Global food prices and their determinants

Prakash Shetty

Univ of Southampton, UK LANSA, MSSRF, India Declining food prices

A drastic decline in real prices for food and agriculture commodities

1,400 250

1,200 200

1,000 Palm oil ($/ton) 150 Soybeans ($/ton) 800 Maize ($/ton) Rice ($/ton) 600 Wheat ($/ton)

100 Index, Index, 1990=100 constant 1990 constant US/t Agriculture (Index) 400 Food (Index) 50 200

0 0 1960 1965 1970 1975 1980 1985 1990 1995 2000

Source: World Bank, “Pink Sheets” Rise in real price of food after 2006

FAO food price index: An index that measures changes in international prices of a basket of goods

SOFI - FAO, 2008 Brahmabhatt & Christiansen, 2008 Recent agricultural commodity prices suggest decline

2012 2013 2014*

Cereals 236 219 199

Rice 231 233 235

Wheat 204 194 183

Coarse grains 283 246 202

Oil seeds 224 207 204

Vegetable oil 224 193 198

* Forecast Food Outlook: Biannual report on global food markets, FAO 2014 Agricultural input prices exceed food prices

SOFI- FAO, 2008 Factors that influence global food prices 1. Impact of subsidies

Objective: support agricultural producers by reducing input costs or increasing prices received and to make food more affordable to consumers

In the USA: • Indirect: Perverse incentive that results in more production – leading to cheap HFCS, hydrogenated fats and corn-fed meats – processed foods

• Direct: estimates suggest that agriculture commodity prices may at best rise by 5-7% and consequently of meat by 1%. Overall impact on food costs for consumer small. Simulations suggest elimination of subsidies will result in very small increases to consumers (Alston, Rickard & Okrent, 2010): 8.4% change in grains, 2.9% change in beef & pork 4.8% change in poultry and eggs Factors that influence food prices 2. Costs of Externalities True accounting of food costs needs to include At farm gate: • Environmental costs: pollution water & air, damage to wildlife and biodiversity, damage to health from chemicals and food poisoning and carbon emissions. • (Costs estimated for 1996 for the UK at the farm gate £2.4Bn or £208 per hectare of arable land and permanent pasture estimated to be larger than net farm income– Pretty et al, 2000) ‘POLLUTER DOES NOT PAY’ BUT NEITHER DOES THE CONSUMER! • Animal welfare costs (Ensuring animal welfare may imply only marginal increases in food price?) At the plate: • Transportation costs (food miles) (Domestic > International with shopping trips having biggest impact Online and home delivery is subsidised for the consumer) Factors that influence global food prices 3. Post harvest losses and food waste Food waste includes: post harvest loss and food processing loss and loss at retail and consumer level ‘PROFITABLE TO LET FOOD GO TO WASTE’

Current Global Food Waste is estimated at: • 1.3 Gtonnes per year • Equivalent to 3.7 Gtonnes of CO2 per year • 1.5 Bn hectares of land to produce this (30% of agricultural land) • 250 cubic km of water use • 66% of biodiversity and vulnerable species threatened • Costs $ 750 Bn/yr at producer prices and $ 920 Bn/yr at trading prices

NEITHER THE COST OF FOOD WASTE NOR ITS ASSOCIATED EXTERNALITIES FEATURE IN FOOD PRICES Integrating food waste into full cost accounting in market prices would unrealistically inflate food prices.

FAO, 2014 Concluding remarks • Subsidies, cost of externalities and food waste need to be considered when accounting for the true or real cost of food. • Increased food production coupled with low food prices has contributed considerably to reduce food insecurity in the world. Need to note that we have about 850 mill hungry/ food insecure and a rise if food prices will make the situation worse. • Evidence that food price increases in developed and developing countries increases hunger and poverty. • Increase in food prices will increase food fraud especially when austerity measures during economic recession result in feeble regulation. • Subsidies are contentious – different in developed and developing countries but will need to be addressed. • Cost of externalities when internalized will cause food price rise – will need to be reduced gradually. • Global food waste needs urgent attention. Its reducible. • True Accounting of food price reveals a significant difference between Real food prices and the price – while trying to reduce the difference we need to be aware of the consequences a rise in food prices will have on vulnerable populations in both developed and developing countries.