of agricultural crops during this period, resulted in the revival of agriculture activities, higher prices of production inputs and higher value of agricultural land rent. The reduction which followed in the prices of agricultural crops during the 2008 / 2009 season, were not commensurate with the costs of production; subjecting farmers’ further losses. The price of production inputs such as fertilizers, chemicals, fuel, and agricultural machinery remained high, in spite of the significant decrease in crops prices and took many small farmers by surprise, by compounding the effects of the continued losses incurred.

The Government of Egypt implemented several measures to mitigate the impacts of higher prices on small-scale farmers. However, it is believed that the following recommendations can further promote both farming and improve farmers’ livelihood, in light of the current high risk environment described in this study. It is suggested that the GOE should: establish a crop price stabilization fund to compensate farmers in case of price fluctuations; increase support to smallholders through subsidized production inputs such as chemical fertilizers, improved seeds, agricultural machinery, fuel, lease or purchase prices of agricultural machinery; strengthen the role of cooperatives in providing extension services, guidance and protection to farmers; ensure that farmers follow the recommended crop rotation to avoid soil deterioration that occurred as a result of its absence; increase small farmers’ access to official source of credit particularly the small farmers; declare farm-gate prices (floor prices) for crops, and the price of production inputs, prior to crop cultivation in order for the farmer to take the appropriate decision; reactivate the role of the cooperative in crop marketing in creating good marketing channels, in order to enable farmers to sell their produce at reasonable prices and protect them from the exploitation of traders and brokers; ensure that all farmers are benefiting and covered by the Social Security Programs currently implemented in Egypt; and make sure that subsides go to the poor and needy people in the rural areas.

38 Impact of High Food Prices on Farmers in the Near East Jordan

Views expressed in this paper are solely those of the author and do not reflect the views of the Food and Agriculture Organization of the United Nations

This paper has been revised and condensed from its original form

Impact of High Food Prices on Farmers in the Near East 39 Executive Summary

The sharp increase in food prices witnessed in 2008, has forced many Jordanians to take certain measures in order to make ends meet and farmers were no exception. This study aims at characterizing the behaviour of smallholders in Syria in response to changing food prices and document the ways in which their livelihoods have been affected. Changes in socioeconomic and policy environments of smallholder farmer communities are also addressed. The study was conducted in three regions of Jordan, namely, Karak, Mafraq, and Irbid. Information/data used in the study came from 3 sources: • Qualitative study of wheat farmers. In total 6 focus group interviews were carried out; • Quantitative study among wheat farmers. In total 109 face to face interviews were carried out; • Secondary data collection from official sources.

In addition to the price increase of food and input materials for farming, lack of rain and the unfavourable weather conditions for farming have made life harder for small farmers. Over the past few years the rainfall has been very low and most of the farmers have experienced bad seasons. Ultimately, the world price increases in 2008, simply further exposed the challenges faced by Jordanian small farmers. These included the lack of financial resources and the shortage of rainfall. The sharp increase in food prices also forced many farmers to change shopping patterns, with the majority of surveyed farmers showing a reduction in overall food consumption. Many of the problems mentioned above were only exasperated by, what an overwhelming number of farmers felt was the lack of any possible benefit from utilizing any of the available government support systems. Recommendations from the study include: • Developing a sense of empowerment and ownership through community development, cooperatives, or any other activities. • Having the government ensure an adequate supply of farm labour. • Productivity based subsidies and assistance. • Encouraging farmers with water wells, to plant wheat and barley. • Exploring the option of finding seeds, which do not need high levels of rainfall, with the help of the private sector or international donors.

1 Introduction

This study aims at characterizing the behaviour of smallholders in Jordan in response to changing food prices and document the ways in which their livelihoods have been affected. Changes in socioeconomic and policy environments of smallholder farmer communities are also addressed

In striking contrast to Egypt and Iraq, where redistribution of land irrigated by the Nile and Euphrates rivers was a pivotal political, social, and economic issue, land tenure was never an important concern in Jordan. More than 150,000 foreign labourers--

40 Impact of High Food Prices on Farmers in the Near East mainly Egyptians--worked in Jordan in 1988, mostly on farms. Moreover, since the early 1960s, the government has continuously created irrigated farmland from what was previously arid desert, further reducing competition for arable land. Ownership of rain-fed land was not subject to special restrictions. Limited land reform occurred in the early 1960s when, as the government irrigated the Jordan River valley, it bought plots larger than twenty hectares, subdivided them, and resold them to former tenants in three to five-hectare plots. Because the land had not been very valuable before the government irrigated it, this process was accomplished with little controversy.

In general, the government has aimed to keep land in larger plots to encourage efficiency and mechanized farming. The government has made the irrigated land that it granted or sold permanently indivisible, so as to nullify traditional Islamic inheritance laws that tended to fragment land.

The total land used for agriculture in 2007 was 190,000 hectares, down from 252,000 hectares in 2006 (- 23.8%). The total land used for field crops (winter & summer crops) in 2007, was 77,000 hectares, down from 124,000 hectares in 2006 (-42%).

Livestock is estimated to contribute about one half of the total agricultural GDP. Following sector reforms, agriculture in Jordan is now virtually free of all controls and restrictions, and all direct subsidies have been removed. The major livestock animal is sheep, while cattle, goats and poultry are also reared. Credit to agriculture at low interest rates is now the single most important conduit for Government of Jordan (GOJ) subsidies to agriculture.

Irrigated wheat farming represents around 10% of the total sector, (2,705.9 hectares out of 27,177.5 hectares planted in 2008), the other 90% of farmers depend on rainfall. Jordan relies heavily on imports of wheat and barley to satisfy local consumption.

Jordan is one of the most water-poor countries in world, with limited natural resources. Agriculture contributed substantially to the economy at the time of Jordan>s independence, but it subsequently suffered a decades-long steady decline. In the early 1950s, agriculture constituted almost 40% of GNP, but by 2008, its share in GNP was only about 3.6%. The agricultural sector provides a livelihood for about 20% of the population and employs about 7% of the labor force. The major grain crops are wheat and barley, but these need to be heavily supplemented by foreign imports. Three regions namely, Karak, Mafraq, and Irbid where used to conduct this study, and qualitative and quantitative methodologies along with secondary data collection, were employed. What the study found was that world price increases helped expose the challenges already faced by Jordanian small farmers. The most pressing of these issues included lack of access to financial resources and the shortage of rainfall. The sharp increase in food prices, also revealed how the small farmers’ consumption patterns where affected and changed. The lack of confidence in government aid programs has shaped the recommendations of this

Impact of High Food Prices on Farmers in the Near East 41 study to focus on: empowerment and ownership through community, cooperatives, or any other such activities; adequate supply to farm labour; productivity based subsidies and assistance; encouraging farmers with water wells, to plant wheat and barley; acquiring seeds which do not need high levels of rainfall, with the help of the private sector or international donors.

2 The Context of Soaring Prices

The downward trend of real food prices for the past 25 years came to an end, when world prices started to rise in 2006 and escalated into a surge of price inflation in 2007 and 2008. Prices of staple foods, such as rice and vegetable oil, doubled between January and May 2008. The upturn coincided with record petroleum and fertilizer prices. For low-income and highly import-dependent countries, high food prices and a larger import bill have become a major challenge, particularly for those with limited foreign exchange availability and high vulnerability to food insecurity. High food prices, in combination with high and volatile petroleum prices, have the potential to spur inflationary pressures, while competing for public expenditures intended for alleviating poverty or meeting MDG targets, and fuelling political unrest. Poorer households with a larger share of their total expenditures dedicated to food, are suffering the most from high food prices, due to the erosion of purchasing power which has a negative impact on food security, nutrition and access to school and health services.

A number of factors have contributed to rising food prices. On the demand side, food consumption expanded rapidly in developing countries as a result of strong global economic growth in 200407-. A dietary transition from cereals toward more animal protein has also increased demand for feed crops, such as maize, in emerging economies. Demand for non-food agricultural products, such as timber and fibre, has also increased sharply. By contrast, the supply of food and agricultural products slowed due to stagnation in areas under cultivation and yields, as well as low investment. Bad weather reduced production levels in many important exporting countries, notably Australia (one of the major wheat exporters), over the last two years. World cereals stocks, as a proportion of production, also declined to one of their lowest levels in recent years, exacerbating the crisis. Besides the high oil prices, which resulted in higher food production and transport (including freight) costs, the weak dollar, speculative activities and trade policies also contributed to high food prices.

Table 2.1 CPI index for cereals (2000 -2008) 2000 2001 2002 2003 2001 2002 2003 2001 2002 Cereals 96.3 96 89.7 91.3 103.8 112.7 117.3 140.8 193.4

Government policies in response to rising food prices have included a series of immediate short-term measures. These can be grouped into three main groups: • Trade-oriented policy responses that use policy instruments, such as reducing tariffs and restricting exports to reduce prices and/or increase domestic

42 Impact of High Food Prices on Farmers in the Near East supply; • Consumer-oriented policy responses that provide direct support to consumers and vulnerable groups in the form of food subsidies, social safety nets, tax reductions and price controls, among other things; and • Producer-oriented policy responses intended to support farmers to increase production, using measures such as input subsidies and producer price support.

The general consumer price index for the year 2008 rose by 19% in comparison to prices for the year 2006, dairy products price index increased by around 53%, cereals and its products increased by 35%, and energy prices (fuels & electricity) increased by 52.8%. Inflation for 2008 was 14%, up from 5.7% in the year 2007. Many farmers stated that they have similar shopping patterns to consumers in urban areas and those who attended the focus groups conducted for this study stated “We are like any other family in Amman, we buy all our food needs from supermarkets/ groceries”, while 89% of sampled farmers said they had felt the hike in prices in the last 2 years.

In addition to the price increase of food and input materials for farming, lack of rain and unfavourable weather conditions for farming have made life harder for wheat farmers. Over the past few years the rainfall was very low and most of the farmers experienced bad seasons. Most of the farmers who took part in our study said that they have not seen a good harvesting season for nearly five years. Many of these farmers did not have crops to sell last season (20072008-), when the price of wheat was the highest (560 USD/ton), due to shortage in rainfall. This season (2008- 2009) the rainfall and weather conditions were favourable in some areas and many farmers were expecting a good harvest.

The announced purchasing price (season 20082009-) of wheat by the Government was 420 USD/ton, and 560 USD/ton for seeding wheat. As for barely, the purchasing price was 350 USD/ton, while the seeding barely price was 532 USD/ton. The selling price for wheat seeds to farmers from the Government in 2008 was 630 USD/ton, and for barely seeds 490 USD/ton.

3 Agriculture - Smallholders in Jordan

Farmers in Jordan face many challenges, from low rain levels to the lack of financial resources stopping farmers from adopting modern agriculture methods. The estimated number of people working in this sector in 2007 is around 75,000, which represents 5.6% of the total Jordanian work force (Ministry of Labour). According to the World Bank agriculture efficiency is between 0.18 - 0.22 (World Bank 2007). There are no official figures on the number of wheat and barley farmers and there are no official classifications of small, medium and large farmers. During our study in the three regions (Karak, Mafraq & Irbid), we managed to get some approximate numbers from farmers in each area.

Impact of High Food Prices on Farmers in the Near East 43 Table 3.1 Estimated number of farmers per area and average yearly rainfall

Governorate Average Rainfall No. of Wheat Total Land No. of Framers Farmers Owned(acre) with livestock Karak 280 mm 1930 8020 1392 Irbid 420 mm 1200 5279 130 Mafraq 150 800 1150 534 (Mafraq 50 farmers of the 800, owning 450 acres irrigate their crops if rainfall is low).

Based on figures collected from the Ministry of Agriculture, the following table describes the total land cultivated for wheat and barley for the years 2002 – 2008.

Table 3.2 Land used for wheat & barley Cultivated land for wheat and barley - acres 2002 2003 2004 2005 2006 2007 2008 Wheat 26900 72360 16066 43577 23562 40473 15468 Barely 24970 48970 9750 47748 18073 29929 9839

4 Characterization of Farmers and their Responses

4.1 Research methodology / data collection

The study was conducted in three regions of Jordan, namely, Karak, Mafraq, and Irbid. Information/data used in the study came from 3 sources: • Qualitative study of Wheat farmers. In total 6 focus group interviews were carried out. • Quantitative study among Wheat farmers. In total 109 face to face interviews were carried out. • Secondary data collection from official sources.

4.2 Characterization of the sample

Farming is the main occupation among 77% of the respondents. Among those whose primary occupation is not farming, 44% are employed by the Government, 24% do trading, and 20% are retired. Of the farmers who were interviewed, 91% did not belong to any farming association. The sample split of respondents is depicted in below. Figure 4.1 Percentage of farmers surveyed from each region

Karak, 39 Mafrag, 31

Irbid, 39

44 Impact of High Food Prices on Farmers in the Near East The majority of the farmers fall under the middle class category and only 6% of farmers can be considered as “rich”. The overall average age of these farmers is 58 years. They have larger families with an average of 8 members. Each farmer, on average owns about 17.7 hectares of land. A breakdown of the ownership of land is given below.

Table 4.1 Ownership of land Land (in acres) Own Rented 1 - 10 58% 21% 11 - 20 15% 17% 21 - 30 9% 9% 31 - 40 2% 0% 41 - 50 6% 3% 51 - 60 1% 4% 71 - 80 1% 0% 91 - 100 2% 2% 101 - 200 2% 4% Do Not Own/Rent 4% 40%

Many farmers described themselves as “gamblers”, because they never know if the season will be good or not. One farmer was quoted as saying that, “Each time we plant we take the risk not knowing if the rain will be enough or not”. Majority of the farmers (90%) follow the rain fed system, and any inconsistency in rain will lead to losses, for majority of the farmers. The farmer’s share of income from various sources is shown in Table 4.2, which reflects the high percentage of income from farming activities.

Table 4.2 Share of income from various sources Source of Income Last 3 years 2008 - 09 Growth Crop 22% 28% 28% Animal raising 13% 24% 94% Casual labor in farming 2% 2% 0% Off Farm engagement 42% 32% -24% Remittances 8% 6% -20% Others 5% 5% 0%

4.3 Impacts on consumption

51% of total income of the farmer is spent on food. Farmers, from Mafraq and Karak, spend as much as 59% and 56% of their incomes on food, respectively. On average, 18% of cereal consumption comes from the farm. However, 44% farmers say that the ratio of their cereal consumption has increased over past two years. Mafraq farmers consume as much as 39% of cereals from their farms’ produce. It is to be noted that when there is a price increase, farmers either consume less of the same item (53%), or consume the same quantity but of lower quality (19%). Few commented that they removed some basic items from the list of consumption, to cope up with the rise in price.

Impact of High Food Prices on Farmers in the Near East 45 4.4 Expansion in land area

There will be a marginal change in the area covered by wheat and barley crops. On an average about 160 hectares of land was available for cultivation of wheat. It will be more or less the same next season. In the case of barley, there has been a 31% growth from past allocations

This could be due to the encouragement bonus of 70 USD the government has offered for the season 2008 - 2009. There was specific intention or common cause for expanding the area for such crops in half of the cases. In Mafraq, 87% of the farmers agreed to expand their areas whereas, 72% in Karak did not agree. Those who wanted to increase their area mainly desired to do so because they believe (55%) that they would achieve higher profits. Overall, 36% increased their farm area for making family feeds.

Of those surveyed, 58% of farmers say that they are planning to increase the area for producing wheat first, whereas 22% are planning to increase land for production of barley first. Furthermore, 55% of farmers are planning to increase area for producing barley in general. There would be enough land made available either owned or rented to expand the production and 92% of farmers are confident that they will have additional land.

Only 32% feel that the areas of certain crops have actually increased due to increase in prices of which 74% of farmers feel that wheat is the first and 68% feel that barley is the second crop whose area actually increased.

Of those who did not want to increase land area for any particular crop gave reasons of, lack of support for production (26%), variation in prices (20%) and lower prices offered (17%). Only 2% of farmers were afraid, or did not have means to arrange for greater area of land.

If the prices remained as high as the first half of the period, 200809-; it would have convinced 65% of the farmers to expand areas of certain crops. Specifically in Mafraq, 84% of the farmers would have been convinced. 79% of the farmers said that wheat would have been the first crop whose area could be increased, if prices remained as high as they were in early 2008 and 58% said that barley would have been second crop whose area could be increased. 41% of farmers said that they would increase their land proportion by 25% whereas, 39% said it could be increased from 25% to 50%. Only 10% farmers agreed to increase their area by more than 50%. Regionally, 32% from Mafraq agreed to increase their area by more than 50% whereas, 54% from Irbid and 49% from Karak said it could be increased between 25% to 50%.

46 Impact of High Food Prices on Farmers in the Near East 4.5 Use of agricultural inputs

Overall, only 27% farmers have easy access to affordable and desired inputs. However if we specifically look at the Karak farmers, 71% have easy access to these inputs. Fertilizers (59%) and seeds (23%) are of great importance when it comes to agricultural inputs. Apart from them, on time seeding and ploughing (15%) is also important.

In 30% of the cases, the farmers will continue to have easy access even if the area under cropping is planned for incrementally, but 29% farmers said they will face problems in accessing the inputs. Some of the access problems include financial needs (35%), late delivery (15%), prices of fertilizers (14%) and seeds (13%). There has also been a noticeable change in cost of agricultural inputs.

There are no subsidized prices available for agricultural inputs. The soaring food prices which came as a result of the global price increase, has added more constraints on wheat and barley farmers in addition to the long term obstacle farmers face in terms of rainfall and unfavourable weather conditions. The cost increase (USD/acre) for input materials to farmers in 2008, was in the range of 27% from 2007.

