Food Prices: Drivers and Welfare Impacts in Emerging Market Economies

Growing protests against high food prices in both the developing and developed worlds have elevated food prices as one of the top issues among policymakers. Since 2002-2004, average world food prices have doubled. While most prices sharply declined during 2009 due to the economic crisis, since then most agricultural commodity and food staple prices have recovered and surpassed the peak observed during 2008. The SIEMS latest Emerging Market Brief concludes that these price increases threaten to erase much of the gains in poverty reduction that have been achieved in the last decade and reduce the growth rate of some of the most dynamic emerging market economies.

The research identifies both short-run and long-run factors behind the global food inflation in recent years. The short-run factors include:

• Financial speculation - The role of index investors has increased substantially in recent years, bringing a new class of investors and a new way of investing into commodity markets. Financial speculation is likely to have played an important role in the volatility—and sharp increases during some periods—for some agricultural commodity prices.
• Higher oil prices – Petroleum is an important input for food production, particularly for fertilizers.
• Government policies - Authorities in some countries have responded to higher food prices by building stockpiles and applying taxes on food exports and export quotas, among other things. These policies have helped to precipitate tightness in global food supplies.

The report also identifies some critical long-run factors:

• Changing patterns of food consumption in the emerging markets – Higher per capita incomes in the developing world is increasing and altering the demand for many foodstuffs. For example, the average Chinese went from consuming 9kg of meat per year in 1970 to almost 54kg in 2007.
• Biofuels Development – Rising global energy demand and the desire to reduce carbon emissions has greatly increased the demand for biofuels this past decade. Crops like maize, sugar and cassava are being used in biofuels production in significant amounts now, drawing down their global stockpiles.

The report stresses that the impact of higher food prices will be felt greatest among the lower-income populations in the emerging markets since food outlays is a large share of their disposable income. For example, for people living below the national poverty level in India (two-thirds of the population), 70 percent of household expenditures is devoted to food. The report concludes with a number of policy recommendations, including incentives to increase long-run agricultural supplies and productivity.