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Policy Actions
High Food Prices: The What, Who, and How of Proposed Policy Actions


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The sharp increase in food prices over the past couple of years has raised serious concerns about the food and nutrition situation of poor people in developing countries, about inflation, and—in some countries—about civil unrest. Real prices are still below their mid-1970s peak, but they have reached their highest point since that time. Both developing- and developed-country governments have roles to play in bringing prices under control and in helping poor people cope with higher food bills.

In 2007 the food price index calculated by the Food and Agriculture Organization of the United Nations (FAO) rose by nearly 40 percent, compared with 9 percent the year before, and in the first months of 2008 prices again increased drastically. Nearly every agricultural commodity is part of this rising price trend. Since 2000—a year of low prices—the wheat price in the international market has more than tripled and maize prices have more than doubled. The price of rice jumped to unprecedented levels in March 2008. Dairy products, meat, poultry, palm oil, and cassava have also experienced price hikes. When adjusted for inflation and the dollar's decline (by reporting in euros, for example), food price increases are smaller but still dramatic, with often serious consequences for the purchasing power of the poor.

National governments and international actors are taking various steps to try to minimize the effects of higher international prices for domestic prices and to mitigate impacts on particular groups. Some of these actions are likely to help stabilize and reduce food prices, whereas others may help certain groups at the expense of others or actually make food prices more volatile in the long run and seriously distort trade. What is needed is more effective and coherent action to help the most vulnerable populations cope with the drastic and immediate hikes in their food bills and to help farmers meet the rising demand for agricultural products.

The combination of new and ongoing forces is driving the world food situation and, in turn, the prices of food commodities. One emerging factor behind rising food prices is the high price of energy. Energy and agricultural prices have become increasingly intertwined (see figure). With oil prices at an all-time high of more than US$100 a barrel and the U.S. government subsidizing farmers to grow crops for energy, U.S. farmers have massively shifted their cultivation toward biofuel feedstocks, especially maize, often at the expense of soybean and wheat cultivation. About 30 percent of U.S. maize production will go into ethanol in 2008 rather than into world food and feed markets. High energy prices have also made agricultural production more expensive by raising the cost of mechanical cultivation, inputs like fertilizers and pesticides, and transportation of inputs and outputs.

At the same time, the growing world population is demanding more and different kinds of food. Rapid economic growth in many developing countries has pushed up consumers' purchasing power, generated rising demand for food, and shifted food demand away from traditional staples and toward higher-value foods like meat and milk. This dietary shift is leading to increased demand for grains used to feed livestock.

Poor weather and speculative capital have also played a role in the rise of food prices. Severe drought in Australia, one of the world's largest wheat producers, has cut into global wheat production.

Higher food prices have radically different effects across countries and population groups. At the country level, countries that are net food exporters will benefit from improved terms of trade, although some of them are missing out on this opportunity by banning exports to protect consumers. Net food importers, however, will struggle to meet domestic food demand. Given that almost all countries in Africa are net importers of cereals, they will be hard hit by rising prices. At the household level, surging and volatile food prices hit those who can afford it the least—the poor and food insecure. The few poor households that are net sellers of food will benefit from higher prices, but households that are net buyers of food—which represent the large majority of the world's poor—will be harmed. Adjustments in the rural economy, which can create new income opportunities, will take time to reach the poor.

The nutrition of the poor is also at risk when they are not shielded from the price rises. Higher food prices lead poor people to limit their food consumption and shift to even less-balanced diets, with harmful effects on health in the short and long run. At the household level, the poor spend about 50 to 60 percent of their overall budget on food. For a five-person household living on US$1 per person per day, a 50 percent increase in food prices removes up to US$1.50 from their US$5 budget, and growing energy costs also add to their adjustment burden.

Many countries are taking steps to try to minimize the effects of higher prices on their populations. Argentina, Bolivia, Cambodia, China, Egypt, Ethiopia, India, Indonesia, Kazakhstan, Mexico, Morocco, Russia, Thailand, Ukraine, Venezuela, and Vietnam are among those that have taken the easy option of restricting food exports, setting limits on food prices, or both. For example, China has banned rice and maize exports; India has banned milk powder exports; Bolivia has banned the export of soy oil to Chile, Colombia, Cuba, Ecuador, Peru, and Venezuela; and Ethiopia has banned exports of major cereals. Other countries are reducing restrictions on imports: Morocco, for instance, cut tariffs on wheat imports from 130 percent to 2.5 percent; Nigeria cut its rice import tax from 100 percent to just 2.7 percent.

