Lecture 3: Economics Analysis of Global Food Crisis in 2008 (PDF)

ECONOMICS ANALYSIS OF GLOBAL FOOD CRISIS IN 2008 Global Food Crisis ◦ The world food price crisis refers to a period of time when the cost of food increased significantly and had a profound impact on the availability and affordability of food for people around the world. This crisis is o...

ECONOMICS ANALYSIS OF GLOBAL FOOD CRISIS IN 2008 Global Food Crisis ◦ The world food price crisis refers to a period of time when the cost of food increased significantly and had a profound impact on the availability and affordability of food for people around the world. This crisis is often characterized by sharp spikes in the prices of key staple foods such as wheat, rice, and corn, as well as other agricultural commodities such as sugar and oil. ◦ World food prices increased dramatically in 2007 and the first and second quarter of 2008, creating a global crisis and causing political and economic instability and social unrest in both poor and developed nations. ◦ In the majority of countries, the increases in food prices have significantly raised the number of people suffering from hunger and living in poverty both in urban and rural areas. ◦ The World Bank estimated that the food crisis pushed 130 million to 155 million people into poverty in 2008.  GLOBAL POSITION ON FOOD SECURITY: PAST Malthusian Theory (1798) Human populations tend to grow faster than agricultural output, resulting in famines or crises. ◦ Exponential growth of population (1, 2, 4, 8, 32, 64…) and arithmetic growth of food production (1, 2, 3, 4, 5, 6, 7…) will lead to a dooms day. ◦ Never happened on a mass scale, although there had been food crisis during short periods in some areas. ◦ Last experienced was during early to mid 1970s. ◦ Crisis was short lived due to benefits of the green revolution. GLOBAL POSITION ON FOOD SECURITY: PAST AND PRESENT EXPECTATION ◦ Definition of food security (UN/ FAO) ◦ Food security exists when: ◦ all people, ◦ at all time, ◦ have physical, social and economic access ◦ to sufficient, safe and nutritious food ◦ which meets their dietary needs and food preferences ◦ for an active and healthy life. ◦ Millennium Development Goal (UN) and Sustainable Development Goals In 2000, world leaders gathered at the United Nations to shape a broad vision to fight poverty, which was translated into eight Millennium Development Goals (MDGs). Millennium Development Goals ◦ Goal 1: Eradicate extreme poverty and hunger ◦ Target: Halve between 1990 and 2015 the proportion of people who suffer from hunger. ◦ Goal 2: Achieve universal primary education ◦ Goal 3: Promote gender equality and empower women ◦ Goal 4: Reduce child mortality rates ◦ Goal 5: Improve maternal health ◦ Goal 6: Combat HIV/AIDS, malaria, and other diseases ◦ Goal 7: Ensure environmental sustainability ◦ Goal 8: Develop a global partnership for development Sustainable Development Goals FOUR LEVELS OF FOOD SECURITY ANALYSIS National Global Global food availability National net National food food imports production National food availability Household Household Incomes Household food access Other basic needs Food Security Care Health and non necessities Individual Nutritional Security  GLOBAL POSITION ON FOOD SECURITY: RECENT REALITY ◦ “silent tsunami of hunger is sweeping the world.” ◦ Within 2 years ◦ Food prices rose by 83%. ◦ Wheat and rice prices have nearly tripled (300%). ◦ 1% increase in food price reduces the calorie intake by 0.5% among the poor. ◦ Rising food prices have pushed 100 m people below poverty line. ◦ Poor countries were double punched by rising food and petroleum prices. GLOBAL POSITION ON FOOD SECURITY: Economic Reasons: Increasing Food Prices ◦ Price is determined by the interaction of demand and supply. ◦ Several factors affect demand (Dn) for a commodity (n) such as: ◦ Price of the commodity (Pn) ◦ Price of other commodities (Po) ◦ Consumer’s income (Y) ◦ Consumer’s preference (T) ◦ Several factors affect Supply (Sn) for a commodity (n) such as: ◦ Cost of Production (prices of input) ◦ Technology of production ◦ Weather … ‫‪Factors contributing to change in food‬‬ ‫‪commodity prices‬‬ ‫تصاعد أسعار النفط الخام‬ ‫التوسع السريع في إنتاج الوقود الحيوي‬  Demand based reasons contributing to change in food commodity prices Economic boom in developing countries (India and China) ◦ 37% of world population in India and China ◦ Increased income ◦ More than 600 million new middle class with tripled income ◦ Leading to increased demand for food and meat ◦ Corn and wheat diverted to feed from food ◦ Food conversion ratio (700 cal of animal feed produces 100 cal in beef, 7:1) Feed Conversion