4.6 Government intervention

Wheat farmers in general do not believe that the government does enough for them, they feel that vegetables farmers get more support. They mentioned that every year the government gives compensation to vegetables farmers when they encounter frost or heat waves, which has never been done for wheat farmers.

At the beginning of this season the government said that, each farmer who would cultivate wheat or barely would get 70 USD/acre. To be eligible for this amount, each farmer had to get a new ownership certificate, or new certified rent contract for those who rent the land.

The government worked on a new, “Agriculture Agenda,” and many farmers hope that this agenda will benefit wheat farmers, while others are very sceptical about it. Most farmers, by virtue of being ex-government employees, or having children working in the government or the army, would benefit from the free medical insurance given to public employees.

5 Conclusions and Recommendations

Raising consumer prices did affect wheat farmers, but the main obstacles for farmers are weather conditions in general and rainfall in particular, because most of the cereal farming is rain-fed. Farmers can face this price increase if they have a good harvest, but a bad harvest combined with increased prices is too much of a burden. In the 2008 - 2009season, 92% of the total land used for wheat was rain-fed land (14,252.3 acres out of 15,467.9 acres), so if the weather is not favourable then the

Impact of High Food Prices on Farmers in the Near East 47 production for the season will be bad.

Increased prices of input materials will not affect farmers as much, because the increase will happen to crop’s selling price. If we look at the 2008 - 2009 season, where the input prices were at their highest, the average cost per acre of wheat was around 295 USD, which represents an increase of 123% in the cost of inputs in 20072008-. Although the selling price for 2009 was 420 USD/ton for wheat, down from 560 USD/ton in 2008, farmers could still make a profit if they had a good harvest for the season.

Good farming practice is another obstacle for farmers. Most farmers know what to do, yet they bend the rules, because they are not sure if they will have a good harvest. The Ministry of Agriculture tries to do its best, but it seems it is understaffed when it comes to giving technical support to farmers. In Karak, Irbid and Mafraq, the number of agriculture engineers who can give technical support to farmers is very low. In total the Ministry of Agriculture, has around 65 engineers who can give technical advice to farmers, which is very low considering that they have to cover the whole Kingdom and all types of farmers.

The average output per acre also seems low, and it could be attributed to the level of rainfall. However, it is our estimation that a certain number of farmers make less then optimal choices, when cultivating the land, in order to save some money. Our recommendations for improving the current state for the small Jordanian farmer, and to ensure long term stability in the sector includes the following. • Farmers need to be given sound technical advice, and to feel that their problems are shared concerns. The feeling of community needs to be re-enforced, and farmers in each area should be encouraged to start cooperatives. This will help farmers to face problems collectively, as opposed to individually, which ultimately gives them more power in negotiating prices for input materials. • The lack of local farm workers needs to be addressed, because many farmers face shortage in labour needed. It seems there is a shortage in agriculture equipment (old equipment) in the public and private sectors; this issue needs to be addressed as well. • Any scheme for helping farmers should be connected to crop production. For example, the current scheme (70 USD per acre), would have been more effective if it was related to delivery of the crop. • Encouraging farmers with water wells, to plant wheat and barley, can help reduce some of the problems. Annual incentives for extra production can be effective in increasing production of cereals. For example, if farmer X delivered 100 tons this season, but is able to deliver 120 tons the following year, the farmer receives a bonus for the 20 extra tons he has produced. • Exploring the option of finding seeds which do not need high levels of rainfall, with the help of the private sector or international donors. • Facilitating the access of the average farmer to rent new farming equipment when needed.

48 Impact of High Food Prices on Farmers in the Near East Morocco

Views expressed in this paper are solely those of the author and do not reflect the views of the Food and Agriculture Organization of the United Nations

This paper has been revised and condensed from its original form

Impact of High Food Prices on Farmers in the Near East 49 Executive Summary

This report lays out the main features of increases in food prices in Morocco and provides a preliminary understanding of the effect of food price shocks on small and medium farmers’ behaviour. The study also reviews specific policy measures taken by the government within the context of soaring food prices.

In 2007 and the first half of 2008, a sharp rise in basic agricultural commodities and food prices (cereals, flour, vegetable oil, sugar etc...), generated a serious concern about cost of living and social stability in Morocco.

Morocco imports at least 40% of the cereal the country consumes. Population growth and low productivity of the cereal sector tend to exacerbate the gap between future needs and the potential supply of cereals (wheat, barley and maize). Dependence on imports will increase if the ultimate agricultural strategy recently launched (Plan Maroc Vert)6, fails to be implemented successfully due to unexpected constraints (natural or political).

The key findings of the study are:

• There is no immediate reaction of farmers to price change in terms of acreages and farming systems. Even producers facing less severe constraints declare they cannot ramp up their farming system in response to the high price due to the seasonal time cycle of agricultural production and the slow reaction of the global environment (market; institutions such as governmental, financial; industries, agricultural technologies etc). • Except during the rainy seasons, most of the farmers claim that the global productivity for major cereals is slowing down. This is partly because public support for agriculture has decreased since the 1990s. The surveyed farmers are sceptical about the beneficial effect of cereal price increases in domestic or world markets unless government policies change. • Some selected groups of farmers (households under poverty) declare that they sometimes sacrifice productive inputs to purchase food, therefore reducing their potential earning from agriculture in the following year. • Farmers, especially the poorest among them, cannot quickly adjust and reduce their food consumption in response to the high food prices. They claim to have made sacrifices in other components of their budgets.

At a domestic policy level and to face the food price shock, the Moroccan government took initiatives including strengthening price controls, advertising prices to avoid speculation, to reducing wheat tariffs substantially and providing subsidies to soft wheat importers. It also maintained price controls on wheat, flour, and bread and reduced taxes on food grains.

6 Among other key objectives of «Plan Maroc Vert » : enhance the food supply provided by domestic agriculture by addressing lagging productivity growth through increased investments and improve supply chain efficiency.

50 Impact of High Food Prices on Farmers in the Near East 1 Introduction

This report lays out features and analyses of the effect of food price shocks on small and medium farmers’ behaviour, as well as the specific government policies and actions taken in this context.

Cereal production is the most significant agricultural resource. It accounts for 70 percent of all agricultural lands. The main cereal crops are durum wheat, soft wheat and barley. Different studies have shown a high correlation between cereal production and agricultural GDP. This indicates that cereal production is a major determinant of agricultural GDP, and high variability of production leads to high variation in agricultural GDP.

During the period 19962007-, cropped area in cereal averaged 5.2 million ha (barley: 43%, soft wheat: 35%, durum wheat: 20%). The remaining area was roughly allocated to maize, rice, oat and sorghum. In terms of quantity produced over the same period, the average production was around 6 million tons (soft wheat 42%, barley 31%, durum wheat 22% and maize 3%). Cereal productivity is erratic and relies heavily on rainfall, (12 qx/ha on average during the last 5 years) despite the effort that has been made in terms of crop intensification.

Cereal production evolution shows a substantial decrease in barley (50% by the 80’s, 31% recently). Durum wheat and maize production dropped about 7 percent and 4 percent respectively. Inversely soft wheat production increased dramatically (from 11% to 42% over the same period) because of the expansion of the area allocated to this crop and also the launching of an intensification program by the Ministry of Agriculture in 1985 targeting one million ha. A package of incentives backed this objective with adoption of new seed varieties, guaranteed ceiling price for the producers and a marketing margin for the collectors. The result was that the soft wheat area reached 2 million ha.

Analysis of the evolution of imports of main cereals shows that prior to 1996, soft wheat share averaged 83% of total imports, followed by maize (9.6%) and durum wheat (2.3%). After 1996 and despite increasing imports, the soft wheat share fell to 55% in 19962004- and to 40.8% in 20052008-.

Table 1.1 Import shares of the principal cereals in % Product 1980 - 1995 1996 - 2004 2005 - 2008 Soft wheat 82.7 54.9 40.8 Durum wheat 2.3 12.8 14.7 Barley 6.2 12.0 10.8 Maize 9.6 20.3 33.5

According to the Ministry of Agriculture (2000), in 2020, the total demand for cereals is expected to reach 13.7 million tons based on the nutritional needs of 40 million people (Table 1.2).

Impact of High Food Prices on Farmers in the Near East 51 Table 1.2 Present and projected production and consumption of cereals Product Present situation (2000 - 2007) Horizon 2020 Supply Demand Ratio Supply Demand Ratio (ton) (ton) (%) (ton) (ton) (%) Soft wheat 2460 4500 54,7 3160 4510 70,0 Durum wheat 1460 2100 69,7 2500 31200 80,1 Barley 2050 2600 78,8 4500 5000 90,0 Maize 140 1100 12,7 340 1120 30,3 Total 6110 10300 59,3 10500 13750 76,4 Source: Ministère de l’Agriculture; ONICL; Author’s calculation.

Moroccan food policy takes into account “food security” and at the same time the balance of payments constraints. Import substitution policy in general and particularly cereals, has always been of special interest to policy makers up until the 80s (starting period of SAP: Structural Adjustment Program and the signature of Uruguay round agreements).

The Office National Interprofessionnel des Céréales et Légumineuses (ONICL), a central cereal marketing board, is the main body responsible for ensuring adequate grain supply and stable prices throughout the country. The Government has attempted to insulate producers from the effects of subsidized consumer prices by setting floor prices for cereals.

Since 1995 no licence imports of cereals is compulsory. Presently, Moroccan pricing policy pursues three objectives:

- improve production efficiency and preserve cereals producers income; - review consumers subsidies program and fit to the food security constraint; - Revitalize professional relationships between the stakeholders along the cereals channel (Plan Maroc Vert Strategy).

These objectives will continue to be implemented within the framework of the world market and respect the signed agreements.

The main measures related to cereals production concern in particular the price of improved seeds, soft wheat producer prices and securing production (acting on the farming system, encourage the producers to subscribe to risk insurance and improve the training sessions of technicians and farmers).

The marketing season starts around the first week of June each year. The cooperatives and local markets (weekly markets) play an important role for the flour-milling industry and the informal sector. ONICL supervises the marketing process oriented mainly toward the industrial sector.

Presently, the famers can sell their production directly to cooperatives, intermediaries or to the milling industry. For a number of reasons, the official floor price (soft wheat) is rarely, available to framers. First, smaller–scale producers generally cannot meet

52 Impact of High Food Prices on Farmers in the Near East the quality and delivery standards required in order to receive the official price. Even cooperatives apply the same standards. In addition purchasing centers are far from the production site. Since cereals prices are set at the marketing/collection centre and not at the farm gate, it is the farmer who must bear the transportation cost. Internal markets for food legumes and cereals (except soft wheat) are free and unregulated.

The report is organized as follows. The increase in food prices both in world and domestic markets is discussed in the next section, followed by a description of smallholder farming and associated policies in Morocco. Section 4 summarizes the findings from the formal and informal rural appraisals. The report concludes with policy recommendations.

2 The Context of Soaring Food prices

2.1 The magnitude of the food price shock at domestic market level

The food-price shock has had a major impact on inflation. The rise in food prices threatens macroeconomic stability primarily through inflation. The country faced increasing fiscal pressure due to the recent shock. Morocco employs subsidies to address high food prices, but these subsidies deteriorate a country’s fiscal balance. Although food commodity prices have fallen in recent months, they remain higher than when the price shock began and inflation remains a concern. Evolution of prices of main cereals is shown in Table 2.1.

Table 2.1 FOB and local prices of main cereals (prices are expressed in terms of Dh per quintal (100Kg)) Hard wheat Soft wheat Barley Maize

FOB Local FOB Local FOB Local FOB Local 2002 269 309 155 256 123 242 137 221 2003 238 292 148 253 145 177 129 212 2004 219 289 178 256 137 216 145 217 2005 214 279 138 241 143 167 126 218 2006 202 295 147 259 143 249 132 216 2007 255 291 249 249 219 211 190 226 2008 n/a n/a 383 319 210 323 316 2009 493 275 321 248 180 186 178

Monthly prices are not available for time series data. To meet the study objectives we focus on the monthly prices for the main food items of the Moroccan intake in 2007 - 2008.

Regarding the most important cereals in Moroccans’ diet, consumer price increased dramatically as shown in Figures 2.1 and 2.2. The reported statistics show the

Impact of High Food Prices on Farmers in the Near East 53 magnitude of the price hike of the main products over the 2007 - 2008 period. For Durum wheat the change was + 9.8% during 2007 and + 39.8% during 11 months of 2008.

Figure 2.1 Durum wheat price (2007- 2008)

220 210 200 190 180 170 160 15 140 130 120 110

100 Nov Dec Jan Feb Mar April May Jun Jul Aug Sep Oct Nov Dec Jan Feb April May Jun Jul Aug Sep Oct Nov

2006 2007 2008

For soft wheat the prices increased by 10.3% during 2007 and by 22.3% during 11 months of 2008 (Figure 2.2). Vegetable oil prices went up by 14.5% in 2007 and by 41.4% during 11 months of 2008.

Figure 2.2 Soft wheat price evolution during the food price shock

220 210 200 190 180 170 160 15 140 130 120 110

100 Nov Dec Jan Feb Mar April May Jun Jul Aug Sep Oct Nov Dec Jan Feb April May Jun Jul Aug Sep Oct Nov

2006 2007 2008

Some major factors which may explain the increase in prices include: Domestic factors - Cereal production was very low during the crop season 2007 - 2008 (2.5 million tons against 9.2 million tons a year before). - The quantity imported was high (6.2 million tons, 78% more than 2006); World markets - A dramatic increase in food prices in world markets in 2007- 2008. FAO food price index jumped from 139 to 219 between February 2007 and February 2008, which is a 57% increase. - The world market price of wheat doubled within the same period and the

54 Impact of High Food Prices on Farmers in the Near East prices of others cereals increased by about 84.9%. 2.2 Change in input prices at farm level

All farmers underlined negative effects induced by a price hike of fertilizers and animal feed in the cost of production. Some farmers said they will not continue to survive as farmers if their income keeps decreasing. The fact that price of durum wheat, barley and maize are unregulated (free market) doesn’t compensate the price hike of inputs. Small farmers are not well organized to influence market price. The intermediaries set their own price.

At the macro level, the main concern remains the inflation. Food price shock accelerated the rate of inflation and the impact on most of the population was negative. Compared with other countries in the region, the inflation rate was lower but the variation in CPI was much higher compared to previous years, with food prices demonstrating the highest variation (Tables 2.2 and 2.3).

Table 2.2 Inflation in Morocco compared to Egypt and Jordan Countries 2002 2003 2004 2005 2006 2007 2008 Egypt 2.7 4.0 11.7 4.7 7.2 8.6 20.2 Jordan 0.5 2.9 3.9 4.2 7.5 5.7 16.1 Morocco 1.4 1.8 0.5 2.1 3.3 2.0 3.9 Source: IMF

Table 2.3 Variation in CPI in Morocco Year Average variation 2008 1998 - 07 Food 1.6 6.8 Non-food 1.7 1.4 Global 1.7 3.9 Source : HCP

3 Smallholders in Morocco

Agriculture in Morocco is characterized by a dichotomy between traditional and modern (market oriented) sectors. The traditional sector consists of small farms, located in rain fed areas involved mainly in cereal, legume and livestock production. The modern sector operates mostly in irrigated areas. The last agricultural census indicates that 70% of farms are small in size (under 5 ha) and account for about 24% of total land under cultivation (Table 3.1). Farms under 20 ha in size account for 95% of the farms. The average size of farm is 5.7 ha. The average number of plots per farm is around 6.9.

These data hide a severe inequality between regions and land quality. Our survey (Section 4) takes this bias into account.

Impact of High Food Prices on Farmers in the Near East 55 Table 3.1 Farm size profile Farm size Number of farms Percent of total Less than 5ha 1 100 000 71 2050-ha 60 000 4 50 - 100 11 000 0.7 Over 100ha 3 200 0.3 Total number of farms is 1.2 million, 20% are located in irrigated areas

Table 3.2 indicates that 85% of cropland is privately owned. However, many farmers do not have clear title to the land that they use. The vast majority of rangeland, on the other hand, is held collectively. The use of this land suffers from all of the familiar problems associated with common property ownership. Recently the land under collective ownership has been decreasing, as rural inhabitants scramble to gain private ownership of the higher potential lands by sowing cereals. The government has attempted to address this problem, but with limited success.

Table 3.2 Land tenure Land ownership Percentage Private 85% Common 13.6% Sharecropping/cooperatives 1.7% Corporate tenancy 0.02% Source : Ministère de l’Agriculture et Pèche Maritime

4 Farmers Response to Price Changes: Outcome of Survey Questionnaires

4.1 Main characteristics of the population surveyed

Our survey targeted three cereal producing areas representing favourable (Saïs region), intermediate (Chaouia) and unfavourable (Abda) production conditions. A total of 133 farmers were surveyed in the three regions (45 in Abda and Saïs and 43 in Chaouia).

The three regions retained for the survey are the major providers of cereal in Morocco. They are located in different geographical areas (from a dry to less dry climate) and practice different agriculture production methods based on the land’s physical characteristics and property ownership.

Rural family size in Morocco is still quite large, mainly because people are conservative and farming is labour demanding. The structure of family size is similar in the 3 regions (almost 50% of households have more than 6 persons). Larger families are actually composed of a father and a set of married sons and daughters but living under the same roof. Despite the progress made in mechanization of

56 Impact of High Food Prices on Farmers in the Near East cereals production, much of the agricultural labor is provided by farmers and their family working their own land or land that they rent or sharecrop. Traditionally, the peak demand period for workers occurs at cereal planting (October-November) and at the cereal harvest (May-June). However the high cost of seasonal labour has encouraged a trend towards greater mechanization of agriculture.