How effective are these responses likely to be? Price controls and changes in import and export policies may begin to address the problems of poor consumers who find that they can no longer afford an adequate diet for a healthy life. But some of these policies are likely to backfire by making the international market smaller and more volatile. Price controls reduce the price that farmers receive for their agricultural products and thus reduce farmers' incentives to produce more food. Any long-term strategy to stabilize food prices will need to include increased agricultural production, but price controls fail to send farmers a message that encourages them to produce more. In addition, by benefiting all consumers, even those who can afford higher food prices, price controls divert resources toward helping people who do not really need it. Export restrictions and import subsidies have harmful effects on trading partners dependent on imports and also give incorrect incentives to farmers by reducing their potential market size. These national agricultural trade policies undermine the benefits of global integration, as the rich countries' longstanding trade distortions with regard to developing countries are joined by developing countries' interventions against each other.

The increases in food prices have a dominant role in increasing inflation in many countries now. It would be misguided to address these specific inflation causes with general macroeconomic instruments. Mainly, specific policies are needed to deal with the causes and consequences of high food prices. Although the current situation poses policy challenges on several fronts, there are effective and coherent actions that can be taken to help the most vulnerable people in the short term while working to stabilize food prices by increasing agricultural production in the long term.

First, in the short run, developing-country governments should expand social protection programs (that is, safety net programs like food or income transfers and nutrition programs focused on early childhood) for the poorest people—both urban and rural. Some of the poorest people in developing countries are not well connected to markets and thus will feel few effects from rising food prices, but the much higher international prices could mean serious hardship for millions of poor urban consumers and poor rural residents who are net food buyers, when they actually are exposed to them. These people need direct assistance. Some countries, such as India and South Africa, already have social protection programs in place that they can expand to meet new and emerging needs. Countries that do not have such programs in place will not be able to create them rapidly enough to make a difference in the current food price situation. They may feel forced to rely on cruder measures like export bans and import subsidies. Aid donors should expand food-related development aid, including social protection, child nutrition programs, and food aid, where needed.

Second, developed countries should eliminate domestic biofuel subsidies and open their markets to biofuel exporters like Brazil. Biofuel subsidies in the United States and ethanol and biodiesel subsidies in Europe have proven to be misguided policies that have distorted world food markets. Subsidies on biofuel crops also act as an implicit tax on staple foods, on which the poor depend the most. Developed-country farmers should make decisions about what to cultivate based not on subsidies, but on world market prices for various commodities.

Third, the developed countries should also take this opportunity to eliminate agricultural trade barriers. Although some progress has been made in reducing agricultural subsidies and other trade-distorting policies in developed countries, many remain, and poor countries cannot match them. This issue has been politically difficult for developed-country policymakers to address, but the political risks may now be lower than in the past. A level playing field for developing-country farmers will make it more profitable for them to ramp up production in response to higher prices.

Fourth, to achieve long-term agricultural growth, developing-country governments should increase their medium- and long-term investments in agricultural research and extension, rural infrastructure, and market access for small farmers. Rural investments have been sorely neglected in recent decades, and now is the time to reverse this trend. Farmers in many developing countries are operating in an environment of inadequate infrastructure like roads, electricity, and communications; poor soils; lack of storage and processing capacity; and little or no access to agricultural technologies that could increase their profits and improve their livelihoods. Recent unrest over food prices in a number of countries may tempt policymakers to put the interests of urban consumers over those of rural people, including farmers, but this approach would be shortsighted and counterproductive. Given the scale of investment needed, aid donors should also expand development assistance to agriculture, rural services, and science and technology.

World agriculture is facing new challenges that, along with existing forces, pose risks for poor people's livelihoods and food security. This new situation calls for policy actions in three areas:

1. comprehensive social protection and food and nutrition initiatives to meet the short- and medium-term needs of the poor;
2. investment in agriculture, particularly in agricultural science and technology and in market access, at a national and global scale to address the long-term problem of boosting supply; and
3. trade policy reforms, in which developed countries would revise their biofuel and agricultural trade policies and developing countries would stop the new trade-distorting policies with which they are hurting each other.