Ratios (FCRs) measure the amount of feed/crops needed to produce a unit of meat. The combination of a rapidly growing population, rising incomes, and changing dietary patterns in developing countries like India and China has created a significant increase in demand for food commodities. This increased demand, coupled with the inefficiencies of meat production, puts pressure on global food supplies and contributes to rising food prices. GLOBAL POSITION ON FOOD SECURITY: Economic Reasons Cont. Fuel substitutes food Threat of climate change and high petroleum prices induces agro- fuel (ethanol) production. In the past, demand for grain was largely driven by population growth and demand for grain for animal products (about 21 m tons a year). President Bush signed the “Energy Independence and Security Act” on 19th December 2007, which mandates 36 billion gallons of biofuel to be produced yearly by 2022. So, increased biofuel production indirectly contributes to higher food commodity prices due to the higher demand for food caused by the reduced supply. GLOBAL POSITION ON FOOD SECURITY: Economic Reasons Cont. By 2020 US and EU demand for grain for ethanol production 400 m tons a year. China aims at producing 15 billion litres of biofuel. In 2008, demand for grain for biofuel was 114 m tons (28% of the harvest). US estimate is that the impact of biofuel production as 3% increase in food prices, but World Bank estimate is 75%. Corn requirement to fill a tank of a car with 18.5 gallon capacity could feed a human being for 270 days. GLOBAL POSITION ON FOOD SECURITY: Economic Reasons Cont. ◦ 1 SUV would require 660 pounds of corn or other food to fill its tank. ◦ This is equivalent to the annual food needs of two people in the developing world. ◦ Market Speculation for Food ◦ Investment in grain and livestock has more than doubled to about $65 Billion from $25 Billion in November 2007. ◦ More than half the value of corn, soya and wheat of US (the largest exporter) has already been bought. ‫ توقعا لعوائد كبيرة‬،‫ضاربة تداول أداة مالية تنطوي على مخاطر عالية‬,‫ تتضمن ا‬:‫التعريف‬ Imagine a group of people suddenly deciding to buy up all the available bread in a bakery. This increased demand would drive up the price of bread, making it unaffordable for some people. Similarly, when investors buy up large quantities of food commodities, it reduces the supply available for consumers and drives up prices. This can have serious consequences for food security, especially for those who are already struggling to afford food.  GLOBAL POSITION ON FOOD SECURITY: Economic Reasons Cont. ◦ Supply Based Reasons ◦ Rise in oil (input) prices increasing the cost of production of Type: PNG food and transport. ◦ Modern farming is energy intensive  GLOBAL POSITION ON FOOD SECURITY: Economic Reasons Cont. ◦ https://sibresearch. org/uploads/3/4/0/ 9/34097180/riber_sk 14-102_411-427.pdf While there are other factors that influence food prices, the long-run relationship between crude oil and Type: PNG food prices is generally positive.Rising oil prices tend to increase the cost of food production, contribute to the diversion of land for biofuel production, and contribute to broader inflationary pressures, all of which can lead to higher food prices for consumers. GLOBAL POSITION ON FOOD SECURITY: Economic Reasons Cont. o Price of fertilizer (input) increased much faster than food prices (2007-2008) o Increasing the cost of food production and raising the supply function thus food prices. GLOBAL POSITION ON FOOD SECURITY: Economic Reasons Cont. ◦ Climate Factors ◦ Drought in major grain producing areas ◦ Australia, second largest exporter of wheat ◦ Wild fires in Russia GLOBAL POSITION ON FOOD SECURITY: Economic Reasons Cont. ◦ Complacency ◦ Ignoring investments in agricultural education, research and technological adoption. ◦ Investment in agricultural research in developing countries is only 0.6% of GDP compared to 5% of GDP in richer countries. ◦ Removing government intervention and allowing the market to provide food ◦ Structural adjustment/ Privatization  GLOBAL POSITION ON FOOD SECURITY: Is it real? ◦ Reutlinger et al. (1986) ◦ “The world has ample food. The growth of global food production has been faster than the unprecedented growth of the past years. … millions of poor people do not share this abundance. They suffer from a lack of food security caused mainly by a lack of purchasing power”. ◦ Leathers and Foster (2004) ◦ “… the world food problem has grown less severe, but is still a long way from solution”. ◦ It may not be real, we may have the resilience to overcome temporary difficulties. ◦ However, it is a ‘wake-up’ call. ◦ Amartya Sen