During the identification phase of the survey, we aimed to deal with farmers whose main occupation is agriculture. This explains the high rate of more than 80% of farmers surveyed earning a living from farming activity. Nevertheless, it is not uncommon to meet among larger farmers those who have different sources of income and the landless who’s main income is off farm. Smaller-size farmers are not highly involved in cooperatives and unions. Only 35% of respondents are a member of an association, particularly cooperatives.

Most of micro-size farms are not involved in the market activities and are not sensitive to the prices change. Therefore the study focused on medium-size farmers. Actually, the designation of medium and large is controversial. Indeed there is no common comparison between a farm of 5 ha under intensive farming and a farm of 40 ha in extensive farming area. In terms of income 5 ha in irrigated land is twice as beneficial than 50 ha in dry area. Given the farmer’s principal occupation and the extensive farming system, most of the farmers rent additional land. The availability of family workers and the combination of cropping system and livestock justify the important use of rented and sharecropped land. Almost 60% of farmers surveyed own less than 10 ha, and 64% rent or are involved in sharecropping.

4.2 Source and use of income

Crop production and livestock are the main sources of income. Most livestock production takes place in small and medium-sized farms, generally in conjunction with cropping activities. Livestock production is particularly important for low income producers. Farmers with less than 10 ha own almost 75% of the country’s cattle. It has been argued that Moroccan agriculturalists are primarily livestock farmers raising cereals, rather than cereal farmers raising livestock. Indeed, the interrelationship between cereal production and livestock is vital to understand the Moroccan farming system. Livestock provides a means of investing wealth, for converting to cash in emergencies, for special events and to meet farmers’ attempts to stabilize family income over time and reduce the risks of agricultural production.

Figure 4.1 Income sources (in %) for 2008/ 09

2 6 1 46 Crop production

43 Animal raising

Casual labor in farming

Off-farm engagement Remittances

Impact of High Food Prices on Farmers in the Near East 57 Crop production and livestock contribute almost the same share to farmers’ income. Off-farm income is still minor as well as remittances (Figure 4.1).

With regard to income allocation, 55% of households spend more than 51% of their income on processed food (vegetable oil, sugar, tea, coffee, etc). Nevertheless, the Moroccan rural population is still well nourished. The problem is that price increase of processed food is often higher than on-farm produced food.

4.3 Effect of price increase

When asked about the unexpected price increase of the main cereals over the period of March to June 2008, 80% of the farmers felt a noticeable change in prices of cereals. However, they claim that they didn’t take advantage of it because of the severe drought in their respective regions. Households, especially poor ones, cannot quickly alter and reduce their food consumption in response to high prices. Instead, they must make sacrifices in other areas of their budgets. 75% ofthe answers referred to year 2007- 08 (mainly May-June 2008) and attribute the change to the disequilibrium between supply and demand in local markets (supply shrunk because of the drought and demand stayed the same). The deficit has not been compensated for by imports because of high prices in the world market.

4.4 Farmers behaviour under sustained high prices

Most of the farmers expressed willingness to adapt their farming system to the changing market prices (74% are in favour of expanding the area of some crops, soft and hard wheat will be the crops that will benefit from such increase. Moreover, 80% will increase this area by more than 25%; 60% of farmers announce that land is not a constraint, they can rent as much as they need). Nevertheless, they claim that they cannot quickly increase production in response to high prices due to the seasonal time-cycle of agricultural production and the slow development of agricultural technologies. Most of the farmers surveyed reported that the global productivity growth rates for major cereals are slowing; this is partly because public support for agricultural research has decreased since the 90s. Unless this trend is reversed, commodity markets will remain thin and the likelihood of food-price shocks will increase.

Seeds, fertilizers, pesticides are free market commodities, and 50% of farmers declare having ease in accessing the market for inputs and can afford to buy them. Seasonal credit contract is possible only if the farmers cleared their previous debt toward CRCA. But if there is any arrangement to cope with the new context, farmers are willing to get involved. Even under the condition of expanding acreage, 71% of farmers declared as having that input available and that access wouldn’t be a problem.

58 Impact of High Food Prices on Farmers in the Near East 4.5 Impact on the livelihood of small farmers

Over 90% of the surveyed farmers felt the burden of the food price increase. Nevertheless, the reaction differs from one category of farmers to another. The poorest and large family sizes with young children claim that they cannot reduce their budget allocated for food commodities. Only 30% of farmers declared that they cut out some of the basic expenditure items, 36% switched to bad quality items and 30% reduced the quantity consumed of the same quality items. The absence of safety nets specific to the poor worsens the situation of small farmers. However livestock (self safety net) still remains as means to avoid a complete starvation. But the problem of selling their cattle is that it could destroy the basis for the new cycle of production, compromising the future season. We should notice however that there is some bias in the present declaration, which is exceptionally pessimistic. Indeed farmers are under the shock of successive dry years (20062007- and 2007- 2008).

Less than 30% of the farmers invested during the last 3 years. This is mainly due to drought but also because credit is not accessible to the farmers who delayed the reimbursement of the previous amounts. Most farmers cannot contract new credit because of mortgage procedures (land is not titled).

5 Outcomes of Focus Group Discussions

5.1 Inventory of common problems rose during the focus groups discussion

The small producers surveyed raised a set of concerns related to their main activity as farmers. Most of them complained about the damaging consequences of the persistent drought. When asked about their strategies to face this situation they mentioned water conservation, use of drought-resistant varieties, diversify farming systems, food storage, use of livestock, and development of off-farm sources of income. Livestock (mainly sheep) play an important role in drought risk reduction; although farmers often complained about having to sell their livestock in difficult times when prices are lower. Nevertheless they expressed optimism about the ongoing crop season even if they are suspicious about the market price level.

In response to the persistent problems of drought in Morocco, the government has established a National Drought Observatory. Its objectives are: a) to create an early warning system permitting the launching of an emergency program to ease the short-term effects of drought; and b) to improve decision-making tools in the medium to longer-term that integrate drought risks into economic planning.

The lack of access to financial services also seems to create problems for farmers dealing with drought. In good years, farmers tend to store their grain surplus by feeding it to livestock. Grain storage is highly risky due to the potential for vermin

Impact of High Food Prices on Farmers in the Near East 59 infestation, but feeding surplus grain to livestock is also a risky approach to savings.

In drought years, livestock and thus savings are threatened by the absence of drinking water. When farmers are in need of cash, they are often forced to sell livestock when prices are low.

Alternative financial savings mechanisms appear to be unavailable or undesirable. In particular, banking services are not easily accessible to farmers who live in remote areas or who may be poorly educated or illiterate. These facts suggest that the introduction of micro-financial services in rural areas could complement insurance schemes to help rural inhabitants manage their drought-related risk.

5.2 Focus group : Abda region

The average yields in the region of Abda are about 25 qx/ha for soft wheat and 22 qx/ha for durum wheat. These are record yields from the 3 previous years (drought years). However, from the viewpoint of an agronomist, the yields remain low. Indeed, with rainfall of 583mm, well distributed along the cycle, performance should exceed 50 qx/ha (see rainfall).

Current prices (May 2009) are lower than last year>s in the same period. The price fixed by the State is 270 Dh/quintal. This price reduction is most likely due to the poor quality grain. At the weekly market (Souk), the price of wheat ranges from 230 to 250 Dh/quintal and durum wheat ranges from 220 to 230 Dh/ha. Usually the price of durum wheat is always higher than that of soft wheat. This is mainly due to the fact that durum wheat was more sensitive than soft wheat and more prone to attacks by rust and septoria. In addition, farmers are forced to sell at low prices at the Souk in order to repay debts and face costs of harvest.

5.3 Focus group : Chaouia and Saïs regions

Morocco has experienced several years of drought since the early 80s. The recurring droughts have had a dramatic impact both on agricultural production, and livestock. The scarcity of food concentrates and their high prices, as well as the low productivity of rangelands has reduced income related to livestock. The drought has discouraged farmers from investing in agriculture in general and in cereals in particular.

Relevance of the determination by the state of the reference price for soft wheat

Each year, at the approach of harvest time for cereals, the Moroccan Ministry of Agriculture sets the reference price for wheat. The reference price in 20082009- was 270 Dh/quintal. However, we have learned from discussions with farmers that SCAM (the public institution charged by the state to buy soft wheat from farmers) buys a quintal of wheat from farmers at a price of 235 Dh/quintal only, while traders buy at the Souk (local market) at an even lower price, varying between 210 and

60 Impact of High Food Prices on Farmers in the Near East 220 Dh/quintal.

Farmers who cannot sell their crops to SCAM and couldn’t wait for the price to increase in autumn (before the planting period), usually sell their harvest to individuals in the Souks at the price mentioned above. Increase in input prices and their impacts on the income from grain production

Farmers reported increases in input prices as well as expenses related to labor, which was due to nonavailability of hand labor during peak periods. We also found the reduction of cultivated areas in food legumes. This reduction was caused by the damage caused by Orobanche sp., and the rising price of labor and its low availability.

Increases in inputs prices are linked to two successive years of drought in 2006- 2007 and 2007 - 2008, and to rising prices for grains and inputs on the international market. According to our own investigations and discussions in the Focus Groups, expenses for a hectare of soft and hard wheat ranges from a minimum of 2700 and 6000 Dh. These expenses correspond to intensive management with the use of certified seed, the practice of both early and late weeding against broadleaf and grass weeds, and the use of two applications of fungicides. The monetary burden for the conduct of one hectare of barley varied between 1700 and 2200 Dh/ha.

The attitude adopted by the farmers to cope with climate hazards differs from one region to another, and from one farm to another. Some farmers minimize investment in cereals to minimize losses and reduce debt, while others optimize the crop management with the risk of sacrificing their standard of living by reducing levels of consumption and the quality of products consumed. In addition, many farmers prefer to take loans from neighbors or family members, than to use the Credit Agricole services (state owned agricultural bank).

Under conditions of drought, livestock has contributed to the survival of farms. Despite the recent tendency of rising prices of livestock, farmers have seen their profit margins reduced because of the scarcity of food, rising commodity prices, and the reduced productivity of rangeland and non tilled fallow because of low rainfall and its poor intrannual distribution. According to farmers, the sale price of animals also has its share of ups and downs. While the feedlot operation allowed farmers to make a significant profit margin, many farmers prefer to sell the calves born on the farm because the cost of fattening operations may exceed the 6000 Dh level per calf.

Following the price increases of animal feed for example, the price of a kilogram of dry beet pulp doubled during the year 2008 - 2009 from 2.00 Dh the year before. The selling of a kilogram of silage increased from 1.00 Dh to 1.50 Dh. This increase in the price of corn silage was related to drought and scarcity of irrigation water. The low rainfall forced farmers to make 13 irrigations. The increase of the price of butane, which is used as a source of energy for pumping irrigation water, had caused an increase in the cost of fodder unit (FU).

Impact of High Food Prices on Farmers in the Near East 61 The dairy sector, which was a source of guaranteed income for the mixed farms, also faced difficulties for the same reasons, namely the rising cost of feed concentrates and roughage in dry years. The price of a liter of milk, currently set by the factories processing milk at 2.70 DH is no longer attractive. The consequences of increases in prices of inputs and livestock feed on the income level of farmers

Cereal producers face several challenges. In addition to the adverse effects of droughts, which have become a structural feature of the climate in Morocco, we are witnessing an unprecedented increase in prices of inputs and labor, and lower grain prices at harvest time. Knowing that the majority of farmers are indebted, they do not expect higher prices to sell their crops. There are traders who have liquidity and a place for storage, and benefit from increased production during the rainy years, during which the levels of cereal yields are relatively higher compared to dry years.

In parallel with the reduction in income levels of farmers following the substantial increases in input prices, there was an increase in prices of various foodstuffs. These increases have had a negative impact on levels of consumption of different foods, both quantitative and qualitative. According to some farmers, some products are no longer purchased.

Future prospects

The trend towards the liberalization of grain prices in Morocco, dictated by the donors, in an international context of massive subsidies, particularly in Europe and North America, is a strategic mistake. We have shown that the income generated by cereals and livestock is shrinking more and more. While input prices continue their ascension, sales prices are changing in a sawtooth pattern, with decreases during harvest time and increases at the time of planting. This benefits mostly the intermediaries.

We have two opportunities to reverse this trend: (i) better training for farmers on a technical level, to help them improve efficiency levels, and thus improving profit margins; (ii) further strengthening subsidies, for both inputs prices, and the sales prices of cereals.

6 Conclusions and recommendations

For many commodities (wheat, sugar, dairy products, maize, soybeans), Morocco will continue to depend on imports even during years when rain is plentiful. In contrast, for other commodities (feed, pulses, dairy cattle), the import market will fluctuate dramatically, depending on rainfall. The lack of clear agricultural policy, the prevalence of small farms, complicated inherited land status, and the increasing land prices pose serious challenges to agricultural policy makers. Policy makers struggle with the conflicting underlying principles of economies of scale, capitalization requirements necessary to modernize the agriculture sector,

62 Impact of High Food Prices on Farmers in the Near East the desire to alleviate poverty, and maintain the social structure of the traditional rural society. Agriculture suffers from the lack of public investment in research and development, marketing infrastructure, weak institutional capacity lacking an effective extension service to transfer suitable technologies to small holders, lack of market information, and weak farmer organization in most sectors. A new Minister of agriculture was appointed in late 2007, and it appears that he has a mandate to revitalize Moroccan agriculture. Over the course of the year we would expect new measures to encourage investment, both foreign and domestic.

Price changes were unexpected and erratic for outputs, as well as inputs. With respect to inputs, liberalization of input markets, accentuated by a sharp oil price increase, was interpreted as a green light for generalized price increase. Input distributors took advantage of such circumstances (monopoly situation), to increase the prices, particularly during the last two years, and at the beginning of the current agricultural year. With respect to output, prices changed at least for two reasons: disequilibrium between demand and supply (dry years) at domestic level, and the world market price. This price increase didn’t profit farmers as a result of very low production during this period.

Farmers suffered twice from price hikes. On one side they paid higher prices for processed food, such as flour, vegetable oil, sugar, coffee, etc. Also, because of poor harvest, they didn’t take advantage of high market price. Morocco employs subsidies to address high food prices, but these subsidies deteriorate a country’s fiscal balance. Although food commodity prices have fallen in recent months, they remain higher than when the price shock began and inflation remains a concern. Nevertheless, because of the complex system of price regulation, there is no direct relationship between world price and farm gate price. The government sets an official price for soft wheat and uses taxes to adjust for local price. This policy aims to protect local producers and consumers.

Almost all the surveyed farmers felt the burden of food price increase and found themselves worse off. Nevertheless, the reaction differs from one category of farmers to another. The poorest and large family sizes, with young children, claim that they cannot reduce their budget allocated for food commodities. The absence of safety nets specific to the poor worsens the situation of small farmers. However, livestock (self safety net) is still a means to avoid complete starvation, but the problem of selling their cattle could destroy the basis for the new cycle of production compromising the future season.

Most of the surveyed farmers expressed willingness to adapt their farming system to the changing market prices. Soft and hard wheat will be the crops that will benefit from such increases. Nevertheless they claim that they cannot quickly ramp up production in response to high prices, due to the seasonal time-cycle of agricultural production and the slow development of agricultural technologies.

Based only on expectations and lessons from the previous years, farmers reacted positively to soft wheat production. The main reason is soft wheat is easily marketable

Impact of High Food Prices on Farmers in the Near East 63 (milling industry), the price is guaranteed by the Government, and the available research efforts benefit this cereal (productivity and adaptation to severe drought is better than hard wheat and barley).

Soft wheat policy aiming to encourage the expansion of acreages will likely continue to affect the farming system in the future. The reason is that government pursues food security objectives. With regards to durum wheat, it is closely linked to consumption habits in rural areas. The acreage allocated to durum wheat wouldn’t change because of inelastic demand (own consumption purpose). The situation will be different when it comes to large size farms, which are market oriented, the acreage of durum wheat will increase because of profitable price. Any increase in world price will necessarily affect the local price through a regulation system. The increase of wheat acreages would be at the expense of fallow and food legumes. Our recommendations for strengthening the future stability of the Moroccan farming sector include:

1. Strengthening safety nets, mainly during severe periods of drought to maintain poverty at acceptable level. 2. Enhancing rural livelihood through increased investment in education and development; to encourage improved technology and rational farming system adoption. 3. Reducing vulnerability by improving the supply chain efficiency and launching a comprehensive policy of risk insurance knowing that drought cycle became very short. 4. Identify potential investments that can increase productivity and profitability and suitable for land and water resources. 5. Acting on institutions that introduce confidence, transparency and legality into the market of land.

64 Impact of High Food Prices on Farmers in the Near East Sudan

Views expressed in this paper are solely those of the author and do not reflect the views of the Food and Agriculture Organization of the United Nations

This paper has been revised and condensed from its original form

Impact of High Food Prices on Farmers in the Near East 65 Executive Summary

The objective of this study is to determine the nature of food price changes, in terms of magnitude and transmission, and to understand its impact on farming communities in the Sudan, in order to better determine the farmers> supply response and changes in their livelihoods. Formal field surveys were conducted in four locations, namely Gezira Scheme, Rahad Scheme, White Nile, and Northern region, focusing mainly on wheat producers. A sample of 50 farmers were selected and interviewed in each location, using a structured questionnaire prepared by the FAO Regional Office of the Near East, Policy Division (RNEP).

Agriculture in Sudan, which used to be the mainstay of the economy by contributing more than 40% of GDP, has lost some ground with a drop of its GDP share to 33% in 2007. However, agriculture including livestock and forestry, provides employment for more than 70% of Sudan>s population (DTIS, 2008). The contribution of agriculture to the country’s exports fell to about 3% in 2007, down from an average of 74% in the period 19961998- (Hamid et al. forthcoming, 2009).