In the face of rising food prices, both developing and developed countries have a role to play in creating a world where all people have enough food for a healthy and productive life.

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this article is concise and does an academic and yet practical appraisal of the situation as it is. developing countries should particularly pay attention to the third area of policy action in the conclusion of the article.

This report grossly minimizes the effect of global capital markets on food commodity prices, thus leading to a false policy implication that freer markets are a solution. Using FAO and USDA FAS data, it is easy to see that the stock-to-use ratio of rice, for example, is essentially flat worldwide since 2002 -- about 18%, yet the price of rice has more than doubled only in the last several months. Only in the US has the ratio declined in the last year to 9% for rice, which is where, coincidentally, derivatives market traders have been bidding up the world market price of the commodity. This indicates that the most likely primary cause of the food price increases is neither oil or biofuel use of corn (which also maintains a consistent stock-to-use ratio, even in the US), but capital market speculation in food commodities -- in a word, hoarding.

As the derivative prices of grains increase, speculators are forced to cast a wider net to contract with producers to meet their delivery obligations in predominantly US commodity markets. The result is that prices for commodities worldwide are driven up almost completely outside of the relationship to the relative scarcity of a commodity in a particular country. That's the definition of hoarding, and the policy implication is collective action to intervene in the world market for a commodity such as rice, not freer markets.

Remember, markets are social tools, not objects of faith. They are forms of collective action, like other institutions. When they fail, they need to be fixed or discarded.

Yours is a thorough and well-written conventional economist's analysis of the problem, and no doubt it will help. But ...

Conspicuous by its absence is a single word about non-farmers growing their own food. There will always be some of us who cannot engage with the market. There will always be landless folk also. If you are poor, to trust governments to feed you in times of trouble is a long shot - see Zimbawe and Burma for contemporary examples. Best to arrange to feed yourself and your family as best you can. Sprouts grow quickly, vegies relatively so. Long term, we need a massive worldwide program of planting food trees on public land.

Oil is running out far more rapidly than most folk understand, and all hell is doing to break out as region after region loses supply. The paradox is, the folk in the highlands of New Guinea, those least exposed to the world market and modern oil geegaws, are those of us now best placed to ride this out. The cities look ever more like giant mousetraps, so folk should be persuaded to leave them, asap and wherever they can, and to set to, to feed themselves and their families, We need a whole new world education system, that at its core explains to kids that people need to look to their food and water supplies before any other philosophical or religous or nationalistic contentions...

Food crisis in Africa is much more than the press can capture. It reflects decades of neglects on the parts of governments in the continent. There is no word that can express succintly the delimma of Africans. Last Week, Nigeria government announced that it is committing 80 billion naira (about 50 billion dollars to import rice). For a country such as Nigeria that has about 73 million hectares of arable land and aboundant water resources, food crisis should not occur. The question is - from where will the imports come? - when everyone seems to be having scarcity. IFPRI sure has a heculean task to stimulate desired policy reforms that make governments take resposibility for their people' welfare. Telling how bizare the problem is just one way. It will help if we stop embelishing the deficiencies of planning infrastructure/processes in Africa with diplomatic language.

Congratulations to a very concise and clear presentation of the issues and policy options. Still, I would add a further policy need, i.e. the establishment of a grain reserve, possibly combined with a food reserve fund. The grain reserve should be focussed on stabilizing the grain market, not distorting longer term price trends. We know that these markets are highly volatile as a result of the low (short - medium term) price elasticities, both on the supply as well on the demand side. This needs an international initiative as rules, management guidelines and financing require an international burden sharing.

A few observation, if I may, on your article, 'Rising Food Prices: What Should be Done?'

Banning exports of food products summarily removes profit-making opportunities regardless of prevailing prices (and distorts signals to farmers). An export quota linked to the price differential over domestic prices could be considered. If meat exports fetch 3 times the domestic price, that means acceptable substitutes are available for meat in local markets. In such situations, exports are rational. An export quota linked to price differential makes abundant sense. The policy preserves efficiency and profits to agricultural producers.

