TWN Info Service on Finance and Development (Feb11/03)
21 February 2011
Third World Network

Food price hike throws 44 million into poverty
Published in SUNS #7090 dated 17 February 2011

Geneva, 16 Feb (Kanaga Raja) -- Rising global food prices since June last year have resulted in an estimated 44 million people falling into extreme poverty (under $1.25 a day) in low- and middle-income countries, the World Bank has said.

According to the latest edition of the Bank's Food Price Watch, the World Bank's food price index rose by 15% between October 2010 and January 2011. This is 29% above its level a year earlier, and only 3% below its June 2008 peak.

The Bank's estimates showed that extreme poverty in low- and middle-income countries may have increased by 44 million people in net terms as a result of the food price increases between June and December 2010.

This reflects 68 million people who fell below the $1.25 poverty line and the 24 million net food producers who were able to escape extreme poverty.

The food price rises create a range of macro-vulnerabilities, said the Bank. One aspect is the impact on domestic food inflation and overall inflation. More than one-third of the countries in Eastern Europe and Central Asia had more than 10% food inflation in 2010.

Among grains, said the Bank, global wheat prices have risen the most, doubling between June 2010 and January 2011. Maize prices are about 73% higher, but crucially, for many of the world's poor, rice prices have increased at a slower rate than other grains.

Sugar and edible oils have also gone up sharply, said the Bank, adding that other food items essential for dietary diversity in many countries have increased, such as vegetables in India and China, and beans in some African countries.

The latest figures on food prices by the World Bank follows a report released earlier this month by the UN Food and Agriculture Organization (FAO), which found that its food price index had risen for the seventh consecutive month, averaging 231 points in January 2011, up 3.4% from December 2010 and the highest (both in real and nominal terms) since the index was backtracked in 1990.

Many observers have pointed to the rise in global food prices and food insecurity as being one of the major factors contributing to the recent popular unrest in Tunisia, Egypt, Yemen and elsewhere.

In contrast to the 2008 food price hike, said the World Bank, two factors have prevented even more people falling into poverty this time. One is that good harvests in many African countries have kept prices stable, especially for maize, which is a key staple. Another is the fact that the increases in global rice prices have been moderate and the outlook for the rice market appears stable.

According to the Bank, a breakdown of its index shows that the grain price index remains 16% below its peak mainly due to relatively stable rice prices, which are significantly lower than in 2008. The increase over the last quarter is driven largely by increases in the price of sugar (20%), fats and oils (22%), wheat (20%), and maize (12%).

On global wheat prices, the Bank explained that a confluence of weather shocks to various large producing countries, followed in some cases by export restrictions, curtailed supply and caused wheat prices to more than double between the lows of June 2010 and January 2011.

Currently, two factors are keeping wheat prices high. On the supply side, there is uncertainty about the size and the quality of wheat exports from Australia - where crops were damaged by excessive rains and floods - as well as concerns about China's winter wheat crop.

Demand drivers center around the possibility of large wheat-importing countries, particularly in the Middle East and North Africa, coming to the market with large orders, said the Bank.

These are related to assuring the public that adequate domestic food stocks exist during uncertain political times in some countries, added the Bank.

Another reason is that countries like Saudi Arabia are progressively reducing domestic production of wheat to conserve valuable water resources and relying more on imports.

The Bank noted that the transmission rate of global wheat price increases to the domestic price of wheat-related products has been high in many countries.

For instance, between June 2010 and December 2010, the price of wheat increased by large amounts in Kyrgyzstan (54%), Bangladesh (45%), Tajikistan (37%), Mongolia (33%), Sri Lanka (31%), Azerbaijan (24%), Afghanistan (19%), Sudan (16%), and Pakistan (16%).

In India, higher domestic procurement prices for wheat have contributed to record domestic grain stocks, which have been released to curb prices. In parallel, the subsidized wheat program has been scaled up. In Egypt, the bread subsidy is estimated to reach around 85% of the population.

Nevertheless, even in these countries, consumers are not fully exempted from the impact of global price rises as prices of non-subsidized wheat products, as well as other basic staples, have increased.

The Bank said that maize prices have increased sharply and are affected by complex linkages with other markets.

In January 2011, maize prices were about 73% higher than June 2010. These increases are due to a series of downward revisions of crop forecasts, low stocks (US stocks-to-use ratio for 2010/11 is projected to be 5%, the lowest since 1995), the positive relationship between maize and wheat prices, and the use of corn for biofuels.