The study characterizes the local supply and demand of the main cereals produced and consumed in Sudan, namely wheat, sorghum, and millet, focusing on the last ten years. The study then analyzes the retail local prices of wheat, sorghum and millet, focusing on the last three years. Secondary data were obtained mainly from official sources including the Planning and Agricultural Economics Administration of the Ministry of Agriculture and Forests, the Central Bureau of Statistics (CBS), annual reports of the Central bank of Sudan (CBoS), and the Ministry of Finance and National Economy.

The final recommendations for improving the condition of the agricultural sectors mainly revolve around government encouraged investments, added social safety nets, and sector protection through export restrictions, price controls, and price supports.

1 Introduction

The general purpose of this technical background document is to discuss the causes and the impacts of price hikes on small farmers in the Sudan. A structured questionnaire was designed to collect the required data. Four growing wheat areas were selected to represent four regions; namely, the Northern, Central, Eastern, and Western regions. Two pairs of regions represent either the private pump schemes, or the public irrigated schemes. The first pair is represented by Doungula in Northern Sudan, and Kosti in Western Sudan. The second pair is represented by the Gezira scheme in Central Sudan and the Rahad scheme in Central and Eastern Sudan. Approximately 50 respondents were selected from each location and directly interviewed.

The agricultural sector comprises three main production systems. It is dominated

66 Impact of High Food Prices on Farmers in the Near East in terms of area and labour size by private small-scale farms. The small scale farms in the traditional farming areas, averaging about 10 hectares, also have access to considerable communal grazing areas which support extensive livestock production. These grazing areas are also used by nomads who use the rangelands and crop residues on a seasonal basis. This combined agricultural and pastoral production system is referred to as traditional rainfed farming. In central Sudan, in Gedaref and Kassala toward the east and south to Damazin, large-scale semi-mechanized rainfed farming is practiced and millions of feddans are annually cultivated. In this farming system, crops such as sorghum and sesame are produced using mechanization for ploughing and seeding, and manual labour for activities such as weeding and harvesting. The semi-mechanized farming system does not include livestock production. It accounts for about 6 percent of GDP from agriculture, but is declining because of low yields resulting from unsustainable land management and fluctuating government policy incentives to producers (DITS, 2008). Thirdly, there are the irrigated farming systems along the Nile which are dominated by the large irrigation schemes (Gezira, Rahad, and New Half) and are closely operated and managed by the public sector. It is estimated that in total there are about 4 million feddans (1.68 million hectares) of irrigated land in Northern Sudan, which account for about 21 percent of GDP from agriculture (DITS, 2008). There are small irrigation systems in Southern Sudan, but they are insignificant compared to those in the North. The main crops grown in the irrigated sub-sector are cotton, sugarcane, sorghum, groundnuts, wheat, legumes, fruits, vegetables and fodder. It accommodates 100% of the wheat and sugar production, about 95% of cotton, 32% of groundnuts and 36% of sorghum production.

This paper will start by examining the national level impacts within the context of soaring food prices. This is followed by examining farmers perceived impacts at the household level, using the informal and formal surveys prepared. Finally, a list of recommendations based on the data examined will be provided in hopes of better directing government efforts in improving the agricultural sector.

2 The Context of Soaring Food Prices

The factors behind agricultural price increases are interrelated. The demand for cereals for the bio-fuel industry is considered one of the main factors causing food price instability, which is linked to the world oil price. World food prices have risen since the early 2000s, reaching the highest peak in 2008. Prices of some of the cereal commodities in the international market have more than doubled, and sometimes tripled. The food price index in Sudan seems to share the same increasing trend as the world price index. This also suggests the existence of significant local causes of the food price surge in Sudan, which can be devastating, causing severe hardship and suffering for people who are already affected by hunger. Soaring food prices will definitely have a wide and substantial impact on the food security situation of households and individuals around the country.

Urban populations are more exposed to rising food prices than rural ones, for two

Impact of High Food Prices on Farmers in the Near East 67 reasons. First, urban populations are more likely to consume staple foods derived from tradable commodities (wheat), while rural populations tend to consume more traditional staples (sorghum); second, urban populations are less likely to produce a significant share of their own food or produce for sale. The impact of soaring food prices on households depends crucially on their income level. Low-income households that spend a large proportion of their income on tradable staples, for which prices increase substantially, are likely to be the ones whose overall welfare is worst affected. Households that gain a large proportion of their income from the production and sale of those goods will on the contrary be positively affected if producer prices are remunerative, relative to production costs (some of which, such as fuels, seeds and fertilizers, have also substantially increased).

2.1 Domestic prices

Sorghum, millet and wheat are the major staple foods in Sudan. They are produced in the country and their production is primarily consumed domestically. Total cereal production in Sudan fluctuates annually depending on cropped area and productivity. Total cereal production in the country has ranged between 3 to over six million tons over the last ten years. Sorghum is the staple cereal which is produced as a food crop in the traditional farming system, the irrigated system and as a cash crop in the semi-mechanized rain-fed sector. Sorghum accounted for about 77% of total cereal produced in the country in 2008 / 2009. Its production fluctuates annually with a coefficient of variation of about 27% in the period 1999– 2000/ 2009/2008, but it is undergoing an increasing trend of about 193 thousand tons annually during the same period. Exports of sorghum have been quite variable in amount and often subject to restrictions caused by policies that have had a priority of ensuring its domestic availability (FAO, 2008). Exports of sorghum was 321,121 tons in 1999 but was only 2,601 tons in 2006. Domestic production of wheat is low, accounting for only about 12% of total cereals in 20082009/ and its production is variable with high coefficient of variation (38%) during the last ten years. However, its production exhibits an increasing trend of about 49 tons annually. Demand for wheat has increased considerably and often domestic production falls short of meeting local consumption. Sudan is a net importer of wheat and imports have been escalating, reaching about 1.5 million tons in 2006 compared to about 0.4 million tons in 1999. The value of wheat imports amount to US $1,003.5 million in 2008.

Since 2006, the nominal price of wheat in Sudan has risen 70% to 134%, in 2008. The rise in sorghum price during the same period was higher, estimated at 158%. In general, local price of wheat was higher than that of sorghum during 2008. The domestic market for wheat and sorghum is highly integrated, with a correlation coefficient of domestic wheat and sorghum prices in 2008 of about 81% (author’s calculation from price data). Domestic wheat prices were lower than world market prices, and followed an increasing trend during 2007 and the first half of 2008. However, local wheat prices jumped in July 2008 and exceeded world market prices by about 44%; reaching a maximum in August, before it started to drop. It still remained well above world market prices till the end of 2008 (Figure 2.1).

68 Impact of High Food Prices on Farmers in the Near East Analysis of the price data showed a weak association between average wholesale domestic wheat prices, and world market prices, during the period January 2007 and December 2008. This suggests that there are local causes for the price surge, in addition to the factors that affect the international market for agricultural commodities.

Figure 2.1 World market and wholesale domestic price of wheat

800 700 600 500 400 300 Price (Us$/ton) 200 100 0

J- 07 M- 07 J- 07 S- 07 J- 08 S- 08 M- 07 N- 07 J- 08 M- 08 M- 08 N- 08

USwheat Canadawheat Local

The average local price of sorghum was generally higher than the world market price, and followed an increasing trend during 2007 – 2008. Figure 2.2 shows that the domestic sorghum price averaged above world market prices, during 2007 and the first half of 2008. However, it largely increased by about 28% in July 2008, reaching a maximum in September 2008, before it started to decline.

Figure 2.2 World and domestic wholesale price of sorghum

800 700 600 500 400 300 Price (Us$/ton) 200 100 0

J- 07 M- 07 J- 07 S- 07 J- 08 S- 08 M- 07 N- 07 J- 08 M- 08 M- 08 N- 08

World Local

2.2 Government intervention - macroeconomic and sectoral policies

Price changes over 2007 and 2008 were clearly influenced by combination of factors which include domestic macroeconomic and sectoral policies, and external

Impact of High Food Prices on Farmers in the Near East 69 factors. However, some macroeconomic factors favoured stabilization of prices. Monthly exchange rates have been fairly stable during 2007 and the first half of 2008, ranging between 2.005 to 2.058 Sudanese pounds (SDG) to the US$. There was a slight increase in average monthly exchange rate towards the end of 2008, when it rose to about 2.21 in November. In general, the average annual exchange rate slightly increased by about 4% in 2008, compared to 2007 (Bank of Sudan, 2009).

On the other hand, general inflation increased from 7.4% in 2006 to 8.1% in 2007, and rose further in 2008. It reached a peak of 21.8% in August, but gradually declined to 14.9% in December. Yet, the average inflation for 2008 (14.3) was higher than 2007, by about 77%. This corresponded with the general rise in prices, especially those of cereals which adversely affected consumers, particularly low income groups of the population.

Sudan's foreign trade policy is generally associated with a high import tariff. The tariff rates that average at 20.2% are among the highest in the world and considerably higher than most countries in Africa and the Middle East (DTIS, 2008). Further, custom duties include value added tax was set at 10% for all imported food commodities in 2003, increased to 12% in 2007, and to 15% in 2008. However, sorghum tariff rates are relatively low (10%), wheat tariffs have been set at only 3% since 2003, and both rice and lentils are exempted from custom duties (DTIS, 2008). There are 11 Commodity Export Organization Councils under the Ministry of Foreign Trade (MFT), of which one is dedicated to sorghum. The objectives of the councils are export promotion, setting regulations and procedures that regulate commodity exports, and supervision of price movement in internal markets to achieve price stabilization. However, these councils are faced by many constraints and it is not clear whether they have any effect on either export or domestic prices (FAO, 2008), (though it was observed that domestic prices of sorghum were affected by sorghum export policies). The MFT plays an important role in export licensing for sorghum in connection with the Ministry of Finance and National Economy, and its affiliate, the Strategic Reserve Corporation (SRC), and the Agricultural Bank of Sudan. There were indications that the internal sorghum prices rise when its export is allowed and decrease when its export is restricted.

Agricultural finance has important influence on domestic supply, and hence on domestic prices of agricultural products. Financial sector spending on agriculture has increased largely in nominal terms, rising by 3.6 times in the first half of 2008, from its 2005 level (FAO, 2008). However, its share in total finance to several economic sectors remained low, ranging from 8.1% to 9.7%, during 20062008- (FAO, 2008). Despite its lower share, larger allocations in the later years should have increased crop production. The Agricultural Bank of Sudan also increased its financing in 2008, by 42% more than its 2007 level (FAO, 2008). The Agricultural Revival Program 20072011-, which was launched to improve performance of the agricultural sector, is supposed to provide support in boosting agricultural production, which in turn would affect increases in food prices. It was estimated that only about 17% of the budgeted support to the Agricultural Revival Program in 2007 was allocated by the

70 Impact of High Food Prices on Farmers in the Near East Ministry of Finance, but support was expected to be higher in 2008 (FAO, 2008). On the other hand, the Central Bank of Sudan established a Microfinance Unit as a mechanism of reducing poverty, and set policies which encouraged commercial banks to allocate at least 12% of their finance portfolio to microfinance.

3 Results of the Farm Surveys

3.1 Demographic and socioeconomic characteristics of farmers

All respondents were male with a family size ranging from 1 to 24, with an average of 8.2 persons. Their age ranged from 20 and 90 years, with an average of 48.9 years. About 13% of the respondents are landless, while 87% of them have land with a variable size, ranging from 2 to 80 acres, with an average of 14.1 acres. About 24.5% of the respondents rent land for farming. Sorghum and wheat represent the main stable food commodities in Sudan. Wheat area ranged from 0.5 to 20 acres, with an average of 4 acres per farmer, while sorghum area ranged from 1 to 25 acres with an average of 4.7 acres. The majority of the farmers (72.5%) do not participate in any associations. Only 24% of the respondents participated in farmers’ associations, 1% in traders’ associations, and 2.5% have membership in other associations. Farming is the main occupation for 83.5% of the respondents. The other 16.5% occupations include government employee (8%), labourer (5%), and traders (6%). The farming system is mainly irrigated crop production (97%), while the rain-fed crop production is adopted by only 3% of the respondents. The herd size reached about 50 animals, and the herd composition is mostly goat (37%), cattle (27%), and sheep (21%). About 92.5% noticed and felt the consequences of price increases, of which 60% noticed it more than two years ago, 19% noticed it a “long time ago”, and 13% noticed this increase only during the last year. Low income populations mitigate the effect of soaring food prices by shifting their consumption towards less expensive food. About 92.5% of them cited that the change in prices led to reduction of the quantity and quality of food consumption, as well as income. In this respect, the respondents cited that the average percentage of crop production in income during the last three years ranges between 10100%-, with an average of 71.9%, however the percentage of crop production in income has been subjected to reduction, despite the escalated prices. This case also applies for animal production. Off-farm income and remittances remain the same over the last three years, while the labour wages increased from 27% to 31.5%, over the same period. About 56% of the respondents spent about 51 - 75% of their income on food, while 30.5% of them spent 75 - 100%, and about 11% spent 25 - 50% of their income on food. About 79.5% of them cited that this percentage has been subjected to changes over the last three years. For about 46% of the families the farm covers about 50 - 75% of their cereal consumption, for 31.5% of families 76 - 100% and for 13.5 of the families, 25 - 50%. This ratio has been subject to changes over the last two years. About 77% of the respondents intend to expand the cultivated area in the near future for the following reasons; to secure food for their families (40%); to increase their profit as a result of high prices (27%); for better marketing and

Impact of High Food Prices on Farmers in the Near East 71 trade arrangement associated with the crop that makes it stable; and availability of production inputs and support from the authority. Crops which farmers intend to expand on include sorghum (29%), wheat (29%), legume (11%), vegetables (5%) and other crops. About 42.5% of the respondents cited that areas of certain crops have really increased, such as sorghum, wheat, legume and vegetables (especially onion). Those who do not intend to increase crop area attributed that decision to low prices or drop in prices and profit, high variability in prices and no production support. However, if the prices remained as high as the first half of this year, that would be convincing for 88.5% of the farmers to expand the production of sorghum (59.5%), wheat (20%), legumes (18%) and vegetables (2%) as first crops. In the medium term, production patterns will also reflect the movement of relative prices, with an apparent shift to more profitable crops. However that will depend on the access to land and other resources needed. Of the total 54% farmers stated that the crop area will increase by 2550%-, if the prices remain high. About 29% of the respondents cited that they have easy and affordable access to needed inputs especially fertilizers. About 21% of them cited that they will have the same access to inputs when they plan to increase the cultivated areas. However, more than 54% are afraid of accessibility to important inputs, if they plan to expand the area in the future, because they are afraid of delays in delivery of inputs, lack of funds and lack of right inputs. About 95.5% acknowledge the increase in the cost of these inputs. About 54% of them felt the sharp increase in input prices during the last season, 36.5% felt it earlier than that, and 5% of them felt it only this season.

3.2 Marketing of produce

The main selling market for cereal is the rural market, as cited by 79% of the respondents, followed by the central market (17%), and at the farm (2.5%). The reasons for selling in this particular market are easy access (60%), better price and profit (18.5%), or a combination of these factors. The main source of information about prices is the market, as cited by 94.5%, while the extension agents and the farmers' union have a very minor role in disseminating information regarding prices. Early prices are important for the selection of crops, and for determining areas devoted to different crops. During the last three years, about 94.5% of the respondents sell the bulk of their produce to traders in open markets. About 64% of them sell their produce at lower prices than the market maturation. Crops sold at lower prices include sorghum (34.5%), wheat (23%) and legumes (20%). The first crops which experienced the highest price decline are wheat (52%) and sorghum (26%); while legumes and vegetables, were considered as the second crops to experience decline in prices. About 42.5% of the respondents feel that the decline in crop prices was faster than the increase, while 18% of them felt it be slower.

3.3 Awareness about agricultural finance

About 62% of the respondents are aware of the different sources of agricultural finance, however only 35% of them dealt with these sources during the last three years. About 23.5% of them cited that their borrowed capital is subsidized. About

72 Impact of High Food Prices on Farmers in the Near East 66.5% cited that government taxes increased, 18% of them cited that it decreased, while 15% cited that it remained constant in the recent period. Most of the farmers (86%) depend on their own financing. However, 64% of them resort to formal credit to finance their agricultural production. About 32% of the respondents cited that the prices of various inputs are subsidized. In this respect, subsidies on seeds and fertilizer ranged between 1020%-, with an average of 15%, and fuel is subsidized by 40%.

3.4 Livestock

About 56% of the respondents own livestock, and claimed that the prices of the livestock had also increased in the recent years. For those who noticed the increased prices of livestock, 41% of them cited that the increase in livestock prices was faster than that of cereals. About 38.5% of the respondents admit that profits from livestock have improved over the last three years. Such change has many implications that induce livestock production, as cited by 89% of the respondents.

4 Farmer responses to Soaring Food Prices

Regarding the prices of the consumption items, about 63% of respondents admit that the increase in the consumption items is high, while 25% consider it as normal. Respondents behave differently towards the increasing prices of the consumption items. About 38% of them consume less of the same item, 19% consume the same but of poorer quality, and 10% cut out some basic expenditure items. Only 21% of the respondents cited that there are government or other social mechanisms, to support people; 10% of them have been involved in these social support programs, of which 8% received subsidies to inputs of production such as seeds, fertilizers, fuel and received support for school and medical costs. Sorghum is also the main food crop in the irrigated area of central Sudan. Its area has experienced greater expansion during the last few years, at the expense of cotton and groundnut. However in the irrigated areas of the Northern Sudan, farmers cultivate mainly wheat, followed by legumes, fruits, vegetables, forage and finally sorghum. The agricultural production in the traditional rain-fed sub-sector is very sensitive to the quantity and distribution of the rain fall. Principal crop grown in this area is sorghum. This is coupled with sesame and millet in Eastern and Western Sudan. Farmers grew traditional varieties, and operated with simple traditional technology, from land preparation to harvest. This is not sufficient to enable farmers and their families to maintain a reasonable standard of living. Productivity is generally low, which implies uneconomical use of land resources.

