Are high food prices here to stay, wonders Nader Nourelddin* A wave of food and fuel price rises has swept the globe, causing increased levels of hunger and poverty and leading to popular unrest in at least 50 countries. Experts at the World Bank say at least 100 million of people are being pushed deeper into poverty and hunger, but this number according to World Food Programme researchers could be as high as 130 million. As things stand, approximately one billion people live on less than $1 a day, the threshold defined by the United Nations as absolute poverty, below which survival is endangered. No doubt the recent crisis has only added fuel to that fire. On international commodity markets, food prices have gone up 54 per cent over the last year, with cereal prices soaring by 92 per cent, according to evaluations by the UN Food and Agriculture Organisation (FAO) made June 2008. In rich countries people spend 10 to 20 per cent of their income on food, so they can afford to pay higher prices. In poor countries, however, they already spend 60 to 80 per cent of their budget on food. The worst-affected include the rural landless on the one hand, and on the other pastoralist and small-scale farmers in Africa and elsewhere. But the impact is also on the urban poor. In many of the world's poorest cities, people can suddenly no longer afford the food they see on store shelves because prices have soared beyond their reach. This is the new face of hunger. It's no longer simply a matter of availability, as we would see, for instance, in a situation of drought or famine. It's about accessibility, and especially impacts populations who rely on the market. A number of temporary and permanent factors have been identified which help to understand how future commodity prices are expected to evolve. And while the question on everyone's lips refers to whether food prices will remain as high as they are today, it in fact appears that it is very unlikely that they will. But while prices can be expected to fall from current highs, and to resume a gradual decline, they are expected to do so from higher levels than what we have historically witnessed. The main factors that have contributed to the current spike, and which will help determine future developments, can be summed up as follows: - Demand has grown faster than supply in part because of growth in biofuels production. For example the demand for wheat increased by 89 per cent from 2005 to 2007, and will increase again by 37 per cent by 2017. Similarly, the demand for maize changed from 2005 to 2007 by 71 per cent, and is expected to continue increasing by 56 per cent by 2017. Oilseeds and vegetable oil increased in demand by 82 per cent, with another expected increase of 80 per cent by 2017 (Organisation for Economic Co- operation and Development-FAO Agricultural Outlook 2008-2017). - Supply would normally have grown more, but unfavourable weather conditions in some important producing countries reduced their production and export supplies to world markets. Future supply responses will be dampened by high oil prices. - The sensitivity of demand to price changes appears to be falling for various reasons. Thus, a shock to supply of a given significance will require a greater price change to bring about the demand adjustment required to balance the market. - At the same time, global stocks have declined to record-low levels over the last decade, such that any variations in quantities produced and demanded cannot be buffered and hence have a proportionally much greater effect on market prices. - The sharp increase of funding activity in future commodity markets may have further contributed to the short-term price hike, but the extent to which this has been the case is uncertain. - Border measures adopted by many countries in an effort to increase domestic market supplies have reduced supplies on world markets, further magnifying price increases. These developments have combined to lift prices to very high levels. But an element of uncertainty about future developments appears to have had a strong impact as well. This has been particularly the case in recent times, as both governments and investors are acting in ways that sometimes contribute to further price increases and future price volatility. Without these additional influences, prices would most likely not have been as high as they currently are. With respect to future price trends, according to the Outlook, scenario evaluation results have shown the relative impact on prices of different assumptions with respect to developing macroeconomic variables including exchange rates, oil prices, biofuel production and yield trends. When taken together, these changed assumptions could lead to cereal and vegetable oil prices that are some 25 to 40 per cent lower than baseline values in 2017. While these scenarios were implemented in a manner to reduce prices to demonstrate their relative contribution, they may also occur in a different configuration that would lead to prices being stronger than projected in the baseline. However, the analysis that was carried out for this Outlook assessment suggests that at least for cereals, the downside risk for prices in the future seems to be increasing. In addition to these reasons there are further factors that may affect the future of food prices such as: - Dollar-denominated prices have risen substantially, but the generally weakening dollar over this period means that price increases elsewhere have often been less pronounced than headline prices might lead one to believe. With the exception of a few countries, domestic and import crop price increases have been substantial but somewhat less dramatic than in US dollar-denominated terms. - Price projections for 2008 in the Outlook baseline clearly do not, and could not possibly, match the extreme recent price hike. The baseline, generated to provide an impression of possible medium- to longer-term market developments, necessarily has to abstract from some of the short-term factors inherent in commodity markets. These can result in monthly price variations that are much larger than those that can be observed from annual averages which are used in the Outlook. The annual projected values of yields and macroeconomic variables -- including the price of petroleum -- are not assumed to be in single numbers in the projection period. Rather, random perturbations in yield levels, trends and macroeconomic variables are drawn from historically determined distributions, taking the greatest possible extent of correlation among errors and relationships among macroeconomic variables. Several hundred such randomly determined values are fed into the model which is solved for each set. The output represents a wide range of yield values and macroeconomic settings that may be relevant during the period studied by the Outlook. For example, in reference to the oil price in 2008, the tenth percentile is $73 per tone and the 90th percentile is $140. Further details on how the partial stochastic analysis was performed are given in the Methodology section of the full Outlook report. * The writer is a professor of agricultural resources at Cairo University's Faculty of Agriculture.
