FAO presentation on 2/2/2011 to the CTA Briefing No21 on Geopolitics of Food: implications for ACP countries

The FAO Assistant Director-General of the Economic and Social Development Department, Mr. Hafez Ghanem, will make a presentation on 2/2/2011 to the CTA Briefing No21 on Geopolitics of Food: implications for ACP countries. His presentation will be on Greater transparency for a better management of agricultural price volatility.

Food prices have been fluctuating widely over the last four years, hurting both consumers and producers. In the second half of 2010, the FAO Food Price Index increased, especially after the drought in Russia this summer, and reached 215 in December 2010, surpassing its 2007–2008 crisis peak.

Price Volatility has an impact on the poor consumers. Large, unexpected swings in food prices greatly endanger the food security of the poor in developing countries who spend as much as 70 percent of their incomes on food. As a result of the 2007–2008 food price crises, FAO estimates that about 80 million additional people became undernourished. Excessive volatility also hurts producers. When price uncertainty increases, poor farmers invest less and use fewer inputs, making them more likely to remain in poverty. Food price volatility will be one of the priorities on the G20 Agenda this year.

FAO is considering that different variables could affect the food price volatility: the petroleum prices, the crop yields, the food stock levels, and the exchange rates. If the petroleum price is high, there will be an increase of the transportation costs of agricultural products and fertilizer prices. It can create an increase of request for bio fuels which require food crops as inputs and can therefore change food prices. The food demand is inelastic: small changes in supply can lead to big changes in prices, meaning that even limited crop yield variations can have large effects on food price fluctuations. The food price volatility is inversely related to the level of food stocks: as stocks fall, price volatility rises. Finally, changes in exchange rates, especially of major exporting countries, translate to changes in international food prices. An additional cause of price volatility is the lack of reliable, up-to-date information on crop supply and demand, stocks, and export availability. Speculators may also have an impact on the food price volatility.

Price Volatility in Agricultural Markets - FAO Policy BriefThe FAO Economic and Social Development Department is working on price volatility in agricultural markets and will publish in the forthcoming months a report on Price Volatility and Crises in Global Food Markets (see Policy Brief covering the aspects of price volatility which has an impact on the world food security).

Market-friendly approaches are needed to limit volatility. Some of them are reported here below and will be extensively developed in the book:

Yield-enhancing investments: Agriculture has been neglected for too long, particularly in developing countries. More investments must be made, particularly in research and development and infrastructure that promote irrigation as well as drought-resilient crops and their hybrids.

Trade policies: Current trade policies, particularly agricultural subsidies in rich countries and export restrictions during crises, must be reviewed to limit the effects of food price volatility.

Improving market transparency: FAO should intensify its information gathering and dissemination efforts. The efforts should focus on information about both the real agricultural market and related financial transactions.

Reforming policies for grain-based bio fuels: Countries with support regimes for bio fuels could review such policies, taking their impact on food security into account.

Review stock policies: Adequate emergency food stocks, or strategic reserves, must be maintained. These could be held at the national or regional levels. Global emergency reserves could also be envisaged.