Food Prices: Should Emerging Market Economies Be Concerned?

By Nicolás Depetris Chauvin

High food prices are here to stay. This should be a reason of great concern not only in less developed countries but also in the most dynamic emerging market economies.

Food prices have doubled in real terms in the last eight years. Nevertheless, in recent weeks, sovereign debt troubles in developed economies and the possibility of a new global recession has shifted attention away from high food prices. Something similar happened in 2008 with the financial crisis. The differences is that, while most agricultural commodity and food staples prices sharply declined during 2009 to later recover and surpass the previous peak, this time around most commodity prices seem resilient. If most analysts are right, and high food prices are here to stay, this should be a reason of great concern, not only in less developed countries but also in the most dynamic emerging
market economies.

However, before explaining why this is the case, it is important to offer a diagnostic of some of factors behind the price increases.

The short-term factors behind the food prices increases include financial speculation, higher oil prices, and government interventions.

What Drives Food Prices?

The answer to this question is not as simple as it seems. Market analysts agree that there is a convergence of short and long-term factors. The short-term factors often mentioned include financial speculation, higher oil prices, and government interventions. The decline in stock markets and depressed housing values has helped to heighten the appeal of commodity futures as an asset class. On the input side, the higher price of petroleum has helped raise the costs for producing agricultural commodities. The third short term factor is the action of governments trying to mitigate the effect of international prices on domestic prices. As a way to secure food stocks and keep domestic prices affordable, several governments have restored to taxes on exports, export ceilings or bans, helping to precipitate tightness in global supply.

More important, however, seem to be some medium to long-term factors behind this secular movement in commodity prices. On the demand side, the two elements to consider are the rising and changing patterns of food consumption in the developing world, and the evolving patterns in biofuels development. On the supply side, the impact of climate change on agricultural productivity may play a role in the
years to come.

The economic rise of developing countries is creating a growing demand for raw materials and commodities. The average Chinese went from consuming 9kg of meat per year in 1970 to almost 55kg nowadays. China now accounts for half of the global consumption of pork and almost one fifth of all the poultry, which also explains China’s increasing demand for crops that are used for feedstock. Other fast growing countries like Brazil are also beginning to account for larger shares in global meat consumption. Looking to the future, global demographic changes and changing patterns of income distribution over the next 50 years is expected to lead to an increased general demand for food, as well as different patterns of food consumption. It is predicted that global cereal demand will increase by 75 percent between 2000 and 2050, while global demand for meat is expected to double during that same period.

Rising global energy demand combined with efforts to address climate change has prompted growing interest and policy emphasis on biofuels as an alternative fuel source. This could affect the supply of food in at least two important ways. First, certain food crops like maize and sugar could be directly used in biofuel production. Second, the competition for land area devoted to biofuels as opposed to food production. There are, however, some potential mitigating factors in this trade-off such as substantial increases in crop yields, increased efficiency in ethanol production, or the development of alternative to biofuels such as solar and wind energy.

The third long-term factor to be taken into account is the question of the effect of climate change in agricultural productivity. In recent years, some of the major suppliers and some large consumers of agricultural crops in the world markets have suffered poor harvests due to weather conditions. Various scientific studies have highlighted strong evidence that the impact of climate change on agriculture will be quite severe, with most losses concentrated in developing countries.

On the other hand, there are some evolving positive trends that may mitigate food prices. Demand for agricultural commodities will continue to grow over the next decades, but at a slower pace. This is due to the anticipated slowdown in world population growth to an average of 1% per annum to 2030 from 1.7% over the past 30 years. At the same time, current high prices will produce a strong supply-side response in the coming years.


Why Emerging Market Economies should also be concerned

The commodity price boom has both winners and losers among developed and developing nations. Those countries that are net exporters of raw materials have largely benefitted at the aggregate level from improvements in their term of trade. While two-thirds of the countries in the world are net food importers, most emerging market economies are net exporters of raw food. This is the case, for instance, of four of the five BRIC countries with the exception being Russia.

Policy coherence is essential in order to address complex and evolving food, water and energy issues. A growing economy and population require, at the most basic level, adequate supplies of food, energy and water.

The analysis at the aggregate country level, however, can be misleading. To understand the welfare implications of food price increases for emerging market economies, it is important to look within each country. The populations in net food importing countries are not the only ones vulnerable to food price shocks. There are two main reasons for this. First, international trade either in food or in the inputs to produce food implies that factors affecting these international markets could also be transmitted to any country that trades, spanning both net food importers and exporters. Second, in many other developing countries—including large ones like India, Indonesia and even food exporting ones like Brazil and Argentina—the impact of higher food prices will be greatest among the low income population since food outlays is a large share of their disposable income. Both poverty and inequality are high not only in low income countries but also in middle income countries where a large segments of both the rural and urban populations are poor, and a large share of their expenditures is devoted to food. The poor are urbanizing faster than the population as a whole. This in turn suggests that more poor people will be concentrated in urban centers and they will constitute a growing population segment that are net buyers of food and vulnerable to food price shocks. This phenomenon is already affecting fast growing and urbanizing countries like China and India.

All this might help to explain why many countries have taken immediate steps to try and temper the effects of food price inflation, even as they might also have some segments of the population possibly benefiting from higher prices on the supply side. Countries will need to think about the development of social safety nets that involve direct transfers ensuring that the poorest get adequate food and nutrition, or more sophisticated mechanisms such as hedging instruments that would cover the excess fiscal costs of food subsidies in case the price increased. Collective and coordinated action among countries is probably necessary in order to avoid exacerbating already tight food supplies, as well as address growing food challenges in a sustained way. On top of that, policy coherence is essential in order to address complex and evolving food, water and energy issues. A growing economy and population require, at the most basic level, adequate supplies of food, energy and water. These resources are inextricably inter-related as, both agricultural and energy production, are water intensive activities. In moving forward in this area, it is important to consider how policies designed to develop viable energy alternatives or to increase agriculture production do not end up creating adverse effects on human development on other fronts.

About the author

Nicolas Depetris Chauvin is a Senior Advisor at the African Center for Economic Transformation, an Associate Professor at Universidad de Buenos Aires and a Research Fellow at the SKOLKOVO Institute for Emerging Market Studies. He is a development economist with extensive research and policy analysis experience in Africa, Latin America, and the Middle East. He has held academic positions at the University of Oxford, the Dubai School of Government, Sciences Po and INSEAD among others. Nicolas has also worked as a researcher at the United Nations Development Programme, the World Bank, and the Inter-American Development Bank. He holds a PhD in Economics from Princeton University.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.