This document summarizes a presentation on confronting high food prices. It discusses how food prices have risen to unusual levels due to factors like increasing incomes, biofuels production, slowing agricultural growth, and speculation. This has negatively impacted the poor. While globalization and reduced distortions have helped in the past, rising protectionism in response to high prices threatens to undermine trade and harm consumers. The presentation argues for new institutional arrangements to better handle food price volatility and its effects.

1. Confronting the Food Price
Challenge
Joachim von Braun
International Food Policy Research Institute
IATRC Symposium “Confronting Food Price Inflation: Implications for
Agricultural Trade and Policies”
Seattle, June 22, 2009

2. Overview
1. Food price developments
2. Prices, policy dynamics, and feedback
3. Prices and the poor
4. New institutional arrangements
Joachim von Braun, IFPRI, June 2009

3. Are we living in unusual times?
1872-2008 prices and population
Sources: J. von Braun, based on data from NBER Macrohistory database,
BLS CPI database, Godo 2001, OECD 2005, and FAO 2008;
Joachim von Braun, IFPRI, June 2009 Population data from U.S. Census Bureau Int’l database and UN1999.

4. Globalization of agriculture and food
systems
Global integration—across national borders—of
production, processing, marketing, retailing,
and consumption of agriculture and food items
Joachim von Braun, IFPRI, June 2009 Source: von Braun and Diaz-Bonilla 2008.

5. Trade globalization?
Agriculture trade in percent of production
Export/Production 1960s 1970s 1980s 1990s 2000-05
Latin America and the Caribbean 22.7 23.0 22.2 25.0 31.2
Sub-Saharan Africa a 23.3 17.0 12.8 12.2 10.9
Asia Developing 5.3 6.1 6.4 6.4 6.1
All Three Regions 11.6 11.3 10.5 10.7 11.2
Import/Production 1960s 1970s 1980s 1990s 2000–05
Latin America and the Caribbean 6.3 8.4 10.9 13.6 14.9
Sub-Saharan Africa a 8.7 6.3 8.1 8.6 11.1
Asia Developing 6.5 6.2 5.6 6.1 5.6
All Three Regions 6.8 6.7 7.0 7.8 7.8
a Does not include South Africa.
Joachim von Braun, IFPRI, June 2009 Source: Data from FAOSTAT 2009/

6. High-value products in developing
countries on the rise
Domestic consumption Exports
Joachim von Braun, IFPRI, June 2009 Source: WDR 2008 with data from FAOSTAT.

7. Widening gap in trade costs
Trade costs in processed foods in 2000:
- North: 73%
- South: 134%
Geography + history
matter more than
Infrastructure + institutions
(?)
Joachim von Braun, IFPRI, June 2009 Source: Olper and Raimondi 2009.

8. Commodity price spike, 2007-08
800 Price spike 125
Corn
Wheat 100
600 Rice
US$/barrel
US$/ton
Oil (right scale) 75
400
50
200
25
0 0
Closer linkages between commodity markets and
economic performance
Joachim von Braun, IFPRI, June 2009 Source: Data from FAO 2009 and IMF 2009.

9. Food prices in developing countries
stay high
Latest food price as of April 2009
(790 domestic price quotations in 58 developing countries)
80 78%
60
43%
(%)
40
20 17%
0
> 12 months earlier > 3 months earlier Highest on record
Joachim von Braun, IFPRI, June 2009 Source: FAO 2009.