As most farmers in the traditional sector are small and their investment ability is poor, the credit component is very important. The desire for cash to finance the cultural operations and/or to meet other needs, drives farmers to seek financial support from all possible sources. Lending to small producers has been limited by collateral and the associated risk. Instead, farmers are forced to rely on informal loans made by merchants in the form

Impact of High Food Prices on Farmers in the Near East 73 of cash, seeds, food or other goods, against a share of the farmers’ crops. Local merchants provide a large percentage of farmers with cash through sale contracts, or direct purchase of the crop. This relationship imposes a weak bargaining power for the tenant, and hence, low farm gate prices. Future selling of the crop to local merchants is known as . Basically, it is a form of share cropping, in which farmers mortgage part of their crop to the merchants in exchange for other goods. The interest rate is reported to be in the range of 50 to 75% per annum.

Recently, the agricultural bank of Sudan increased the share of its portfolio going to short term working capital, and private commercial banks were encouraged to setup rural branches, and extend a larger share of their portfolio to the agricultural sector. Despite that, some farmers cited that the majority of small farmers do not have collateral, and they claimed that most of the money goes to big farmers who do not need it. Only 4% of the respondents invested in agricultural assets during the last two years, which they were able to do because of realized profits from farming, government support and financing. About 7.5% respondents invest in non-agricultural investments, because of the accrued profit from farming and the facilitation given to them.

5 The Underlying Causes of High Food Prices (Temporal Analysis of Prices)

The price of wheat was 50% higher in January 2009, than the price recorded in the same period in 2008. There are number of causes of soaring sorghum and wheat prices associated with cyclical and structural impacts. The cyclical factors are short- term phenomena that will ease over the year, but the structural factors are medium to long term, and indicate that the problem of high cereal and food prices will continue into the foreseeable future. Cyclical and structural factors may impact the price by raising demand, or by reducing supply.

Cereal stocks have been falling over the past few years, indicating that growth in consumption of grains, for all purposes, has been in excess of growth of production. This decline in stocks is a result of both cyclical and structural factors. Among the cyclical factors that have been at work are adverse weather conditions, unavailability of improved seeds, the demanded quantity of other essential inputs coupled with the unavailability of credit, which have all negatively reduced harvests in the country. The structural factors are characterized by the rising energy prices, and energy intensity of the agricultural sector, which have increased the cost of critical inputs like fertilizer, fuel, and power. Energy prices have increased rapidly in recent years. The diversion of cereal use from food, to producing alternative fuel (bio- fuel), is increasing as oil prices become higher. High input prices led to high costs of production, which would buffer good prices for producers and aggravate the consumer problems. Temporal analysis of market prices of wheat has been used to trace the stability of wheat prices over time. The temporal analysis of wheat prices, combined with historical and empirical knowledge of the wheat market would

74 Impact of High Food Prices on Farmers in the Near East provide interesting results regarding the possible impact of government policies on the evolution of seasonal price movements, thereby potentially offering useful guidelines for improving these policies.

Examination of the graph suggests that seasonal and/or random fluctuation of wheat prices have been greater since 2006. Figure 9 shows the nominal prices where the exponential and the coefficient of the trend component have been calculated, as demonstrated by the linear regression equation in this figure. These coefficients, which were derived from the linear regression, were used for completing analysis of trend, seasonality, and cycle.

Figure 5.1 Exponential function of wheat prices, 2006- 2009

y=50.44e0.023x 160.0 R2=0.999 140.0 120.0 100.0 Seriesl ــــــ 80.0 60.0 40.0 20.0 0.0 1 6 11 16 21 26 31 36 41

Three centred moving average (CMA) characteristics are worth- mentioning. First, it has the same trend as the price. Second, the CMA will show cyclical fluctuations around the price series. Finally, the CMA has eliminated very short term fluctuations appearing in the original series. The producer price index for wheat during the last three years almost doubled. The standard deviations on monthly indices revealed the stability of the seasonal price pattern. If standard deviations, as a whole, are relatively large vis a vis the seasonal pattern, then one may conclude that seasonal price movements cannot be readily predicted. A comparison between twelve standard deviations would also reveal during which months of the year uncertainty about future supply and demand is greatest. One would expect to observe low seasonal indices from September to February and higher indices during the rest of the year. Random fluctuation increases and uncertainty was also greatest during the later period as indicated by the standard deviations.

The grand seasonal index for wheat was calculated over 20062009-. It indicates that the trend in seasonal prices is pronounced, but unstable. In real terms, the index increases from September when the seasonal price is at its lowest level, to the seasonal peak in February and the standard deviations, indicate the usual level of uncertainty for a given month. The lowest standard deviations indicate that

Impact of High Food Prices on Farmers in the Near East 75 the market’s uncertainty is at its minimum level when information on the market conditions is readily available. Likewise, the standard deviations are at their peak just before the harvests. The lack of complete and reliable information on supply and demand conditions creates even more uncertainty during these months. Results demonstrate the importance of having good and timely market information to reduce random fluctuations in prices. Analysis of the trend for the principal harvesting months highlights a notable difference vis a vis other months. Apparently, prices fall more steeply during the harvest and rise higher during the post harvest period. The seasonal index appears to confirm these observations. These results are positive and support the hypothesis that prices are showing greater seasonal fluctuation as the years go. Uncertainty has two well-defined peaks. The first occurs in January to March, and once the harvest begins, standard deviations decrease. However, they immediately begin to increase until they reach another peak in June.

6 Conclusion and Recommendations

High food prices are undermining the gains of poverty reduction efforts, and will make the achievement of the Millennium Development Goals difficult. Food expenditures comprise a large share of the total expenditures of the poor, in most cases over 50% which makes them particularly vulnerable to soaring food grain prices. Food price inflation may have seriously eroded their purchasing power, increasing the severity of food deprivation. These effects will worsen if the food price surge persists. Higher expenditures on food, caused by higher prices, also reduce expenditures on health and education, and squeezes expenditures that are critically needed in agricultural inputs-such as fertilizers, fuels, and power to expand food production in response to higher prices. In the macroeconomic context, higher food prices will mean higher inflation. Given the large weight of food prices in the consumer price index basket, inflation rates will rise as a result of a persistent food price increase. Higher food prices may dampen economic activity. In examining the impact of world food prices on Sudanese small farmers’ supply response and livelihoods, the following are our suggestions for improving the state, security, and stability of the agriculture sector in Sudan, and for its small farmers. • Short term assistance, in terms of safety net programs for food-stressed populations, including strengthening targeted food subsidies and emergency food security reserves systems. • Policies such as export restrictions, price controls, price supports, optional food grain reserves, and input subsidies need to be revisited in order to restore food price stability, in light of the higher food prices which could persist. • The rapid hikes in the prices of key inputs such as fertilizers, pesticides, and fuel have created additional hurdles for farmers, which could limit their supply response. Thus, further improvements are needed to ensure that farmers have easy, reliable, and affordable access to seed, fertilizers, pesticides, and credit. This should be coupled with medium to long term assistance in term of incentives. • Investments in agriculture may still not generate the envisaged returns unless

76 Impact of High Food Prices on Farmers in the Near East these are accompanied by reforms, pricing, trade, and other policies. • Low levels of investments in the sector have led to poor upkeep and maintenance of existing agricultural structures and facilities, and insufficient development of new structures and facilities. For these reasons, investments in infrastructure are needed to ensure efficient and reliable irrigation water supplies and connectivity to markets. Investments in irrigation systems will improve the efficiencies and reliability of irrigation water supplies, which will in turn raise crop productivities, expand irrigated areas, and reduce the incidence of crop failure. Improvements in connectivity to the markets will help lower production and marketing costs, reduce wastage of inputs and produce, and improve returns to agriculture. Therefore, investments in rehabilitation, maintenance, and development of existing and new farm-to- market roads need to be a priority area for public sector intervention. • Rehabilitation and upgrade of postharvest processing facilities is of vital importance to enhance food security by limiting wastage, and increasing income, supply, and employment. • In the context of financial sector reform, financial institutions including microfinance institutions need to expand operations rapidly to improve access to credit for farmers and rural poor. • Productivity growth in agriculture will require significant increases in investment in adaptive research, and technology dissemination. New high- yielding and pest-resistant varieties are needed to reverse the stagnation in yields. Institutions engaged in agriculture research and technology dissemination in Sudan will need to be promoted, in order to shoulder the promotion of agricultural production in the country, to protect the biodiversity, promote the environmental sustainability, and enhance food and bio-safety. • Although information technology has seen great progress, farmers have largely been left out. The timely flow of market information is still lacking, which makes it difficult for farmers to adjust their production decisions to respond to changing market conditions. • Appropriate measures should be implemented to protect consumers and support immediate food availability by keeping food prices low through export restrictions, reduction of taxes and duties on imports of basic foods, and price controls during the lean months of the year. The government should also maintain the domestic producer prices to align them with the international prices especially for the main stable commodities such as wheat and sorghum. At the same time it should subsidize the essential inputs such as fuel, fertilizers and seeds to enhance the domestic production. In addition to that, the government should expand the strategic stocks and invest in increasing its capacity in order to reduce risk of price fluctuations.

Impact of High Food Prices on Farmers in the Near East 77 78 Impact of High Food Prices on Farmers in the Near East Syria

Views expressed in this paper are solely those of the author and do not reflect the views of the Food and Agriculture Organization of the United Nations

This paper has been revised and condensed from its original form

Impact of High Food Prices on Farmers in the Near East 79 Executive Summary

The objective of the study was to provide a rapid assessment of the impact of rising food prices on agricultural communities in Syria and changes in the livelihoods of small farmers. The study was implemented through a participatory rural appraisal and a formal survey which covered 152 farmers in three governorates and two regions in each. The survey tried to explore the reasons of the price increase and the resulting consequences.

Syria, like other countries, has been affected by the food price increase of 20072008-. Increase in food prices were influenced by factors affecting world markets as well as other internal factors. Examples of these include the increasing demand for food because of the large number of immigrants from neighbouring countries and from tourism, and the drop in supply due to dwindling agricultural production caused by adverse weather conditions (drought) and the increasing cost of production. External factors also induced this price surge, such as trade openness, increasing fuel prices and increasing prices of imported goods. The Syrian government responded to the increase in food prices with an increase in public salaries and wages and by setting preferential prices for basic foodstuffs. Exports of some foodstuffs were banned for a certain period of time.

The study showed that most farmers noticed the price increase in 2008, while mainly agricultural workers noticed the price surge in 2007. Farmers resorted to a set of strategies to cope with the increasing prices, such as decreasing growing area, modification of crop rotation, reducing input quantities such as fertilizers and reducing frequency of irrigation.

Increasing prices induced most farmers to consider increasing the implanted area for some crops (wheat and barley) in the event that these crops maintain their high prices, as they were at the beginning of 2008. However, some obstacles impeded such expansion namely; the limited land unavailability of some inputs such as fertilizers, pesticides, fuel as well as funding and marketing constraints. Other farmer strategies to cope with soaring prices included increasing off-farm activities and remittances, the reduction of the consumption of some foodstuffs or a switch to lower quality foods. Farmers acknowledged the importance of government food subsidies, education and health programs as well as fuel subsidies in easing the burden of soaring prices.

The study concludes by stressing the necessity to link wages to prices, and to help farmers reduce the cost of production by expanding the electrical network to improve access for farmers. The study also stresses the vital role of the state in managing the supply of basic foodstuffs and intervening when necessary. Furthermore, the study highlights the importance of boosting the efficiency of the marketing chain for some crops in such a way that benefits both producers and consumers, and establishing social safety networks that target the poorer farmers for certain times and according to the emerging needs.

80 Impact of High Food Prices on Farmers in the Near East 1 Introduction

This study aims at characterizing the behaviour of smallholders in Syria in response to changing food prices and documenting the ways in which their livelihoods have been affected. Changes in socioeconomic and policy environments of smallholder farmer communities are also addressed

Agriculture is an important sector in Syria with a contribution to GDP of about 21- 25% and it employs 2025%- of the workforce. Syrian agricultural production is characterized by a large rain-fed component (one-third of all agricultural production and 70% of the cultivated area), causing fluctuations in production with changing weather conditions and making production more dependent on natural resources. Agricultural production has developed significantly in the last decade. Self- sufficiency has been achieved in wheat, food legumes, cotton, vegetables, fruits, olive and olive oil and a large portion of livestock products. Surpluses for exports became available for many of these agricultural products. Nevertheless, there is still a large deficit in some products such as sugar and maize, and a small deficit in a few dairy products, meat, vegetable oil (excluding olive oil), and barley in dry seasons.

Limited availability of water resources is considered the most important constraint to agriculture in Syria. In recent years, the average water deficit has reached 3.5 billion m3. Poor rainfall, uneven seasonal distribution which caused a decrease in ground water tables, droughts and declining outflow of some rivers have all negatively affected agricultural production. In addition, poor land resources are also a concern in some regions due to deteriorating soil conditions, induced by intensive cultivation and various polluters.

Regarding land ownership, the rangeland (Al Badia) and the forests which respectively constitute 55% and 3% of the total land area are state-owned. Some other areas are also owned by the state, but are rented to private farmers. Generally speaking, about 98.5% of the agricultural land is privately cultivated (cooperative sector offers services only when land is owned by farmers). The contribution of joint ventures and the public sector is respectively 1% and 0.5% out of the total investment.

Since 1986, marking the sixth five-year plan, the agricultural sector has shifted from centrally planned system to a participatory planning approach according to some indicators. The Annual Agricultural Production Plan, which was prepared by the relevant Ministries, Peasants Union, and Chambers of Agriculture, is now ratified by the Government.

The Agricultural Cooperative Bank (ACB) offers short, medium, and long-term credit, at a preferential interest rate. Inspection officers are assigned with the responsibility of ensuring the use of credits for the declared purpose. Agricultural marketing policies have witnessed considerable development. The private sector is increasingly playing an active role in the marketing process, except for some

Impact of High Food Prices on Farmers in the Near East 81 crops such as cotton, sugar-beet, tobacco, and wheat, which are still restricted to the Government. The private sector contribution in manufacturing, marketing and exporting products is increasing, in addition to its growing contribution to supplying agricultural inputs such as, fertilizers and chemicals. There still remain various obstacles to marketing including the provision of agricultural inputs, and securing funding to create productive assets.

The following section presents a discussion of food price increases both in external and internal markets, and actions taken by government. Section 3 provides a description of smallholders in Syria, followed by the survey results and farmer responses in Section 4. Section 5 lists the conclusions and policy commendations.

2 World Food Price Increases Between 2000 and mid 2008

World food prices increased gradually within a reasonable range until the beginning of 2007, after which they showed a sudden surge. The indexes of FOB prices of some of the main commodities that increased significantly were as follows: soft wheat 209%, durum wheat 226%, maize 189%, rice 163%, sugar 123%, beef 135%, banana 161%, soybean flour 160%, in addition to price increases ofoil seeds and vegetable oil. Transportation costs also increased significantly due to the increase in oil prices.

Many interrelated factors caused this surge in food prices some of which are: • Fall in production of food staples in many producing countries due to the adverse climatic conditions and the decrease in food international stocks • Growth of income in China and India that led to increases in consumption of plant food as well as fodder used for animal production • Increase of fixed and variable costs, as well as transportation cost due to the rising world oil prices • Population growth, mainly in developing countries and more demand on food • Reducing support for some commodities by countries that used to offer significant agricultural support • Decline in supply of vital agricultural products replaced by production of biofuel crops (e.g. wheat, maize, barely, sugar beet, etc.), generating more competition between food vs feed production. • Speculation

2.1 Domestic food prices in Syria

Domestic prices jumped to record levels during the period 2007 - 2008, for all domestic and imported products. Several factors that contributed to the increase in domestic prices include: • Immediate transmission of high world prices imported food and production

82 Impact of High Food Prices on Farmers in the Near East inputs to internal markets of due to trade liberalization. • Increasing demand for imports of some commodities7 to meet the growing local demand due to population growth, changes in consumption habits, agricultural production inputs, and raw material for industry. • Increasing demand of domestic food products as a result of an increasing number of refugees and tourists. • Increasing incentives for (legal and illegal) exports in times of high world prices rather than securing domestic supply. • Drop in agricultural production because of the adverse climate conditions, drought and other calamities. • Increase in production costs due to increase of costs, such as mechanical and manual labour and increasing input prices, when they are not available in the required time or quantity.

Consequently, domestic prices increased sharply, especially in 2007. High increases occurred in domestic and imported cereals, products such as beef and dairy, vegetable oil, and many vegetables and fruits. For example, bulgur increased by 48%, rice by 14%, chick peas 21%, lentils 75%, sheep boned meat 29%, vegetable oil 73%, and cattle milk 50% (which led to an increase in all dairy products).

The beginning of 2008 witnessed a significant price increase of domestic vegetables and fruits. This was largely due to the frost that struck these crops reducing their supply and causing prices to go up sharply (eg. 50% for beans, 140% for zucchini, 30% for eggplants 33% for bananas and 44% for apples). Non-food products and services also witnessed a remarkable price increase that caused economic stress, especially on poor livelihoods. This coincided with fuel prices crises where there was a severe shortage of diesel supplied at official prices.

