FROM SUPPLY TO FOOD SECURITY (contd.)

STABILITY OF FOOD SUPPLY

The second dimension of food security is the stability of food supply. Temporary disruption of supplies can have long-term impacts. The two options for fulfilling demand – food imports and domestic production – imply several reasons for instability of food supplies. A major reason for instability in food supply is high fluctuation in food prices (price volatility). Volatile prices lead to poor investment strategies of producers and immediate impacts on consumers, especially in developing countries where consumers spend a large share of their income on food. Another source of instability is conflicts, which increase food supply risks.

PRICE VOLATILITY

Low and fluctuating prices are a core problem for stable food production. Agricultural price volatility increases the uncertainty faced by farmers and affects their investment decisions, productivity and income. Lagging investments can be a constraint in meeting changing consumer demands. For willingness to invest it is the volatility of the revenue flows that matters. Instability in prices is related to factors in the agricultural domain as well as in other sectors. 

Figure 31: Crushed by war and world conflicts. For people in countries at war or subject to economic embargos, many goods are scarce, with shortages of food and water being the most crucial. (Source: PRIO, 2004).

Trade policies that limit market access, increase the volatility of commodity prices, unfairly subsidize developed country exports and constrain the trade policy flexibility of the developing world affect the stability and security as well as overall economic wellbeing of developing countries. A quarter of the world’s governments implemented some export restrictions in the current period of high prices to ensure domestic food security. The impacts of these restrictions varied from panic-buying to the cultivation of smaller areas due to high input costs and the expectation of low product prices. These restrictions even increased price volatility of food products on the world market, thereby decreasing the food security of other countries (FAO, 2008). Earlier experience shows that attempts to gain domestic price stability create global price instability (OECD, 2008; World Bank, 2008). Furthermore, once policies are established to protect food markets, they are not easily dismantled.

It should also be noted that global food prices are determined by a small share of food products that are traded on the global market. The share of cereals traded compared to the volume produced is small and has increased slightly over the last four decades, from 9% to 13%. Annual fluctuations in world cereal production are in the same order of magnitude, varying from +9.8% to –3.9% of the previous year’s production. This implies that supplies to the world market (the sum of the surplus in the supply of each region) can be reduced by one-third or increase two-fold. Demand in the world market does not follow this trend, however, and probably even moves in the opposite direction in case of poor harvests. These yearly trends describe the risk of discrepancy between supply and demand on the world food market. For this reason, with open markets, developing countries are very vulnerable to fluctuations in global food supply and prices and temporary protection of their own agricultural markets is promoted for these countries.

Supplies from food stocks can also buffer shortages on the world market (FAO, 2008). Stocks of cereals and vegetable oil have fallen to low levels relative to use, reducing the buffer against shocks in supply and demand. Stocks are not expected to be fully replenished over the coming 10 years, implying that tight markets may be a permanent factor in the next decade. This does not necessarily lead to permanent higher prices, but provides the background for continuing price volatility in the future. 

CONSTRAINTS BY CONFLICTS

Conflicts increase the risk of food supply instability tremendously (Figure 31). Countries in conflict and post-conflict situations tend to be food insecure, with more than 20% of the population, and in many cases far more, lacking access to adequate food (IFPRI, 2006). The group of countries that are experiencing civil conflicts cannot meet their basic needs and are large importers of food. In addition, the transport of commodities is hazardous and the situation is not secure enough for farmers to make investment decisions.

ACCESSIBILITY TO FOOD

Accessibility to food concerns both physical access and affordability. Access to markets concerns transportation of commodities and its costs as well as the transmission of price developments to producers. Poor transmission of price incentives to producers results in broadening the gap between consumers and producers, especially in periods of changing diets.

ACCESS TO MARKETS

According to the latest UN estimates, almost all of the world’s population growth between 2000 and 2030 will be concentrated in urban areas in developing countries (Figure 32). By 2030, almost 60% of the people in developing countries will live in cities (FAO, 2003). If present trends continue, urban population will equal rural population by around 2017.

 
Figure 32: Urbanization in developing countries between 1960 and 2030. (Source: UN, 2007). Figure 33: Supermarket share of retail food sales. (Source: Reardon et al., 2003).