10. Domestic prices of key staples remain high:
Wheat
Joachim von Braun, IFPRI, June 2009 Source: FAO 2009.

11. Domestic prices of key staples remain high:
Maize
Joachim von Braun, IFPRI, June 2009 Source: FAO 2009.

12. Domestic prices of key staples remain high:
Rice
Joachim von Braun, IFPRI, June 2009 Source: FAO 2009.

13. Transmission from int’l to domestic prices
varies by country and by product
Items with positive statistical significant coefficients with respect to
the international prices in t (month) and t-4
international price
in regression Mexico Guatemala El Salvador Honduras Nicaragua
ln_wheat_int ln_sweet_bread 0 ln_bread 1 ln_bread 1 ln_bread_loaf 0 ln_bread 1
ln_white_bread 0 ln_pasta 2 ln_macaroni 2 ln_spaghetti 1 ln_bread_loaf 1
ln_bread_decaja 1 ln_pastry 1 ln_bread_sweet 1 ln_wheat_flour 1 ln_bread_loaf_sliced 1
ln_cookies 0 ln_crackers 2 ln_crackers 2 ln_spaghettis 2
ln_other_cookies 0 ln_bread_semitas 1 ln_wheat_flour 1
ln_wheat_flour 0 ln_cookies 2
ln_pastry 0 ln_crackers 1
ln_candy_polvoron 1
ln_corn_int ln_corn 0 ln_corn 1 ln_corn 2 ln_corn 0 ln_corn 0
ln_tortillas 0 ln_tortillas 0 ln_tortillas 2 ln_tortillas 0 ln_tortillas 0
ln_corn_flour 0 ln_corn_flour 1 ln_corn_flour 0 ln_corn_flour 1
ln_corn_milling 0 ln_cornflakes 0 ln_cornflakes 1
ln_rice_int ln_rice 1 ln_rice 2 ln_rice 2 ln_rice 0 ln_rice 2
We report “.” when the null is rejected for maximum rank equal to 1,2,…,N-1
international price
in VECM Costa Rica Panama Dominican Republic Ecuador Peru
ln_wheat_int ln_bread 1 ln_bread 0 ln_bread1 1 dln_bread 1 ln_bread_cereals 2
ln_bread_square 0 ln_flour 1 ln_bread2 1 dln_bread_baguette 2
ln_bread_sweet 2 ln_pasta 2 ln_spaghetti 1 dln_flour 2
ln_cookies 0 ln_crackers 1 ln_pasta 1 dln_cookies 0
ln_crackers 2 ln_cereals 0 dln_pasta 0
ln_wheat_flour 2 dln_spaghetti 0
ln_corn_int ln_tortillas 0 ln_cereals 0 dln_corn 2 ln_bread_cereals 1
ln_corn_flour 0
ln_rice_int ln_rice 1 ln_rice 0 ln_rice 0 dln_rice 1 ln_bread_cereals 1
ln_rice_selected 0
ln_rice_premium 0
Joachim von Braun, IFPRI, June 2009 Source: Robles and Torero 2009 (forthcoming in Economica).

14. Price transmission, Uganda
Correlation of global and Ugandan price and food index
series, Jan 2000–July 2008
No lag One-month Three-
lag month lag
Maize 0.672 0.524 0.312
Rice 0.875 0.734 0.500
Food Commodity 0.779 0.755 0.707
Index
Joachim von Braun, IFPRI, June 2009 Source: Benson, Mugarura, and Wanda 2008.

15. Reasons for the change in price trends
1. Income and population growth
2. Energy and biofuels
3. Slow agricultural growth
4. Speculation and financial crisis
Joachim von Braun, IFPRI, June 2009

16. 1. Income and population growth
• Annual income growth high in 2005-07
- 10% in developing Asia, 6% in Africa
- 3% in industrialized countries
…but slowed down in 2008-09
- 6% in developing Asia, 4% in Africa
- -1% in industrialized countries
• Population grew by 78 million per year in
2005-09, reaching 6.8 billion in 2009
- Expected to reach 9.1 billion by 2050
Joachim von Braun, IFPRI, June 2009 Sources: IMF 2009 and UN 2009.

17. 2. Energy and biofuels
• Energy prices now affect not just agric. input
prices, but also output prices strongly via
biofuel-land competition
• IMPACT Model: Increased biofuel demand in
2000-07 contributed to 30% of weighted
average increase of grain prices
Joachim von Braun, IFPRI, June 2009

18. 3. Slow agricultural growth
Annual total factor productivity growth, 1992-2003
%
East Asia 2.7
South Asia 1.0
East Africa 0.4
West Africa 1.6
Southern Africa 1.3
Latin America 2.7
North Africa & West Asia 1.4
All regions 2.1
Joachim von Braun, IFPRI, June 2009
Source: von Braun et al. 2008.

19. 4. Speculation
Grain and oilseed futures and options - Ave. daily volume
Number of contracts
And closure of commodity exchanges (India, China, etc.)
Joachim von Braun, IFPRI, June 2009 Source: Chicago Board of Trade 2008.

20. Speculation and prices:
Evidence of causality
Commodity
Indicator of speculation activity Wheat Corn Soybeans Rice
1. Monthly volume (futures contracts CBOT)
2. Monthly open interest (futures contracts CBOT)
3. Ratio volume to open interest (1)/(2) (futures + +
contracts) (Apr/05 - (Dec/04 -
Oct/07) Jun/07)
4. Ratio non-commercial positions to total reportable +
positions (long) (Sep/05-
Mar/08 )
5. Ratio non-commercial positions to total reportable + +
positions (short) (Jan/05- (Aug/05-
Jul/07) Feb/08)
6. Index traders net positions (long – short positions)* + N/A
(Jan/06 –
May/08)
- “+”: evidence of causality
- Starting period of evidence of causality in parenthesis
- * It combines futures and options positions, data available since January 2006.
Joachim von Braun, IFPRI, June 2009 Source: von Braun, Robles, Torero 2008.