Overall, the average price increase for all commodities was about 50%. Taking into account that incomes were relatively steady at that period of time, this negatively affected livelihoods and increased the food bill, especially for low and medium income classes, and therefore significantly increased the number of impoverished people.

Comparing consumer prices in 2006 and 2007 with prices in 2005 and according to the Central Bureau of Statistics, the increase was substantial for essential food goods which have a strong influence on food security. These goods include wheat, flour, grains, rice, pasta, maize, oils, milk products etc. The dramatic price increase lasted for a few months after the beginning of 2008, supported by food export restrictions (e.g. rice) imposed by major food producing countries.

7 The main imported commodities are: sugar, dairy products (cheese, butter and ghee, powder milk, etc.), liquid and hydrogenated and vegetable oil, maize, barely, fodder cakes, in addition to veterinary medicines or their primary materials which significantly affect animal products (fodder accounts for 75% of total the production cost)and production inputs such as fertilizers, pesticides, agricultural machines, etc.

Impact of High Food Prices on Farmers in the Near East 83 2.2 Actions to curb the impact of prices increases in 2008

The spike in food prices badly affected both producers and consumers. Even though producers might have benefited from higher price for their crops or the goods, they remain consumers of many other goods, whose prices were also high. The situation was aggravated by the world financial crisis and the increase in oil prices which reached $147/barrel. The Syrian government had to increase fuel prices (diesel) which had been significantly subsidized. The rate of increase was almost 342%.

The government took some actions to reduce the impact of higher prices on producers and consumers, including: • Increasing salaries and wages in the public and private sector by 25%. • Strengthening the government’s role in providing essential goods for food security. • Promoting the role of price monitoring bodies with the objective of controlling prices, implementing government regulations concerning setting ceiling prices for basic foodstuffs, and imposing deterrent penalties against price and quality manipulators. • Enforcing strict control on agricultural and food exports through border crossing points in accordance with the laws and regulations in force. • Imposing an export ban on some basic food products, or restricting exports for limited periods in order to mitigate the rapid rise of prices in the local markets, such as wheat and its products, beans, tomatoes, meat, etc. • Offering a price subsidy for producers of main crops in order to encourage them to sell their products to government companies, and maintain the strategic stock (mainly for wheat). • Compensating cotton farmers by direct payments (SP 30 thousand/hectare or $600/hectare) to cover the extra cost caused by the increasing fuel price. • Providing each household with 1000 litres of diesel at a subsidized price for heating in winter. • Launching a food aid program (government and international) that included households who had been adversely affected by the drought. 2.3 Recent developments on inputs and crops prices

Generally speaking, 2008 was characterized by adverse conditions brought about by high prices of food and production inputs accompanied by adverse climate conditions. For example, wheat production in Syria was reduced by half (to 2 million tons) in comparison to previous years. In addition, the General Establishment for Cereal Trade and Processing was able to procure only 1 million tons compared to 3 million tons in the previous years. As for the winter season of 20082009/, the Syrian government took many early precautions to encourage the implementation of the agricultural plan, especially for strategic crops. For instance it maintained the fertilizer subsidy and increased prices of strategic crops (wheat and sugar beet). In addition, the government decided to buy such crops at the production cost plus a profit margin of 25%. In the summer season of 20082009/, as a result of decreasing world oil price, the government reduced diesel price and liberalized fertilizer prices after a long

84 Impact of High Food Prices on Farmers in the Near East period of subsidy. As a result, fertilizer prices increased significantly, by 293% for super phosphate, 202% for nitrate, and 458% for potassium. Since cotton is the main summer crop, the government increased its support price and offered cash compensation to cover the increase in fertilizer prices and compensate other cotton farmers who irrigate their crops from wells using diesel. 3 Smallholders in Syrian Agriculture

Smallholder farmers represent a large proportion of the farms in Syria, though their contribution to total output remains low. The number of smallholder farmers has been increasing in the past decades as a consequence of high population growth, which increased the population pressure on land, as shown by the last agricultural censuses (1981, 1994). Given the fact that the total cultivable land is relatively stable, the size of holdings has decreased

Currently, about 36% of smallholders own 1 hectare or less, with 85% of farmers holding less than 10 hectares, producing slightly more than one tenth of cereal production (Table 3.1). The averages mentioned vary from region to region and from one ecological zone to another. (SOFAS 2007).

Table 3.1 Smallholders in Syria Area Class (ha) No. of Holders No. of Holdings Total Cultivable Ratio of land (ha) Landholding to total (%) * 0.1 8836 8749 1104 0.02 0.2 40349 39847 13278 0.29 0.5 62697 61851 43331 0.94 1.0 92889 91421 127541 2.77 2.0 113063 111034 312596 6.78 4.0 59304 58133 277710 6.03 6.0 65979 64454 485046 10.52 10.0 44553 43340 521215 11.31 15.0 25826 25018 421056 9.14 20.0 27939 26979 639192 13.87 30.0 20108 19175 709589 15.40 50.0 8609 8066 532109 11.54 100.0 2691 2461 358909 7.79 300 & Above 350 306 166482 3.61 Total Country 573193 560834 4609159 Source: Central Bureau of Statistics (CBS), 1994 Census * Authors calculation

Smallholders have been impacted in different ways and have taken steps to respond to increased prices while at the same time minimizing the negative implications. Section 3 of the report will look extensively at findings from rapid appraisals and will make an effort to classify the smallholder response. The following section will give a brief overview of the increase in prices in 2007 - 2008, the underlying causes, as well as the local price changes during the same period.

Impact of High Food Prices on Farmers in the Near East 85 4 Farmers’ responses to soaring food prices

4.1 Methodology

The study was conducted in the three major governorates that produce cereals in Syria namely: Al Hassakeh, Aleppo, and Hama. A formal questionnaire (Appendix I) was prepared to survey the farmers. Prior to conducting the formal survey, discussion groups with the farmers in the targeted areas were organized to assess the attitudes of farmers towards price increases. Two discussion groups in each Governorate were established and Participatory Rural Appraisal (PMA) methods were utilized to gather qualitative information.

4.2 Description of survey regions and summary of Participatory Rural Appraisal

Al-Hassakeh Governorate (Summary results in Table 4.1)

1. Amooda District: This area includes irrigated and rain-fed cultivation. Irrigated cultivation depends on medium depth wells (140160- m). Agriculture is the main source of income (more than 90%), while the rest of income comes from off-farm activities, government employment, or working in other governorates. The Government launched an emergency food aid program targeting some seriously drought affected villages. In- kind aid, e.g. rice, macaroni, tomato paste, flour, and oil were granted, though the program did not cover Amooda.

2. Al -Qahtaniah District: Qahtaniah District is located in agro-zone 1 and 2. The last three agricultural seasons were characterized by adverse weather conditions (drought and dust which is a new phenomenon in the district) and high prices. The situation got worse with the increasing inputs prices.

Agricultural production in this region suffered harsh climatic and economic conditions at macro and micro level. This made wheat, which is the main food staple, lose its advantage not only in the Al-Hassakeh governorate but rather at the county-level. Farmers will be compelled to grow only small areas to meet their household needs. Lentil, in contrast, gained an advantage because of its relatively high price and low cost compared to wheat. Although maize and lentil make good and positive gross margins, these two crops require certain modifications in the overall economy (maize pricing, adjusting trade policies to encourage export of lentil surplus, and adjusting marketing policies for maize to enable the General Establishment for Fodder (GEF) to procure maize since the GEF does not have necessary dryers for maize). On the micro-economy level, the electrical grid needs to be extended so farmers can shift to electrically-operated pumps. In addition, diesel subsidy should be granted according to pump power.

86 Impact of High Food Prices on Farmers in the Near East Table 4.1 Summary of survey responses from Al Hassakeh governorate Al-Hassakeh Responses to Amooda Al -Qahtaniah increased prices Production Reduced cultivated area (mostly Reduced cultivated area, irrigated) (wheat, vegetables substituting main crops with less (especially onions)) costly crops and less water- Increased production of less demanding crops, such as water demanding crops (cumin, cumin, lentil, and coriander, lentil) Sold part of their land holdings, Reduced irrigation (wheat given Shifted from fuel to electrically 23- irrigations compared to the operated pumps, and shifted to usual 56- times) modern irrigation for some crops. Reduced fertilizer use (fell by 30% ) Finance The Agricultural Cooperative Most farmers were heavily Bank (ACB), and the private indebted to the ACB due to the lenders are the main sources of drought that struck the region finance for the last three seasons making The ACB does not give adequate farmers unable to repay their credit for agricultural operations loans. As a consequence, farmers and inputs, and does not offer resorted to costly private credit credit for fuel. to secure their inputs. They Farmers’ high indebtedness to the borrowed, for example, barley ACB, caused by recurrent bad and wheat seeds. seasons, obstructs farmers from ACB credit. This made farmers resort to private lenders who offer funds for a very high interest rate (2535- %) for one season, or to borrowing inputs from traders on condition that farmers sell their crop at reduced price in advance to those traders. Consumption consumption of food substituted consumption of food, substituted by cheaper foods (e.g. rice for by cheaper foods (e.g. rice burghol). Consumption of meat for burghol). Consumption of also reduced and was substituted meat also reduced and was with vegetables. substituted with vegetables. 70 % of farmers’ income is obtained from agriculture, 20 % from government employment, and 10% from remittances provided by relatives working abroad. Government Farmers see government If input prices remain high, and programs programs as emergency measures crop prices do not increase with no lasting effect except again, farmers will violate the input subsidy, as a cornerstone to agricultural plan by reducing preserve agricultural sector in the the wheat grown area while region. Targeted subsidies, such increasing summer crops as diesel and power of pumps for (cotton), even though this latter farmers, are critical for those in crop requires high quantities of needs. Setting one price for all water. producers,

Impact of High Food Prices on Farmers in the Near East 87 regardless of the irrigation source does not help generate better water use behaviour. Several government actions against increasing prices (e.g. banning exports of some foodstuff and providing diesel coupons) were not significant as they either covered only a slight portion of the increased price or involved long, intensive procedures. Unless input prices, mainly diesel, go down, it is difficult for farmers to continue on planting their land in the coming seasons. Migration To other governorates Small holder farmers (less than 5 hectare) migrated to other governorates (Day's) to work as rented labour.

Hama Governorate (summary results in Table 4.2)

1. Soran District The input price increase during the last three seasons heavily affected agriculture in this region. The grown area of wheat, sugar beet, and cotton has dropped significantly by 5070%- and even orchard farms were affected. As a response to this price surge, farmers introduced barley and flowering sern in the crop rotation. Last year administrative prices for most crops did not increase, even though market price was much higher.

2. Tal dara District In Tal dara, irrigated land represents 30% of the total area and the rest is rainfed. The source of irrigation water is shallow wells and treated water.

Suggestions made by farmers include:

- Help farmers by selling diesel at differential prices - Provide credit to farmers to establish modern irrigation networks and offer credit according to agriculture license; not according to the well license - Find suitable solutions for unlicensed wells - Offer reasonable prices to farmers and facilitate cereals procurement - Set crop prices prior to the beginning of the agricultural season - Abolish fertilizer liberalization process - Set trader prices according to official prices - Allow the conversion to electricity operated pumps - Reduce fertilizer prices to increase productivity - Conduct a study to draw Euphrates water to Salamia (23/), and Hamra (13/). - Construct dams - Pay the subsidy before the season

88 Impact of High Food Prices on Farmers in the Near East Table 4.2 Summary of survey responses from Hama governorate Hama Governorate Responses to Soran Tal dara increased prices Production Farmers substituted irrigated During the last there seasons wheat for irrigated barley the grown area dropped by because of its lower 25%, because of the increase irrigations requirement. Even in diesel price, fertilizer, in rainfed areas, barley area labour and tillage cost. On doubled at the expense of irrigated land, winter crops wheat. Rainfed crops found in planted are: wheat, barley, this region are cumin, lentil, legumes, and small areas chickpeas, safflower, and of aniseed, and wheat was black seed. replaced by barley and High fertilizer prices aniseed. In the summer made farmers use half the season, vegetables and required quantities, reducing watermelon are grown. In the productivity. Increasing crop rainfed area, the following prices did not compensate for crops are grown: vetch, the increasing cost. cumin, and flowering sern Aniseed was the best crop (a newly introduced crop), in the past year with high and barley in a decreasing productivity. area. Last year wheat, but no Last season, livestock sector barley, was planted. This year, in Tal dara experienced a however, the barley-grown heavy loss because high area doubled at the expense price of feed, and low-priced of wheat. sheep. Sheep numbers fell by 15 % and will reduce the rent of land for fodder (daman) the next season. Finance Farmers buy inputs from traders, and pay back the money at the end of the season. The traders who lend the money buy the wheat in advance from the farmers for only SP 10/kg , while the official price for wheat is SP 16 /kg, i.e. the trader lends the money for 60% interest rate. Consumption Poor households responded Poor families responded to the increasing prices to increasing food prices mostly by borrowing. It by substituting sheep meat is worth mentioning that with frozen meat, while this rural household income is year they substituted sheep generated from agriculture meat with imported buffalo sector and free business meat, and reduced food equally. consumption.

Impact of High Food Prices on Farmers in the Near East 89 Aleppo Governorate (Summary results in Table 4.3)

1. Bash Cawa district During the last three seasons, the cropping pattern in Bash Cawa has changed depending on the product price. Farmers pointed out that the price increase was higher and faster than the fall in prices. The price surge made it difficult for farmers to make the right agricultural decisions. Farmers grew lentils, chick peas and barley instead of wheat.

2. Qabaseen village Due to low rainfall, agricultural production was affected in rain-fed areas. Production was also affected by increasing prices of inputs which caused farmers to reduce fertilizer use (in some cases cotton was never fertilized), and reduce irrigation time by half. This negatively affected productivity.

For example, those who sold their crops early did not benefit from the price surge. In addition, farmers who stocked crops hoping that prices would go up further did not benefit because the government took some precautions to curb the price increase, such as allowing imports for some crops (chickpeas). Only a small number of farmers benefited from the price surge. It is worth mentioning that prices went down very slightly and since two months there has been no drop in price. The increasing and fluctuating prices confused the farmers and increased risk.

Animal production was not in better condition as sheep numbers in this region decreased dramatically because of forestation, diminishing pastures and the increasing feed prices. In the last two seasons, fodder price exceeded 20 SP/kg. In the current season, although pastures are available and feed prices have declined, the high price of meat will encourage breeders to sell their sheep pushing the numbers down.

Farmers’ demands for reclaiming new lands to reduce risk, comes from adverse climatic conditions. In case climate and economic conditions do not change farmers will follow the old crop rotation with only one winter or summer crop every season. Eventually farmers demanded reconsideration of the fertilizers and diesel prices to help in increasing production, achieving food security and preserving the agricultural sector.

90 Impact of High Food Prices on Farmers in the Near East Table 4.3 Summary of survey responses from Aleppo governorate Aleppo Governorate Responses to Bash Cawa Qabaseen increased prices Production Lentil area increased at the Famers reduced the wheat-grown expense of wheat area. area within the crop rotation, In 2008, production of olives while expanding barley and short dropped by 3%, production season crops such as lentils, of wheat was halved, and the potato and cumin in order to productivity of lentil was 200 save money. In addition, these kg/hectare, while in 2007 lentil newly introduced crops require produced 1000 kg/ha. relatively less quantities of water Lentil prices jumped to 70 SP/kg, and are less costly, especially however production was low and after the price increase came the total revenue did not change. at the end of the season which As for animal production the means that the crop price situation is better this season, increase did not benefit all while in 2008 animal sector farmers. experienced loss. According to current climate In 2008 farmers found that barley and economic circumstances, was the best crop, and this was canal-irrigated barley was the reflected in the area grown. most profitable crop followed by As much as 60% of cultivated cumin and garlic. area was barley taking from the area of wheat and cumin. In the current season, 10% of cultivated area was grown with wheat. Government In order to mitigate the effect of Government took some increasing food prices, food aid procedures to curb the price programs have been launched, increase such as allowing where flour was provided at imports for some crops such as schools in some villages in chickpeas. Consequently, a small AL- Badia. While in the cities, number of farmers benefited vegetables and other foodstuffs from the price surge and others were sold at preferential prices at were impacted negatively. the branches of Establishment for Consumption Goods. In addition, the Government provided diesel coupons, although traders benefited most of these coupons. Consumption Income from agriculture Income from agriculture went represents 60% of total income, down considerably. Agriculture while off-farm income obtained represents 70% of income in this from working in neighbouring region, and this was reflected in household consumption of villages represents 20% of foodstuff by reducing consumed total income. In Bash Cawa quantities and replacing costly farmers experienced a huge loss food products with foodstuff that estimated at about 300 million is produced by the farmers (ex: Syrian pounds. There was a such as substituting rice with reduced quantity of consumed burghol and sheep meat with foods, costly rice replaced with beef and chicken). burghol, and costly oil with lower quality oil.

Impact of High Food Prices on Farmers in the Near East 91 4.3 Formal survey results

Sample composition The total sample size was 152 farmers from three governorates; Al-Hassakeh, Aleppo, and Hama. Two sites from each governorate were selected; each site included irrigated, rain-fed, and mixed farming types. Table 4.4 Sample composition Farming Systems Farmer's categorization Irrigated crop Rainfed crop Combination Total production production of two or more Poor Count 7.0 25.0 15.0 47.0 % poor farmers 14.9 53.2 31.9 100.0 Average Count 12.0 23.0 40.0 75.0 % average income farmers 16.0 30.7 53.3 100.0 Rich Count 11.0 7.0 12.0 30.0 % rich farmers 36.7 23.3 40.0 100.0 Total Count 30.0 55.0 67.0 152.0 % total farmers 19.7 36.2 44.1 100.0

Survey results

Farmer perceptions of the price increase

Interviews with farmers revealed that one fourth of them attribute price increase to increasing world prices, one fourth attribute it to supply shortage in the domestic market, while a half of the respondents said it is due to both factors. Farmers found that this price increase was not confined to food and agricultural products, but it encompassed all goods in Syria. They claimed this increase was coupled with fuel price increase that induced a price surge in agricultural and non-agricultural goods, and at different rates.