Large urban markets create the scope for the establishment of big supermarket chains, with implications for the entire food supply chain. In 2002, the share of supermarkets in the processed/packaged food retail market was 33% in Southeast Asia and 63% in East Asia (Figure 33). The share of supermarkets in the fresh foods market was roughly 15–20% in Southeast Asia and 30% in East Asia outside of China. The 2001 supermarket share of Chinese urban food markets was 48%, up from 30% in 1999. Supermarkets are also becoming an emerging force in South Asia, particularly in urban India since the mid-1990s (Pingali and Khwaja, 2004).

The increasing growth and power of international food corporations are affecting the opportunities of small agricultural producers in developing countries. While new opportunities are being created, the majority are not able to utilize them because of the stringent safety and quality standards of food retailers, hence barring market entry. The economy of the corporate food supply chain has grown steadily over the past years. Between 2004 and 2006 total global food spending grew by 16% from US$5.5 to US$6.4 trillion. In this period, the sales of food retailers increased disproportionately to the sales of food processors and companies in the food input industry. The sales of top food processors and traders grew by 13%, sales by the top 10 agricultural input countries by 8%, while the sales by top food retailers grew by 40% (IFPRI, 2007). However, on a global scale the agricultural input industry is more monopolized than the food retail industry. In the agricultural input industry, three agro-chemical corporations control approximately half the world market (UNCTAD, 2006), while the top five food retailers control only around 13% of the total market.

Trade and urbanization affect consumer preferences. The rapid diversification of the urban diet cannot be met by the traditional food supply chain in the hinterland of many developing countries. Consequently, importing food to satisfy the changing food demand could be relatively easier and less costly than acquiring the same food from domestic sources.

In Asia traditional rice-eating societies are consuming increasing quantities of wheat in the form of bread, cakes, pastry and other products (Pingali and Rosegrant, 1998). Countries that traditionally imported rice for meeting food shortfalls may now be shifting towards increasing levels of wheat imports (Pingali, 2004). This trend is also evident in the import of other temperate products like vegetables, milk and dairy products and temperate fruit. Net imports of this category of products increased by a factor of 13 over the last 40 years, rising from a deficit of US$1.7 billion in 1961/1963 to US$24 billion in 1997/1999 (Pingali, 2004). Between 1997/1999 and 2030, the cumulative increase in imports of these products is expected to be 154% and 17% for vegetable oils and oilseeds, while meat imports are expected to increase by 389%. The overall result is that we are beginning to see a homogenization of food tastes across the globe, but with regional variations (Pingali, 2004).

Poor connections between urban and rural areas hinder price transmissions towards local markets, broadening the gap between urban demand and rural production in increasing demand for traditional products or for product diversification. The lack of access to markets is most evident in Africa, although large parts of Latin America and Asia are also experiencing long transport hours to reach markets (Figure 34). Consequently, domestic prices do not always follow international prices (FAO, 2006). The periods of rising real prices were generally associated with real exchange rate devaluations. Relaxation of government controls over prices and market systems also led to gains in producer prices in some cases. In other instances, import liberalization appears to have contributed to a decline in the real domestic prices of some commodities. Consequently, global shortages of food and feed that lead to global price increases are not followed by production increases at the local level.

FUTURE WORLD FOOD PRICES

Accessibility to food is also determined by the long-term trend in food prices (which is a different issue from price volatility). The rising trend in global food prices is likely to persist in the next decade. In the long run, however, prices will decline (OECD-FAO, 2008).

Prices are driven by a complex combination of factors. Historically, productivity gains and increasing competition in trade have overtaken stronger demand, resulting in the declining trend of the past 100 years. Recently, food prices have been driven by a combination of rising fuel costs, production of biofuels, and unfavorable weather conditions, with trade restrictions boosting upward price pressures (World Bank, 2008).

Figure 34: Market access in agricultural areas of Africa, Asia and Latin America. (Source: Sebastian, 2007).

Agricultural prices are forecast to decline over the next two years, but remain well above the levels of the first half of this decade. A strong combination of supply response and continued growth in demand is expected to keep prices above historical levels, but well below the peaks experienced in recent years (OECD-FAO, 2008). In real terms, prices in 2017 are projected to be 10% to 35% higher than in the past decade (OECD, 2008). While the long-term outlook for agricultural prices is particularly uncertain, the decline is expected to continue. In Global Economic Prospects, the World Bank projects a decline of about 0.7% a year through the forecast period until 2030 (World Bank, 2008b).

Price projections depend on a wide range of factors, including climate change, productivity developments, GDP and population growth and the policy environment. One of the cruel ironies today is seen in the connection between rising energy and food prices. Higher energy prices have increased fertilizer and transport costs and stimulated biofuel production (see box). This coupling can have devastating implications for global poverty and food security.