21. 4. And financial crisis
Food- and financial crises linkages
Food crisis Financial
crisis
But Who drives Whom?
Joachim von Braun, IFPRI, June 2009 Source: von Braun 2008.

22. Any lessons from history?
Financial and Food Price Crises 1900 - 2008
Pre World War:
CORR (1900 – 1950) = - 0.16
Banking, currency, sovereign default, and inflation crises
index (weighted by share of income)
(2000 US$/metric ton, 3-year averages)
Panic of 1907
Wheat price
Sources: The wheat price are compiled and interpolated from data from BLS 2008, Godo 2001, NBER 2008, OECD 2005,
U.S. Census Bureau 2008, and United Nations 1999.
The BCDI Index is a composite index of banking, currency, sovereign default, and, inflation crises. It was developed by
C. Reinhart and K. Rogoff, and presented at Brookings Institution in April, 2009.
Joachim von Braun, IFPRI, June 2009

23. Commodity prices, inflation,
and monetary policy in the USA
Core inflation, effective federal funds rate
Oil price per barrel, PPI – commodities
End-2004: oil price spill to other commodities, effect on core inflation
2004-07: Tight monetary policy triggered recession (from housing
market defaults to decreased consumption and incomes)
Joachim von Braun, IFPRI, June 2009 Source: Data from US Bureau of Labor Statistics.

24. Overview
1. Food price developments
2. Prices, policy dynamics, and feedback
3. Prices and the poor
4. New institutional arrangements
Joachim von Braun, IFPRI, June 2009

25. Decreased market distortions ?
Producer support estimates
India Indonesia
30 80
20 60
10 40
20
Percent
0
Percent
0
-10
-20
-20
-40
-30
-60
-40
-80
1985 1987 1989 1991 1993 1995 1997 1999 2001
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
%PSEc %PSE %PSEc %PSE
China Vietnam
30 80
20 60
10 40
20
Percent
0
Percent
0
-10
-20
-20
-40
-30 -60
-40 -80
1995 1996 1997 1998 1999 2000 2001 1985 1987 1989 1991 1993 1995 1997 1999 2001
%PS Ec %PS E %PSEc %PSE
Source: Orden et. al 2007.
Global Trade Restriction Index: 1985-89=23%, 2000-04=12%
(Lloyd, Croser and Anderson 2007)
OECD producer support: 1986-88=37%, 2005-07=26% (OECD 2009)
Joachim von Braun, IFPRI, June 2009

26. But now a new wave of
trade protectionism with high prices?
Export restrictions in 2008 were serious!
• Tariff increases do not explain trade decline
• Trade financing an issue in the recession
Potential costs of rising protectionism are high!
• Failed Doha round: up to -11.5% in world
trade (volume) if tariffs increase to their
current WTO limits (bound level)
Joachim von Braun, IFPRI, June 2009
Source: Laborde, Torero 2009, IFPRI.

27. …And reversal in grain stock policy
Cereal stocks
206.9
200
2006
149 2009
150
Million tonnes
100
54.5
50 39.4 44.4
25.8
0
China India EU
Joachim von Braun, IFPRI, June 2009
Source: Based on data from FAO 2009.

28. Creation of cartels?
• 2008, Vietnam, Thailand, and Burma
attempted to form a rice cartel
• June 2009, Russia, Ukraine, Kazakhstan to
form a 'grain pool’ to:
- manage stocks and prices
- improve infrastructure incl. rail and port
capacity
Joachim von Braun, IFPRI, June 2009

29. Result: Accumulation of market
inefficiencies
Market efficiency:
From “hypothesis”
to “fact”
to “myth”?
(Justin Fox, 2009)
Joachim von Braun, IFPRI, June 2009

30. Rise in food protests
800 Maize 25
700 Wheat
Rice 20
600
Riots (right)
500
# of riots
15
US$/ton
400
300 10
200
5
100
0 0
Jul-07
Jul-08
Jan-08
Jun-08
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Aug-08
Sep-08
Oct-08
Apr-08
Feb-08
Mar-08
May-08
Joachim von Braun, IFPRI, June 2009 Source: J. von Braun based on data from FAO 2009 and news reports.