Perceptions on the evolution of the price increase

The survey showed that all farmers perceived this price increase for inputs as well as for agricultural outputs. More than two thirds of them perceived the increase just last year (2008), while one fourth of the sample perceived this increase two years ago. Only a small number perceived the increase a long time ago.

However, these rates were not the same for all farmers. More than three quarters of better-off farmers perceived this increase only last year and none of them perceived it long time ago. Two thirds of poor farmers perceived this increase only last year. In addition, price increase observation differed according to farming type. Most farmers who depend on irrigated farming perceived it last year, which is reasonable since the fuel price increase (which was 240%) occurred only last year.

In the livestock sector, about half of the livestock producers perceived that livestock prices increased faster than cereal prices. Some said the pace of the price surge was the same as cereals (19%) while 34% did not observe the livestock price

92 Impact of High Food Prices on Farmers in the Near East increase. This price surge has encouraged half of the farmers to be more interested in investment in livestock production. Still, 23% of livestock producers were not encouraged to expand their production.

Generally speaking, the prices increased in 2007 until mid 2008 and then it decreased again. For about 60% of the farmers, the pace of decrease was slower than increase in comparison to only 20% who considered the price drop being quicker than the price increase. Another 20% thought that the increasing and decreasing pace was about the same. In terms of crops, two thirds of farmers considered wheat and barley as the quicker price decreasing crops, two out of five considered lentils, and one out of six considered cumin as one of the crops which had a quick fall in its price.

Farmers’ coping strategies with the price increase

Changes in input use Farmers’ budgets show that a high share of input costs in irrigated farming goes to irrigation cost (including fuel) and fertilizers, since lately the prices of these two inputs have substantially increased. One of the strategies adopted by farmers in response to fuel price increase, (as shown in the PRA) was reducing the number of irrigations needed for the crops. This negatively affected crop productivity. Farmers also noticeably reduced the application of fertilizers, which further affected productivity. Another option adopted by farmers who had no cash to pay for highly priced inputs, was reducing the cultivated area by variable rates.

Change in area grown by crop and farming system Wheat Irrigated wheat farmers reduced their wheat area by 8%, while the reduction rate was 11% for rain-fed farming. For mixed farming farmers, the reduction rate was 9%. The study shows that poor, medium, and better-off farmers reduced wheat grown area by 11%, 5% and 13% respectively. Some farmers modified the cropping patterns; replacing irrigated wheat with irrigated barley because of its relatively lower cost of production.

Barley The study shows that farmers who depend on irrigated farming increased barley grown area by 25%, compared with the average of the last few years. The increased barley area was at the expense of the wheat area, which requires more operations and irrigation. Administered prices were another motive for farmers to shift to irrigated barley. Farmers of rain-fed and mixed systems did not make noticeable shift.

Lentils Increasing price for the last two seasons did not encourage farmers to increase its area. On the contrary, the area has shrunk in both irrigated and rain-fed systems,

Impact of High Food Prices on Farmers in the Near East 93 while it increased in the mixed system. The explanation was that the cropping pattern applied in irrigated systems (cotton-wheat) could not be modified. Poor and medium farmers reduced lentil grown area, while better-off farmers increased their area grown, because they owned some resources to finance this crop.

Chickpeas and cumin These two crops are mainly grown in rain-fed areas. Since 45% of rain-fed system areas are owned by poor farmers, the area planted for the two crops increased in hope of a good season.

Expansion of production of certain crops

Two out of five farmers are willing to expand in certain crops, while the rest do not wish to expand. This intention differs according to farmers and the farming system. According to farming system, it was evident that half of the mixed system farmers (irrigated and rain-fed), one third of the rain-fed system, and one out of seven in the irrigated system are willing to increase area of growing certain crops. Half of the farmers who are willing to increase the area of certain crops are middle class, and two remaining quarters include poor and better off farmers equally. As a first priority crop, the survey showed that less than half of the farmers are willing to increase wheat crop, while only one out of 7, and one out of 10 are willing to increase cumin crop and barley, respectively. As to the second crop, one fourth of the farmers are willing to increase barley-grown area as a second crop, while about one out of five are willing to increase area planted with lentils and only one out of ten farmers are willing to expand wheat production (Figure 4.1).

Figure 4.1 Share of farmers who intend to expand areas of certain crops as a first crop or second crop

6.15% Other 10.77% Barley 27.69% 23.08% Other Barley 9.23% Cotton

7.69% Cotton 9.23% 10.77% 9.23% Cumin Wheat Wheat 20.0% 10.77% 9.23% lentil lentil no answer First Crop Second Crop

Land resource is one of the essential determinants to area increase. That is because land is available for only 27% of the poor, one third of the medium, and half of the better-off farmers. The farmers are also distributed according to farming type. Three out of five farmers of the irrigated system are better off, and half of the farmers who are willing to increase the area grown in rain-fed and mixed systems are middle class farmers.

There are several reasons for refraining from crop expansion:

94 Impact of High Food Prices on Farmers in the Near East • 26.14% of the farmers do not intend to grow crops or increase the planted area because of unavailability of land, • 21.59% of farmers stated declining prices and profits as reasons for not expanding • 7.95% do not intend to increase the growing area because of the absence of subsidy, • 3.41% mentioned unstable prices, and • 40.91% attribute the reason to two or more of the above factors.

Access to inputs was another obstacle to expansion. About 46% of the sample pointed out that they experience difficulty in accessing inputs. This rate differs according to farmers' class. About half the poor and medium farmers pointed out that access to inputs is difficult, while 70% of the better-off mentioned that it is easy. When farmers were asked what inputs they find difficult to access, more than half of them mentioned fertilizers. One out of six said that it is both fertilizers and pesticides. Only one out of twelve farmers said that all inputs are difficult to access, while one fifth of the sample mentioned other inputs such as fertilizers and fuel, or fertilizer and seeds.

Self-financing represents half the funding available for the sample. Therefore, we cannot expect a considerable change in the volume of investment during the short- term. The funding source composition differs according to farmers> classification. For example, formal funding represents 12%, 23.5%, and 29% of total funds for poor, medium, and better-off farmers respectively.

Changes in marketing strategies

In Syria, cereals and legumes are marketed through local markets. However, three crops (wheat, chickpeas and lentils) can be marketed to the General Establishment for Cereal Processing and Trade, GECPT (governmental institution). Recently, due to decreasing international prices, farmers were obligated to sell all their wheat production to GECPT at subsidized price. For the rest of the crops (chickpeas and lentils), farmers are free to sell it to the GECPT or to the local market.

Government institutions were the first buyers that farmers sell their crops to, especially cereals and mainly wheat. Three quarters of the farmers stated that they sell their production to GECPT only, or to both GECPT and the central market. Less than 10% of farmers sell their production to only the central market.

Concerning the reason why farmers choose the GECPT, 38% said that it is mandatory to sell the production to the GECPT, 20% said that the GECPT gives better prices and consequently, better profit. One fourth of the farmers pointed out that the reason for selling to the GECPT is for both reasons mentioned earlier and because of easy accessibility and secured marketing.

The problem of marketing remains the most important, especially selling crops for less than the market price.

Impact of High Food Prices on Farmers in the Near East 95 Indirect responses of farmers

Income Income sources of the sample studied are variable; agricultural (plant and animal), casual labour, off-farm engagement, remittances and other sources. Total income composition differs according to economic activity. Data on average income sources by category and how it has evolved over the last three years are shown in Table 4.5.

Table 4.5 Average income sources throughout the last year by farmers’ class (%) Farmers' class % of income Crop Animal Casual Off-farm Remittances Others production raising labour engagement Poor Last Year 52.3 9.1 6.0 18.6 4.1 9.8 Last three years 64.3 7.3 4.5 16.1 1.8 6.1 Average Last Year 47.1 10.3 5.7 21.6 7.3 8.0 Last three years 56.9 10.4 4.7 15.4 5.8 6.8 Rich Last Year 55.5 10.3 1.0 20.0 1.7 11.5 Last three years 63.2 9.8 1.0 15.5 1.7 8.8 Total 50.4 10.0 4.9 20.4 5.2 9.2

Changes in consumption and cost of living

From 2007 to 2008, food prices soared to record levels. Most of the sample (more than 90%) pointed out that they were affected and responded to this increase in several ways. About one fourth of the sample consumed fewer quantities of the foods whose prices had increased, one out of ten farmers switched to lower quality foods or gave up purchasing some basic expenditures, while more than half the sample adopted a combination of these strategies. More than six out of ten poor farmers adopted more than one strategy to cope with the increasing food prices.

Table 4.6 Adopted strategy to cope with price increase Strategy Farmer's categorization Poor Average Rich Consume less of same items 21 33 7 Consume same but poor quality 6 4 3 Cut out some basic expenditure items 4 3 23 Two or more of the above 62 53 43 None of the above 6 7 23

Investment in agricultural and non-agricultural assets

According to 40% of who invested in agriculture, only one fourth of the farmers invested in agricultural assets because of profits made in agriculture, one fifth renew of agriculture and one fifth for two reasons or more.

96 Impact of High Food Prices on Farmers in the Near East 5 Conclusions and Recommendations

The world has witnessed a gradual price increase during the 2000–2006 period. However, it increased sharply during 2007 until the beginning of 2008, and the price increase rate exceeded 200% for some goods like wheat. The increase in prices was a result of the combination of internal and external factors.

The government took many actions to ease the burden of the price increase, such as increasing wages and salaries, activating the role of government institutions in securing basic foodstuff at differential prices, and ceasing exports of some foodstuffs for a certain period of time. On the other hand, farmers were given adequate compensation by increasing the administered prices of some crops, and were granted decoupled payment for cotton. Moreover, households have been given quantities of diesel at subsidized prices. In addition, families most affected by the drought were given food emergency aid.

The following summarizes the responses of farmers: • Most farmers realized the price increase in 2008, while workers, especially in agriculture perceived increasing prices in 2007. • Many farmers applied one or more strategy to mitigate the negative effects of the price surge such as the reduction of cultivated areas, changing the cropping pattern in the crop rotation, reduction of the used inputs such as fertilizers and irrigation water. • Increasing crop prices pushed farmers to consider increasing cultivated area of some crops if prices remained high. • The problem of marketing is one of the most important problems of the agricultural sector in Syria. Most farmers are driven to sell their production (especially wheat) to government institutions as they receive prices higher than those of the domestic market. Some crops are sold at below-market prices at the peak of the production season, such as lentils, barley, and cumin. • The return on investment from crops cultivation has dropped despite the increase in yield per hectare, due to higher costs. • One of the strategies adopted to cope with the increasing food prices was increasing off-farm income and remittances. Some farmers applied other strategies such as less consumption of some goods, or resorting to lower quality products. • All sample respondents benefitted from food subsidies, education, and health programs, in addition to fuel subsidy. • Farmers became worse off because of the price changes. Some recommendations for policy include: - Implement a policy that links wages with prices in order to maintain a good standard of living, since the large increase in food prices led to a decrease in the consumption of food and other non-food products and services as well. - Conduct a detailed study on the impact of rising energy prices, its impact on the increasing production cost, and reducing competitiveness of domestic

Impact of High Food Prices on Farmers in the Near East 97 products. The study should also assess the impact on investment, as investments can be attracted by cheap energy costs. - Maintain government control of the basic foodstuff that affect food security, ensure availability of food at suitable prices and when necessary, prevent exploitation when the supply is insufficient. - Boost the role of price monitoring bodies with the objective of controlling prices, implementing government regulations concerning setting ceiling prices for basic foodstuffs, and imposing deterrent penalties against price and quality manipulators. - Manage exports for certain products and essential foodstuffs and restrict exports for some time, when it affects national food security. This mechanism will limit the rapid increase of prices in the domestic market, (this should be associated with compensations to producers), in order to avoid harming producers or consumers. - Continue offering remunerative prices for producers of main crops to encourage them to sell their product to the government marketing institutions, and preserve strategic stock mainly for wheat. - Take practical measures to prevent smuggling and the manipulation of prices of food commodities. - Encourage investment in the agricultural sector by providing the necessary infrastructure, such as roads, electricity networks, communication facilities and others to help agricultural investments benefit from these facilities and reduce production costs. - Enhance the efficiency of the marketing chain of some crops for the benefit of producers and consumers through the creation of commodity unions. - Create an information system on production and marketing to provide the required information on the availability of food and identify the requirements of domestic and external markets of food commodities - Provide assistance in securing the necessary funding for production at the beginning of the season, especially for crops irrigated by wells. - Enhance the awareness of agricultural producers and help them develop their strategies according to different scenarios to make timely modifications in support of their food security and increase economic return for their investments. - Create social safety nets to benefit the poor families for a certain period of time to be defined according to the emerging needs.

98 Impact of High Food Prices on Farmers in the Near East Yemen

Views expressed in this paper are solely those of the author and do not reflect the views of the Food and Agriculture Organization of the United Nations

This paper has been revised and condensed from its original form

Impact of High Food Prices on Farmers in the Near East 99 Executive Summary

Yemen is one of the least developed countries in the world with a population growth rate among the highest. Poverty and food insecurity are widespread, and agriculture plays an important role in supporting the lives of the rural poor. This study is aimed at understanding the behaviour and strategies adopted by the smallholders who were faced with the food price increases of 2007 - 2008.

Due to the sudden and short lived nature of the surge in prices, the study relied on a rapid assessment of smallholders. The study was conducted through (i) a survey of 100 farmers using a formal questionnaire, and (ii) an interview with a group of selected farmers. The interview with the selected group was aimed at better capturing the stories of change in the farming environment and the adopted strategies.

The results of these interviews conclude that the price increase encouraged farmers to expand the area of their production. More farmers were interested in the expansion in the future if the current high price continues. Preference for local high quality cereals, in particular wheat and their high prices compared to imported goods, also encouraged farmers to produce more. Still, the expansion was limited or sometimes the production decreased due to increasing production costs. High costs of fertilizer and pesticides prevented small farmers from increasing their production. Some farmers were also discouraged because of unpredictability of food prices. Despite intervention measures introduced by the government including provision of machinery, income subsidies, credit service and encouragement of private sector engagement and investment, majority of farmers responded that they did not benefit from government measures. Farmers expressed that more assistance in production inputs such as seeds, fertilizers and pesticides are critical to boost production.

1 Introduction

This study aimed to understand the impacts of rising food prices on Yemeni farming communities and to find any changes in farmers’ behaviour or strategies. During the global food price increases between 2006 and 2008, Yemen, one of the poorest countries in the world, was also influenced by these price surges. As 15.7% of the population live on less than 1 USD per day and 45.2% less than 2 USD per day, food expenditure constitutes the largest spending of the poor and increases in food prices had a devastating effect on the poor. The food imbalance status, in particular, wheat imports with two million metric tons per year, made the country highly vulnerable to world price surges.

Yemen was in the midst of its own food crisis even before global food prices became headline news. The proportion of the population below $1 per day, had increased between 1998 and 2005. About two thirds of the population, including 80 percent of the country’s poor people, live in rural areas depending largely on agriculture for

100 Impact of High Food Prices on Farmers in the Near East their livelihoods.

Agriculture is the most important production sector in the domestic economy of Yemen, despite its decreasing importance. It contributes 15% of the GDP, employs more than half of the labour force and provides livelihood to more than two thirds of the population. This is in comparison to 50% of GDP and 74 % of the labour force in 19901991-. This decreasing relative importance of agriculture is owed to the rapid expansion in industry, construction, transport, service and trade sectors. Still, in 2003 total agriculture value added at the production level was estimated at 1.87 billion USD, equivalent to 1,260 USD per agricultural household without reflecting the incremental added value generated downstream by agro-industries.

Yemen has a total land area of approximately 45.6 million hectares. Despite the arid climate, farmers cultivate about 80 percent of all the scarce arable land although only about 1.45 million ha (3.1 %) are regularly cultivated. The rest of the area is marginal agricultural land which is cultivated only during high rainfall years. In 2007, about 52% (752,823 ha) of the cultivated land depended solely on rainfall, while 48% (453,616 ha) was supplied with irrigation water. Currently wells constitute the second most common source (31%) of irrigation after rain (50%). Most farmers are small-holders with average land size of 1 ha.

Less than 0.3 percent of the land is planted with permanent crops while the marginal land consists of woody vegetations or shrub growth; rocky and mountainous areas; and semi-arid to arid ranges. Overall forests and forested areas constitute almost 4 percent of total land area. In terms of output values, crops represent the majority (75%), followed by livestock (20%), forestry (4%) and fisheries (1%).

For crop production, its cultivated area and production are heavily dependent on rainfall. For instance, the increase in wheat and other cereal production in 2006- 2007 decreased during 20072008- (Table 1) due to the change of rain precipitation. In terms of crop varieties, they were heavily concentrated in food grains, sorghum, millet, wheat, and barley, which comprised almost 95% of all crops. Such concentration has reduced to 52% through diversification. Different ecological zones of Yemen allows farmers to grow i) temperate zone crops like potatoes, grapes, tomatoes, coffee, cereals, onions, sesame and deciduous fruits, and various legumes such as beans and cow peas in the highlands, and ii) sorghum, millet, maize, barley, tomatoes, onions, sesame, oranges, mangoes, banana, tobacco, and cotton in the coastal area and the Eastern Plateau. Although crop diversification in general has improved (see Table 1), some of these shifts were unfavourable, especially with substantial well irrigation development that can cause a decline in groundwater tables.