The impact of climate change is a particularly difficult issue in the long-term forecasts for agricultural prices. Forecasts of the rise in temperature and its impact on agriculture over the next two decades are extremely uncertain. Climate change threatens yields in many developing countries, although most of this effect is not likely to be felt until after 2030. The World Bank assumes an overall decline in agricultural productivity of between 1–10% by 2030 (compared with a future where average global temperatures remain stable), with Canada and Europe least affected and India, Sub-Saharan Africa, and parts of Latin America most affected. Were there to be no climate change between now and 2030, global agricultural productivity would be nearly 4% higher and the world price of food 5.3% lower. Over the longer term, the impacts of climate change could be much more serious, with agricultural productivity in many developing regions, notably Africa, potentially declining much higher than the global average (Cline, 2007).

The relationship between food prices and the oil price

Energy and agricultural commodity prices are increasingly correlated with each other. Rising oil prices increase fertilizer costs and freight rates. The emerging biofuel market strengthens these interdependencies, while a higher oil price increases demand for biofuels. The agricultural commodities used nowadays for biofuels were previously used for feed and fodder. As well demand for agricultural commodities as for factor inputs increases in this case.

Yields must increase by at least 43% by 2030 to meet demand, assuming all other factors constant (FAO, 2003). Fertilizer alone accounts for about 50% of historical increases in production (FAO, 2003). The projected increases required to sustain demand assume a substantial increase in the use of fertilizers by small-scale farmers in the region. As the cost of fertilizer is strongly correlated with oil prices, the future prices of oil will have a great influence on the accessibility of farmers to commercial fertilizer. Current FAO projections (2015/2030) scenario assumed an average oil price of US$21/barrel, while the later 2030/2050 scenario assumed an average oil price of US$53.4/barrel. At the peak of the current food crisis, oil prices hit US$147/barrel. As the cost, and subsequent use, of fertilizer is strongly correlated with price, a potentially higher oil price would lower the use of fertilizer or further increase the food price. 

Fuel price is one of the main determining factors for fisheries. Rising energy prices have a strong impact on capture as well as aquaculture (for the production and transport of fish feed) and lead to higher costs during the processing, transport (particularly air freight) and distribution of fish products. Small-scale fisheries, which depend on outboard motors and small diesel engines, have especially suffered from the spiralling rise in fuel prices.

In Global Economic Prospects 2009, the World Bank has run a number of simulations to quantify possible outcomes. Should global agricultural productivity rise by only 1.2% per year on average, instead of the 2.1% projected in the baseline, then prices, rather than declining, can be expected to rise by as much as 0.3% per year. If cereal production could increase as projected without any environmental constraints, it is expected to grow by 1.5–1.5% to 2030 according to demand, and by 0.9–1.0% between 2030 and 2050 (FAO, 2006; World Bank, 2008). However, the current scenarios of losses and constraints due to climate change and environmental degradation – with no policy change – suggest that production increases could fall to 0.87% towards 2030 and only 0.5% between 2030–2050 (World Bank, 2008). 

Alternatively, biofuels could have a significant impact on food prices if oil prices remain high or the cost of biofuels production declines. With a permanent increase in the rate of growth of demand for food products as source material for biofuels (assuming a doubling in biofuel production compared to the baseline), food prices will decline by only 0.5% a year. In general, OECD-FAO estimates confirm this sensitivity to key assumptions about yield and biofuels production (OECD-FAO, 2008). 

Overall, soaring food prices are blamed for their impacts on human vulnerability. However, there are two sides to this picture. Increasing food prices do have a positive effect on net food-selling households (FAO, 2008), augmenting their incomes and allowing more possibilities for farmers to afford investments in production inputs. This underlines the need to minimize short-term price volatility and stimulate slow increases in long-term food prices, in order to enhance investments in the agricultural system and bridge the gap between developed and developing countries as well as between rural food producing and urban food consuming regions. Ideally, these developments should take the environmental aspects previously described into account to achieve sustainable agricultural systems that will meet the food demand of all the world citizens and eradicate hunger. However, increasing yield and food supply without simply continuing the conventional expansion of cropland and rangeland and use of fertilizers and pesticides  –  at the cost of biodiversity and future generations – will require major investments and implementation of food energy considerations in the entire food production and consumption chain.

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