Second, since a larger fraction of perishable crops and processed foods result in wastage, the same could be reduced by offering incentives to switch to weather-resistant and non-perishable crops and foods. By the same analogy, technologies that convert perishables in to long-standing (basic/staple) food could be subsidized. The point here is policies that promote production and manufacture of foods with long shelf lives alleviate pressure on food supply and prices.

Third, it should be possible to cross-subsidize foods across income groups, but the issue is confounded by the differences in quality of food consumed across those groups. If a food quality index could be developed, then a quality surcharge on food purchases would yield revenues with which to subsidize food for the poor. In a similar vein, processed foods consumed by the rich could be taxed higher to subsidize grains, and unprocessed food.

Finally, delinking agriculture- and food policy from electoral politics (as opposed to energy policy) could do all of us a lot of good.

As a secondary science educator I think it is imperative that we address global food issues in our public schools. We are raising among the most capable individuals in the world to solve these problems.

Although this is an excellent analysis, it works from an economic perspective that unfortunately omits another critical reason for the crisis...land use and changing patterns of agricultural production.

It is important to remember that much of the worlds poor also used to maintain their nutritional intake through the use of small plot farms and kitchen gardens...plus a chicken, goat or cow or two. The buying up of land...or the renting of land to large agribusiness for factory farming have also affected how much of the world's population can feed itself. When Ghanian women lost their poultry cooperatives due to the lack of capital...they also lost more than their livelihood...they lost the battle to produce their own food stuff....now they can barely afford chicken....which is surplus US.

The food crises is a land use crises...and that is much deeper than simply an economic crises in supply and demand.

in some ways the international response the food crisis is like the reaction to the financial crisis in the 1930s..to protect themselves individual counties restrict their openness to trade and thereby make the international effects worse....we need international agreement to keep markets open and thereby speed the supply response which is the only long term solution

1. Why targeting only subsidies on biofuel in this article? 2. Why not speaking of the large imperfection of the world agricultural commodity market? And thus not recommanding countries not to use the world price as a benchmark... liberalism is not always THE solution.

However this is beyond IFPRI general dogma. What is the cost of the recommanded safety net compared to national subsidies? Which countries are able to set this type of system... ask Ethiopia and see how much they contribute.

What you did not mention in youre article was all the interference in the foodproduction through subsidies, quota, globalism etc etc. Cities grew at an alarming rate the past 20 years. Why? Farmers could not make a decent living, and went to the city to survive. China is experiencing just that. The result: too less food production and a big loss in farming knowledge. Just dont interfere in food economics. Free economy starts here, at the roots. If farmers can make a decent living they will return to there lands. Farming we do for milenia.

If on the other hand we let BIG Farma get control of the foodproduction through genetic alterations, we will face even bigger problems. It will drive even more farmers to the city in desparation. Let food have a price, and agriculture will thrive.

I have a couple of points to add to your comprehensive picture, but will concentrate my comments on the rice market First, a small factual point. Thailand almost but did not introduce export restrictions. What the government has done is to stop the reduction of its own stockpile to maintain it at the "safety" level of 2 million tons, from an excessive 4 million tons accumulated from the previous 4-5 years, when the government was supporting prices.

This brings me to the broader picture. No doubt there are secular factors at work (feed demand and biofuel and all that), which you bring out in your paper. In the case of rice, it is mostly spillovers from maize and wheat markets. (For a brief moment, rice and wheat prices appeared to be at parity, before rice prices surge ahead again).

But my main point is that the effect of all these secular factors on rice is indirect. There is no reason for as sharp a spike in rice prices. During this year, there is a sharp increase in speculative demand arising out of sheer panic among many parties: governments, better-off consumers. For commodities in general (including to a lesser extent, petroleum), there is also a flight away from dollars. There is thus a certain amount of speculative froth in the market. In the case of rice, I fear, it is much more than a froth. Policy-makers would be well advised when planning for the long-term, not to rush into unwise investments in the long-term. Remember that the spike in the 1970s was followed by a long-term depression in all cereal prices.

The only difference this time round that I concede is that energy prices look sure to remain substantially higher than in, say, 2000. Even then, since using maize as bio-fuel has been shown to be inefficient (at least vis-a-vis sugar-cane), the question for long-term cereal prices becomes: how long will the corn lobby in the US be able to push for a clearly inefficient policy.

thank you for this policy brief. this one is really worth sharing to policy-makers around the world.

