Recent Global Food Price Shocks: Causes, Consequences and Lessons for African Governments and Donors

Abstract

Dramatic increases in international agricultural commodity prices began in 2006 and peaked in July 2008. An equally remarkable and rapid decline of those prices then ensued, accompanied by extreme volatility in those prices. The trend in food prices lagged the rapid increases in other commodity prices, including oil and metals, but accompanied those other prices in the downward part of the cycle. Not all agricultural commodities increased to the same extent—grains and oilseed prices increased the most, with rice among the most expensive at the peak and rising as much as crude oil, while prices of some African exports (cocoa, coffee and cotton) increased to a much smaller extent than the grains. High commodity prices quickly raised farmgate prices in developed countries. In developing countries, poor market integration and border barriers may have limited pass-through of these prices to the farmgate, but there was more rapid food price and general inflation than occurred in many developed countries. Countries were impacted to differing extents, and food riots occurred in the most affected cases. It has been noted that underlying fundamentals of food price inflation differ by the extent of development, as poor countries have smaller distribution costs but higher budget shares in basic staples. Import dependence, tradable versus non-tradable status of grains and whether there were home goods substitutes influenced the extent of price transmission. Many developing countries reacted by altering trade and domestic agricultural policies and attempted to stabilise domestic markets. Importing countries reduced tariffs and taxes in many cases, and food subsidies were increased in some cases. Export taxes were enacted to protect domestic users, and bans of exports were applied in some extreme cases—explaining the especially large increase in rice prices. While impacts on domestic prices vary across country cases, disentangling the role of policy response from market integration would require further work. Policy responses were complicated by disagreement at the time that prices were rising as to whether the increases would be permanent or short lived, which in turn depends on the root causes of the increases—over which there has been considerable debate. Consensus has emerged on some factors, while controversy over macroeconomic relationships persists. They were also complicated by dynamic adjustments of related prices, which were not instantaneous. For example, fertiliser prices did not fall until several months after grain prices fell. Policy responses of national governments in Africa and elsewhere in the developing world contrast sharply with initiatives recommended by the international community. International organisations, development banks and donors emphasise emergency relief and longer term agricultural development, whereas national governments heavily utilised market interventions through trade and domestic policy. In this paper, we will first explore the factors that have been offered to explain the run-up and subsequent down-turn in agricultural commodity prices. Explanations have included supply and utilisation events, competition for grains and oilseeds as food versus fuel, and financial factors such as currency changes that exaggerated prices measured in dollars. Interactions between these factors will matter to the resulting outcomes, so specific contributions cannot be assigned. Moreover, debate persists on the exogenous mechanisms driving these changes, which are often interrelated (e.g., worldwide economic boom and then global recession, speculation in commodities). The goal will be to identify factors likely to drive commodity prices in the future and to provide some understanding of the dynamics and persistence of the observed global price changes. The next part of the paper will explore how those global price changes were transmitted to developing country markets. The extent of farmgate price changes and retail food price adjustments will be documented to the extent feasible. The roles of border policy, domestic agricultural policy, market integration and retail food margins will be considered. Special emphasis will be placed on what actual policy adjustments were taken and how well they worked. Given the presumed underlying causes of high and then low food prices, and the uncertainty of future global commodity prices, policy options now available to developing countries will be explored. These will include short-run safety nets, market interventions and long-run incentives to agricultural development. In this part, special emphasis will be put on what happened in Africa and how it should respond in the future. Some of the key issues in the current debate on expanding African agricultural sectors, including price stabilisation and fertiliser subsidisation, will be explored. In the process, we will evaluate how far various methodologies have taken us in providing an understanding of the consequences of these recent events, and providing a sound basis for policy recommendations.