"Prospects of easing in this market depend partly on the size of the crops in Latin America, particularly Argentina, which has been affected by unusually dry weather due to the La Nina effect, and the extent of import demand from China in 2011 as well as oil and sugar price trajectories," said the Bank.

Countries in Sub-Saharan Africa have benefited from excellent maize harvests, which have led to a sharp fall in prices. The declines from June-December 2010 come on the heels of even sharper price falls in the early part of the year - on average, maize prices were lower in 2010 in comparison to 2009 in Uganda (52%), Rwanda (37%), Kenya (33%), Malawi (30%), Ethiopia (22%), and Tanzania (19%).

However, these prices also exhibit considerable volatility, which has adverse impacts on both producers and consumers. For instance, after a sharp decline in the early part of 2010, maize prices in Rwanda have rebounded by 19% since June 2010.

Several Latin American countries saw the price of maize rise dramatically in the last half of 2010 as dry weather lowered yields - the largest increases were witnessed in Brazil (56%) and Argentina (40%).

Higher global maize prices are also passed through to consumers indirectly by raising annual feed prices, meat prices, and the price of many processed food categories.

Pointing to the slower rate of increase in global rice prices, the Bank said that the export price for Thai rice has increased by 8% (Thai 5%) between October and January 2011, and 17% since June 2010. They remain about 70% below the peak reached during the 2008 food crisis.

Following good harvests in large exporting countries, the decision by the Philippines to limit imports, and the release of large stocks onto the market by Thailand, prices appear to be levelling off.

One factor limiting the downward pressure on rice prices are recent announcements by large importers such as Bangladesh and Indonesia to significantly increase domestic stocks.

The domestic price of rice was significantly higher in Vietnam (46%) and Burundi (41%) between June-December 2010. Indonesia (19%), Bangladesh (19%), and Pakistan (19%) have increased in line with global prices.

Rice price increases in Sri Lanka (12%) and China (9%) have been relatively moderate in the second half of 2010, while in Cambodia and the Philippines, the retail price of rice remained largely unchanged during this period.

Rice prices outside Asia remained stable in many countries, such as Cameroon, Guatemala, Mexico, Panama and Somalia, during this period.

The Bank further found that sugar and edible oil prices have increased sharply in recent months. Sugar prices have risen by 73% since June due to supply shortfalls from Brazil, the largest exporter, and weather shocks in Australia.

Similarly, edible oil prices were up on account of a number of weather-related shocks. Prolonged dry weather related to La Nina lowered expectations of yields in Brazil and Argentina, which together account for roughly 45% of soybean exports.

On the other hand, floods in southern Malaysia and Indonesia have hindered palm oil harvests.

These higher prices feed through to domestic prices quickly in many countries - for instance, sugar prices doubled in Cambodia between June and December 2010 and edible oil prices increased by 15% between September and December in Afghanistan, said the Bank.

The prices of other food items essential for dietary diversity have risen in many countries, said the Bank, noting that in India, food inflation stood at 18.3% in December partly due to the higher prices of fruits and vegetables, milk, meat, and fish.

In China, similarly, food inflation was driven largely by vegetables. In the second half of 2010, beans prices increased dramatically in Burundi (48%), Cameroon (43%), Kenya (38%), and Uganda (22%).

Meanwhile, the latest FAO Global Food Price Monitor released earlier this month found that the prices of all the commodity groups monitored (by the FAO) registered strong gains in January compared to December, except for meat, which remained unchanged.

The FAO Cereal Price Index averaged 245 points in January, up 3% from December and the highest since July 2008, but still 11% below its peak in April 2008.

International prices of wheat have risen some 4% in January compared to their December levels. International prices of maize also increased 4% in January. Export prices of rice declined some 4% in January following improved market availabilities from the main crop harvests in major producing Asian countries.

The FAO Oils/Fats Price Index rose by 5.6% to 278 points, nearing the June 2008 record level. The FAO Dairy Price Index averaged 221 points in January, up 6.2% from December, but still 17% below its peak in November 2007.

According to the FAO, its Sugar Price Index averaged 420 points in January, 5.4% higher than December's level.

By contrast, the FAO Meat Price Index remained steady at around 166 points. +