Perhaps, though it may not directly address the problem on rising food prices, however, it is important to take into consideration the current curriculum of various univesities and state colleges pertaining to the field of agriculture, forestry and natural resourcee (AFNR). an inventory of these curricula should address the issue on whether universities are producing graduates suited to needs of the global industries -- is there really a mismatch on the supply and demand of AFNR graduates?

this may not have a direct impact on combatting rising food prices, however, if we teach students to become self-sustaining entreprenuers, and not just job-hunting souls, then in the future, they may help in solving the issue on unemployment, which on the otherhand, affects one's ability to afford his/her basic needs (food, clothing, etc.)

However, one version of rising prices is shifting of cereals acreage into biofules crops due to constant demand of removal of subsidies given over cereals items in first world. This has caused in generating supply-side constraints in global food markets. Thus, restraints to be needed needs in WTO proceeds.

Your analisis and advise is contradictory, for years farmers in poor countries have sold their products below cost price driven by cheap imports because of the subsidy of Eruope and the US distorting world market prices downwards. Now the situation should favor farmers, but the policies you favor will take away this price advantage. Why not let farmers for once earn a reasonable income?, I agree with your measures for the urban poor, however great care and proper districution is necesary knowing that food aid has been shown to worsen farmers situation in all countries where it has been implemented, Biofuels is the immoral wildcard which is driving food scarcity and prices higher then their proper place.

Good article by Joachim von on food prices and what to do. A couple quick points.

"Fourth, to develop, countries need to invest in roads, electricity, and communications, and crop storage and processing capacity." Yet such investment in the past merely made land more valuable, more worth fighting over, and the winning landowners richer, the losing country folk poorer and hungrier.

A fifth positive step to take, maybe most basic, is land reform, especially a kind that works, letting farmers own land. To spur absentee owners of huge tracts to sell off their excess at prices poor farmers can afford, tax land at its annual rental value. Having to pay the overhead, big owners no longer find it worthwhile to be a middleman. This tax broke up huge estates in Denmark, California, Australia, New Zealand, and Taiwan, Afterwards, working their own land, farmers produced much more food, wiping out hunger in the case of Taiwan.

Looking into the food prices one wonders what will happen if the WFP decides to get more food to give away as food aid. Most probably it will further increase prices. It seems that it is time for the poor countries to do some sound investment in agriculture in order to get the benefits in a couple of years.

e o oligopólio de fertilizantes no Brasil, formado pela Bunge, Cargil e outras, não são reponsáveis por tais aumentos aqui e no mundo. além dessa maluquice de troca da matriz alimentar pelo Biocombustível, etanol americano. aqui no paraná estaremos fazendo uma reflexão no proximo dia 12 de maio dos impactos da privatização do setor fertilizante no país agrícola, numa audiência pública na assmbleía legislativa/Pr.

Wouldn't it be the IFPRI's competency to analyse the effect of each of the contributors to the higher commodity prices? If not IFPRI, who would do it? What in particular is the weight of speculative trading/ the conversion of food to fuel/ the impact of crop failure on the price development of the major commodities?

I am writing a book on rural Egypt, and food prices in Egypt have skyrocketed in recent months.

I believe more speculative capital flows deserve more attention. The dramatic run up in commodity prices very recently has all the hallmarks of the invisible hand of capitalism. Enron provided that energy traders could manipulate energy prices, directly impacting home owners. We should explore whether something very similar is happening to food prices. Even absent intentional manipulation, excess capital flows could nevertheless, have very dramatic impact commodity prices. Have we gone from the tech bubble to the housing bubble to the commodity bubble?

Thanks for excellent article. It looks that there is a self enforced loop between agroenergy crops and petroleum prices. That must change. On the other hand, one question that keeps coming to my mind is what happened with years of external support to agriculture development in African nations? I am not an expert on the topic, but did not most of these countries own its share of fertile land? Isn't this time an opportunity to definitely develop a sustainable agriculture in Africa?

This very clear and on target statement will be very valuable for teaching. I will use it immediately in my courses.

Important policy brief just issued by IFPRI....

I think the problem of Baladi bread is the end result of interaction between imbalance in international creals policy and Egyptian creal policy. Would you agree with me?