Primary cash crops of fruit and vegetables are available thanks to irrigation. In particular, the production of qat rose 6.7%, accounting for 5.8% of GDP in 2005. The World Bank and other studies also acknowledge the significant role of this single product in Yemen’s agricultural economy, employing an estimated 150,000 persons. However, qat production consumes an estimated 30 percent of irrigation

Impact of High Food Prices on Farmers in the Near East 101 water at the expense of exportable coffee, fruit, and vegetable productions. As well, the rise in these irrigated crops further resulted in the decline of traditional rainfed crop production.

Table 1.1 Crops area and production, 2006 -2008 2006 2007 2008 Area Production Area Production Area Production Wheat 110.7 149.2 141.5 218.5 123.1 170.5 Other cereals 646.3 557.8 749.1 722.3 637.1 543.4 Pluses 47.3 83.2 53.0 98.2 50.3 93.5 Vegetables 75.7 904.9 82.1 995.4 84.9 1,037.2 Fodders 127.8 1627.0 147.0 1870.9 155.8 2,000.34 Cash crops 80.4 81.5 224.5 86.4 232.4 254.5 Fruits 84.9 862.0 87.8 922.4 90.7 959.0 Qat 136.1 147.4 141.2 156.3 145.0 135.0 Source Ministry of Agriculture and irrigation. Statistical Year Books, 2007- 2008 Area: 1000 ha; Production: 1000 ton

Food consumption and production have also changed, primarily due to market forces rather than deliberate government policies. Fast rising consumers> incomes in urban areas stimulated import trade and created new markets for domestic farmers. These changes have not only affected agricultural production, but also the economic development of the country as a whole. After centuries of subsistence farming utilizing traditional cultivation techniques, farmers are now faced with new growing urban demands, and new technology. These changes have created a need for agricultural development. The development process requires a flexible response from both farmers and Government.

The demand for food was aggravated by the rapidly growing population of Yemen and it is further expected to double from 2010 to 2050, from 24.3 million to 53.7 million people. Given the rate of growth of population, the demand for educational and health services, drinking water and employment opportunities will also increase along with the demand for food. In addition, Yemen faces a severe water shortage, with available ground water being depleted at an alarming rate.

To understand the impacts of rising food prices on farming communities in Yemen, in consideration of above mentioned conditions, farmers’ supply responses and changes in their livelihoods are surveyed in two ways: one using the structured questionnaire interviewing around 100 farmers, and the other collecting information through focus group meetings. The findings from the survey are presented after the introduction to Yemeni agriculture, changes in food prices, and government interventions.

102 Impact of High Food Prices on Farmers in the Near East 2 Price Increases and their Impacts at National level

2.1 Soaring food prices and farmers’ perceptions on prices

Between 2006 and March 2008, the increases of food, especially grain prices are widely observed in Yemen. Rice rose by about 30% (from YR 165/Kg to YR 215/Kg) by 2007, but reached 90% (YR 320/Kg) in the first quarter of 2008. Contributing factors include: decline in the level of rice production by approximately 30%, increasing demand for high quality rice, in particular from India, export ban in major exporting countries, and increase in marine shipment costs from USD 0.27/ ton to USD 0.38/ton with regard to consignments from the United States of America to Yemen seaports. This increase in import costs continued to increase food prices.

Wheat has also increased from YR 73/Kg in 2006 to YR 115.5/Kg in 2007 (53%), then further increased to YR 170/Kg by the first quarter of 2008 (133% increase). Prices of other foodstuff commodities increased as well. Reduction in supply due to lower global production; lack of supply in international markets induced by dramatic reduction of exports from Australia from an expected 25 million tons to 15 million tons along with Argentina, Canada, Russia, and the EU; growing consumption in India and China reflecting improved economic conditions; and shift of cultivation from wheat to corn for biofuel production in several countries.

As a result of these higher food prices in addition to high oil prices, the efforts of the Central Bank of Yemen to reduce inflation (e.g. from average 40% during 1990- 96 to 5.4% in 1997) have been further challenged, and thus the inflation rate was projected to increase back to an average 14.6% in 2008.

It is also noted that while the global high price of imports was considered as the main reason driving local price surges, when the global wheat prices decreased about 2530%-, the wholesale and retail wheat prices in some regions of Yemen were still among the highest.

2.2 Changes in food and agriculture supply and demand

In 2006, Yemen’s exports totalled 7.3 billion USD and consisted of mainly crude oil (85% of total exports). Increasing trade surplus since 2000 is thus largely due to rising oil prices. Majority of the non-oil exports are agricultural products, mostly fish and fish products, and coffee. Meanwhile, Yemen is dependent on food imports to meet a substantial share of domestic food needs, especially cereals, sugar and dairy products. During the price crisis, the country imported about 2 million metric tons of wheat a year (75% of its consumption), more than double the previous year's level. It required 700 tons of food aid. Also, the country>s imports of rice increased from 194,000 tons in 2005 to 860,000 tons in 2007.

As Yemen, a net importer of wheat (cereal), only produces 9% of the required grains, and the food gap is increasing at one of the highest annual growth rates in the world

Impact of High Food Prices on Farmers in the Near East 103 (3.03%), the country is exposed to more severe swings in agricultural commodity prices than other Arab countries. After a year of record inflation, doubled wheat and wheat product prices, might even increase national poverty by 6 percentage points.

Food grain output and cultivated areas continue to fluctuate as most of these crops are grown under natural rain-fed conditions and rainfall is erratic. Cotton production has sharply decreased over the past ten seasons to grow more of better priced crops. Other factors, especially fast rising labour costs, have also contributed to a drastic fall in seed cotton production from 27,000 tons in 2000 to 5,000 tons in 2000.

2.3 Poverty and Vulnerability

The poor population of Yemen is mainly small-scale farmers and sharecroppers, landless people, nomadic herders and artisanal fishers. Agriculture is a vital economic sector, providing jobs and income in a country with an unemployment rate of 37 percent by averting migration to urban areas. Women are the most vulnerable members of all groups. Poverty is more common in the highlands, the semi-desert in the east and north-east, in the sand dune strip and inter-wadi areas of the central Tihama plain, and in fishing villages on the Arabian Sea. Most of the country’s rural poor people are concentrated in the six governorates of Sana’a, Taiz, Ibb, Hodeida, Dahmar and Hadramwt, which also have the largest share of the total population. The distribution of land and water resources in these governorates is highly inequitable.

The rate of poverty in Yemen had been decreasing from 40% of the total population in 1998 to 35% in 20052006-. This decline of the poverty ratio was more significant in cities (32% of the population in 1998 to 21% in 2006) than in rural areas (42% in 1998 to 40% in 2006).

There is no doubt that the high prices of food commodities, has increased the burden on the family in Yemen, especially poor families. While the urban poor are most affected, it is worth remembering that most rural people are buyers rather than sellers of food. There could be severe effects for the landless rural workers whose subsistence wages may not increase with food prices.

2.4 Government measures

Prince control and subsidies

The average rate of the increase in the local prices was less than the average ratio of the international price increase, because the prices were computed on the basis of the average quantities of available wheat (stock, arriving quantities/consignments, previously contracted quantities, and newly contracted quantities). It was also lower because of price control measures of the Yemeni government, reaching an agreement with the importers on the one hand and supporting intervention of Yemeni Economic Corporation (YEC) on the other hand. For instance, when the

104 Impact of High Food Prices on Farmers in the Near East prices of food commodities increased, the government distributed wheat and flour at the fixed rate of YR 3,700 through YEC, whereas private stores sold them at the price of YR 7,000. This was the first intervention since the adoption of free economy policies in 2000 that had prevented all support to agriculture production prices and inputs.

The government also provided an extra allowance of YR 3,000 to each civil servant, which is approximately equivalent to the difference in the price of wheat sold to the consumer, to assist with partially covering the cost of higher food prices. These measures should lessen the impact on more vulnerable groups.

Institutional measures and marketing

To overcome the increase in prices, the government expanded the activities of the Yemeni Economic Corporation (YEC) to control import and marketing food commodities, particularly wheat and flour, and to secure availability of the basic food commodities to the consumer at convenient prices. Along with support to the YEC, the Grain Silos Expansion Project encouraged the engagement of the private sector to invest in grain silos and cereals warehouses to secure strategic stock of wheat and cereals. Consequently, 580 thousand tons of silos, which had been owned by public corporations, were sold to the private sector.

In addition, in order to support agriculture marketing, the private sector was again encouraged, and the Agricultural Cooperative Union also received the government’s support to establish and equip markets. These are expected to secure provision of the agricultural commodities to the public with easy access.

Financial measures and investment

A Cabinet Decree was issued to provide YR 1 billion to the Cooperative and Agricultural Credit Bank (CACB) in order to facilitate easy loans to wheat and cereal farmers. YR 100 million was issued to the General Agricultural Services Corporation in order to secure availability of the agricultural inputs at the appropriate place and at a suitable time. CACB is owned by the government and aims at providing credit to the farmers to procure tractors, pumps, generators, seeds, fertilizers and livestock forage. However, the policy of CACB does not include preferences or priority for any specific crop or an agricultural product, whether for export or for the domestic market. Currently, there is no support from the government with regard to agricultural export or any other program to finance exports or provide loans for exports, insurance and credits.

The government also encouraged investment in flour mills in order to cover the increasing needs of bakeries, the bread making trade and consumers in general.

Impact of High Food Prices on Farmers in the Near East 105 Production support

Two-hundred and twenty-four tractors were distributed to the farmers at half of the value, supported by the Japanese Grant Aid, 200 small power threshers and 200 small harvesting machines were also planned to be distributed at half of the actual value. In addition, a number of big harvesting machines will be distributed freely to the agricultural associations.

3 Farmers’ Responses to Price Increases

3.1 Methodology

The surveys were designed in two ways: one a questionnaire responses administered to a total number of 124 farmers in 11 agricultural districts from the 6 different Governorates of Sana’a, Dharmar, Al-Mahweet, Ibb, Hajjah and Amran. The other was an interview with a group of selected farmers. The interview with the selected group was to better capture whole stories of farming changes.

3.2 Interview with key groups

The group discussions reveal that: • Rising food prices (especially grain) encouraged farmers to expand agricultural areas, especially in irrigated agriculture and large areas. Farmers cope with the increasing prices of production inputs such as the high wages of hiring labours in rural areas, through the use of animal and poultry manure/dung as fertilizer, engaging all members of the family in farming operations, including women and children and by using conventional tillage. • The results indicated that available wheat, barley, maize and sorghum varieties that are locally grown have high quality, are locally preferred and the prices are almost threefold of imported wheat (50 kg of wheat and barley is threefold of the price of imported wheat (50 kg), also for barley and maize). In some agricultural locations, farmers have not really been affected by the rising of food prices, because of the high demand for grain products, especially in irrigated farming and large areas. • While the farmers meet their consumption of grain from the farm by 100% in addition to the profitable sale in the irrigated and large areas, farms were stimulated to expand the cultivation of cereals, especially wheat in the governorates of Dhamar and Hajjah. • In some villages and districts of Al-Mahwit, Sana>a and Amran possession of agricultural land characterized by limited space, does not encourage the farmer, but rather the farmers will produce for home consumption as the availability of rain allows. • Farmers are often coping with the phenomenon of rising prices of basic agricultural inputs, with the absence of the role of the state in most cases. Some provision of seeds was observed.

106 Impact of High Food Prices on Farmers in the Near East • The high prices of fertilizers and pesticides have led to a significant reduction in the farmers> acreage, because they are not able to purchase such inputs and bear the increase of production costs. Farmers are forced to sell some assets, property and animals in order to cover the increasing costs of production, due to lack of necessary support by the State. Furthermore, as a result of the reduction in their farm incomes, they cut down on their food consumption for their families. • Affected farmers are requesting that the Laws of Producer and Consumer Protection should be activated and effective. • The farmers would continue to bear the consequences of rising production input prices and the rising foodstuffs prices as well, in the absence of the role of government. However, irrigated farming has been affected by the increase of diesel prices, which is not available during the growing or harvesting season, and thus delayed the performance of some of the processes which affect agricultural production and yields. These issues will have reverse impacts on food production, food security, and rural poverty goals, that the government sought to achieved.

3.3 Survey questionnaire

Source of income

In a comparison of the average of the last three years, to the 2008 agriculture season, the change in source of farmers’ income was minimal. The number of livestock farmers and off-farm activities have slightly reduced, but crop production and casual labour in farming were hardly influenced. Prince increases in food and agriculture, and inputs

Majority of the farmers (90%) noted the increase in the cost of inputs such as fertilizers, chemicals and fuel. Among those questioned, 61% answered that they had noticed the sharp increase in prices last season 0708/, and 37% said it started earlier than that. 88% of the farmers finance inputs by themselves and the rest use loans from formal institutions or other sources. No subsidy supports were perceived by farmers, except for a small number of farmers acknowledging fuel subsidies.

For the decline of prices, 67% of farmers expressed that the decrease rate was slower than the increase. Still as many as 25% also felt that decline was faster than the increase. Sorghum and barley are the two major items of which prices have dropped quickly after the hike of early 2008.

Most farmers get to know the commodity prices from market, and only a small number of farmers (3.5%) get them from farmers’ union. Only 12% of farmers were directly selling to consumers, and 84% said their customers are traders in open market.

Impact of High Food Prices on Farmers in the Near East 107 Farmers’ behaviour under high prices

During the high prices, 60% of Yemeni farmers sold their products at lower than market maturation prices, mostly for sorghum (45%), barley (38%) and wheat (17%). The ratio between using the rural market and the central one was almost same (45% each), and the choice of market for sales depended on accessibility, better profits, a combination of these two, and better services and marketing options (in order of importance).

Farmers’ interest in investment was still low despite the price increase. Only less than 6% of farmers invested in agricultural assets (equipment, storage facilities, machinery, etc.), and slightly more (10%) did invest in non-farm assets such as housing and appliances to realize profits from farming.

This tendency was same with agricultural finance sources. More than 50% of farmers were aware of existing agricultural finance sources, but 98% of them have not used them. 65% of farmers reported that they do not consider the borrowed capital concessional as subsidies for agriculture.

As concerns production, 62% farmers said they are interested in expanding the area of crop production: in order to secure family food (35.2%), to achieve prices/ profit (29.7%), for better marketing and trade arrangements associated with the crop (19.5%), if there was availability of production inputs and support from the authority (8.8%), and if there was availability of water (3.1%). It is noticed that out of the 78 farmers who intend to expand the area of certain crops in the future, 34.6% of them are from Dhamar governorate, where irrigation practice prevails in addition to rainfall.

Among these farmers, 60% increased the area of production. Those who did not increase crops areas said no production support is the major reason, followed by unpredictability of prices and sudden price drops. 70% of farmers said they do not have easy access to all required inputs (most importantly seeds). When they intended to increase production, land availability was not much concern, as only 4 farmers reported this as an obstacle.

Impact on the livelihood of small farmers

Majority of farmers (77%) felt the range of increase was high. Only 1.6% answered they did not notice any increase. This increase has also changed consumption behaviour of farmers. 30% out of 122 interviewees answered that they simply consumed less of the same items, and 12% were consuming the same amount but of poorer quality. Almost 21% of the farmers said they even cut out basic expenditure items. Despite such difficulty, more than 90% or farmers said they did not benefit from any government or other social support mechanisms. In general, farmers consider subsidies for consumable items (51%) and for inputs of production (seeds, fertilizers and fuel) (49%) as the most important social support programmes.

108 Impact of High Food Prices on Farmers in the Near East Additionally, the study also notes that income levels, cereal production area and responses were widely different across smallholder farmers (also medium or large farms), so it is not correct to assume them as one homogeneous group. For instance, although 60% of farmers were net wheat buyers, 20% neither purchased nor sold and the remaining 20% were net wheat sellers.

4 Conclusions

Increasing prices of wheat and other cereals encouraged many Yemeni farmers to expand areas during the last three years. This study finds that the main reasons for expanding the area of certain crops in the future, were to secure family food, ensure high prices/profit and better marketing and trade arrangements. 69.4% of the farmers stated that they would expand areas of certain crops if prices were to remain as high as the first half of 2008 (the highest price spike in 2008).

The high prices stimulated or encouraged Yemeni farmers to grow more wheat, sorghum, maize and lentil in the last two years. Profit margins for these crops, as induced by the changing economic environment as well as some additional arrangements (micro or macro policies), were enough to convince farmers to introduce these crops on their farms. Preference of local variety, especially wheat also contributed to favourable conditions for production. The prices of local products are three times more expensive than imported wheat, as well as for barley, maize, and especially the red and white sorghum.

However, some farmers are actually cutting back their production this year. That is due to increasing production costs. Prices for fertilizers and pesticides have gone up even more than food prices, while small farmers in Yemen heavily rely on these chemicals inputs, especially in the irrigated cultivation areas. Interviews revealed that saving and investment have reduced.

Overall, the impact or effects of high food prices were positive for the farmers who grow cereal crops/commodities. Yet, with rising consumption costs, it is likely that existing coping mechanisms will be further burdened. This may cause sales of household or farming assets, taking out high interest loans (exacerbating the debt trap), decreased school attendance, a rise in child labour, and internal migration pressures. Furthermore, as a result of the reduction in farm incomes, farmers cut down the food consumption of their families. In the end, the increase of prices in the world market brought some positive changes, towards the improvement of marketing, increase of competition among input importers (which lead to a decrease of their prices, etc), which stimulate the sustainable growth of production. On the other hand, it still remains a challenge to provide sufficient incentives to increase the production of the domestic farmers.

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