31. Looking for land:
Overseas land investments to secure food supplies, 2006–09
Source: von Braun and Meinzen-Dick 2009,
Joachim von Braun, IFPRI, June 2009 with data compiled from media reports.

32. Overview
1. Food price developments
2. Prices, policy dynamics, and feedback
3. Prices and the poor
4. New institutional arrangements
Joachim von Braun, IFPRI, June 2009

33. Rising number of hungry people in the
developing world
>1 bil.
(in million)
WFS target
Joachim von Braun, IFPRI, June 2009
Data source: FAO 2006, 2008, 2009.

34. 1.4 billion people remain poor in the
developing world
Poverty at $1/day, 2005 PPP
80 1.2 East Asia and Pacific
South Asia
1.0
Sub-Saharan Africa
60
% of population
0.8
Billions
40 0.6
East Asia and Pacific 0.4
20 South Asia
0.2
Sub-Saharan Africa
0 0.0
1981 1987 1993 1999 2005 1981 1987 1993 1999 2005
Joachim von Braun, IFPRI, June 2009 Source: Chen and Ravallion 2008.

35. High food prices reach the poor
• Poor countries fully participate in food
price shocks
• Poor households are reached by high
prices (Dorosh, Dradri, Haggblade 2009)
- Coping strategies vary, and include
switching to non-traded food items
Joachim von Braun, IFPRI, June 2009

36. Maize and sweet potato prices
Zambezia, Mozambique 2006-2008
12
mzpkg
10
wspkg
8
6
4
2
0
Joachim von Braun, IFPRI, June 2009 Source: R. Labardo, A. de Brauw HarvestPlus, 2008.

37. People in low-income countries are very
sensitive to changes in food prices
Price elasticities of maize in Zambia
High Low
estimate estimate
North
Small farm -0.92 -0.52
Rural nonfarm -1.04 -0.59
Middle and urban rich -0.61 -0.45
Urban poor -0.53 -0.39
South
Small farm -0.60 -0.33
Rural nonfarm -0.58 -0.33
Middle and urban rich -0.16 -0.12
Urban poor -0.24 -0.18
National aggregate -0.64 -0.43
Joachim von Braun, IFPRI, June 2009 Source: Dorosh, Dradri and Haggblade 2009.

38. Human costs of volatile prices are high
Price stocks and malnutrition in Kordofan children,
Jan 1981-Dec 1986
Teklu, von Braun, Zaki 1991.
And must be included in sound econ. analysis of
Joachim von Braun, IFPRI, June 2009 price volatility

39. Overview
1. Food price developments
2. Prices, policy dynamics, and feedback
3. Prices and the poor
4. New institutional arrangements
Joachim von Braun, IFPRI, June 2009

40. Strategic agenda
1. Promote pro-poor agriculture growth with
technology and institutional innovations
2. Facilitate open trade and reduce market
volatility
3. Expand social protection and child
nutrition action
Joachim von Braun, IFPRI, June 2009

41. For long-term agric. growth:
Double public agric. R&D to impact poverty
R&D allocation  in # of + Agr. output
(mil. 2005 $) poor (mil.) growth (% pts.)
2008* 2013 2008-2020 2008-2020
SSA 608 2,913 -143.8 2.8
S Asia 908 3,111 -124.6 2.4
Devel.ing
World 4,975 9,951 -282.1 1.1
CGIAR investment to rise from US$0.5 to US$1.0 billion
as part of this expansion
Joachim von Braun, IFPRI, June 2009 Source: von Braun, Shenggen Fan, et al. 2008.

42. What to do about volatility?
1. Keep trade open at times of global and
regional food shortage is a must
2. Regulation of food commodity markets? (only
as part of financial markets)
3. Establish grain reserves policy at global level
(emergency reserve, shared physical
reserves, and a virtual reserve > a new
institution at global level needed)
Joachim von Braun, IFPRI, June 2009

43. Institutional design behind virtual
reserves
Intelligence unit
• Model
fundamentals
Futures market
• Model dynamic
price band
• Trigger alarm
High level technical
commission
• Approve intervention
Country
Appoint commitment to
supplying funds
Joachim von Braun, IFPRI, June 2009

44. Support pro-poor food and nutrition
interventions
Protective actions e.g.:
• Cash transfers
• Employment-based food security programs
Preventive actions e.g.:
• School feeding
• Early childhood nutrition programs
Focus on children, women, and poorest
Joachim von Braun, IFPRI, June 2009

45. www.ifpri.org
Joachim von Braun, IFPRI, June 2009