Addressing agricultural price volatilities
and food policy challenges in LDCs
Rachid Amui
UNCTAD, Special Unit on Commodities
UNCTAD Virtual Institute presentation 2011
Venue: Geneva, 2011
1
Presentation structure
1.
Agricultural development
2.
Food price volatility and food price rises
3.
Government reaction
4.
Implications for policy
5.
UNCTAD actions to help address the emerging price
volatility challenges
2
Agriculture is crucial for LDCs
 The agricultural sector is central to any development strategy for
CDDCs, especially LDCs, because most of the population is linked
to agriculture and dependent on it either directly or indirectly.
 Agricultural development is key for broad-based economic
growth and poverty reduction through:
– Enhancing food security (reliable and affordable supply)
– Creating value-added and employment, especially for women and the
poor (rural and urban)
– Providing capital and inputs to other economic sectors
– Creating demand for the non-farm sectors
– Improving export performance (integration in the global economy)
3
Agriculture is crucial for LDCs
 In 2006, 28% of LDC GDP derived from the agricultural sector, (13% - ODCs)
 Agriculture employ 69% of LDC economically active population (53% - ODCs)
Evolution of agriculture employment as a % of total employment
Evolution of the share of agriculture in total GDP
40.0
90.0
35.0
80.0
70.0
30.0
60.0
25.0
20.0
15.0
1980
50.0
1980
2006
40.0
2006
30.0
10.0
20.0
5.0
10.0
0.0
0.0
LDC RGDP > 6%
2006
LDC RGDP 3 - 6%
2006
LDC RGDP < 3%
2006
LDC Average
LDC RGDP > 6% LDC RGDP 3 - 6% LDC RGDP < 3%
2006
2006
2006
LDC Average
4
Agriculture is crucial for LDCs
 70% of LDC
population live in
rural areas
 The size of the LDC
rural population is
forecast to grow
until 2020 and to
decline thereafter,
due to higher rates
of urbanization
5
Agriculture is crucial for LDCs
 Agriculture has a better income distributional effect in
mostly agrarian economies (WDR, 2008)
 Agriculture has a high multiplier effect (1.5 to 2.7)
 Agriculture has a high proportion of labour force
 Therefore, economic growth, reduction of poverty and
hunger in LDCs cannot be achieved without successful
agricultural and rural development as over 70% of LDC poor
live in rural areas
6
But agricultural productivity is low …
7
And rural poverty in LDCs is high ….
(% of population below the poverty line)
 LDC poverty is high
– In 2009, 35% of LDC
population live on less
than $1 a day
– For LDCs to meet the
MDG poverty target,
extreme poverty rate
must fall to 20% by 2015.
UNCTAD projections show
that LDCs likely to reach a
rate of 33% by 2015.
Nepal
Cambodia
United Rep. Of Tanzania
Uganda
Ethiopia
Burkina Faso
Bangladesh
Mozambique
Mauritania
Gambia
Rwanda
 Rural poverty is
particularly acute in
LDCs
Zambia
Sierra Leone
0%
10%
20%
30%
40%
percent
50%
60%
70%
8
80%
Food Insecurity
remains critical
 The average share
of the
undernourished in
the total LDC
population,
although declining
since 1990, is still
high.
9
Rising food aid in LDCs
 Food aid as a
share of total
ODA is rising in
LDCs
 For example,
Africa has a high
dependency on
food aid –
nearly US$ 2
billion per year
Food Aid as a Share of Total Aid in LDCs 2000 - 2007
%
6
5
4
3
2
1
0
2000
2001
2002
2003
2004
2005
2006
102007
And a rising food import bill ….
LDC food import bill rose from $6.9 billion in 2000 to $23 billion in 2008
11
Whilst ODA to the sector is declining
Share and level of ODA to agriculture
Billion (2004 US$)
10
20
8
16
6
12
4
8
2
4
0
0
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
ODA to agriculture (billion 2004 US$)
Share (% of agriculture to total ODA)
12
Percentage
ODA to
agriculture in
developing
countries has
declined
sharply
between
1975-2005
Improved agricultural performance will require
investment and completion of Doha round
 Increased public and private investment to:
–
–
–
–
increase farmer’s and private sector capacities
foster uptake of new technologies and innovations
develop infrastructure (roads, ICT etc.)
strengthen the capacities of State institutions to develop and
monitor appropriate policies
– widen farmer access to microfinance institutions
– provide financial investment and capacity building support
for agriculture and rural development through producer
groups, cooperatives, NGOs etc
13
Food price volatility and the causes
14
Context 1:
 The World Bank estimates that 119 million more people have
been pushed into hunger as a result of the 2008 food crisis.
There are now an estimated 1.02 billion malnourished people
worldwide
 Price fluctuations are inherent in agricultural markets – partly
due to the supply-demand dynamics and the unpredictability of
weather patterns and harvest yields.
 There are debates as to the extent to which activity in futures
trades and over the counter markets for agricultural
commodities impact on this volatility. Whatever the cause,
extreme volatility in food prices deters producers from making
the necessary investments for increasing productivity and
production: this is one of the underlying causes of continued
world-wide food insecurity.
15
Long term commodity price trends …..
16
Short-term commodity price trends 2010-2011…..
Food prices worldwide continued
to rise in February 2011, and the
recent spike in oil prices could
push food costs even higher in
the months ahead
17
Causes of food and agricultural commodity price
volatility
Common/ macro factors
Sector-specific factors





Exogenous to agriculture
 Energy prices
 Weather
 Strong demand
 Biofuels
Economic growth
Weak dollar
Fiscal expansion
Low cost of capital
"Speculation"
Endogenous to agriculture
 Policies
 Underinvestment
 Low stocks
18
Context 2
 The FAO food price index hit a new record in February, driven
mostly by higher cereals, meat and dairy product prices;
 The situation is not critical in Africa because of good harvests of
maize and sorghum. In Asia edible oil and some cereal prices
(e.g. wheat) are at high levels
 A major factor behind recent cereals price volatility has been an
abrupt disruption to food supplies, following a series of natural
disasters in Australia, Pakistan, Vietnam and Thailand since Q3
2010
 Increased demand for food from fast-growing BRICS
populations
 Growing demand for biofuels
 Higher fuel prices are also increasing the cost of food
19
Food commodity price indices …..
The FAO Food Price Index averaged
231 points, up 3.4% from 12/ 2010.
The highest level (both in real and
nominal terms) since 1990.
20
Food price increases in LDCs, volatility and
impacts
21
Food prices and volatility
 There are two factors critical to explaining the
transmission of international food price trends to
domestic markets:
• the relative share of domestic food demand satisfied by
either domestic food production or by food imports; and
• the ability of government / public policy to regulate
domestic markets through trade policy at the border
and/or the instruments of domestic policy (consumer
subsidies, social safety nets, etc.).
22
LDC Food price trends: Burundi 2008-2011
Wheat flour
prices remain
20% higher
than in mid
2008. Price
stabilised since
01/2010
23
LDC Food price trends: Cambodia
Rice retail
prices have
declined
4.5% since
01/2010.
However
edible oil
prices have
risen steadily
since mid2010.
24
LDC Food price trends: Mali
Rice retail
prices have
declined
since
01/2010.
Millet and
sorghum
prices have
declined
steadily
since
01/2010.
25
Impact of rising prices and volatility on LDCs
 Food expenditure is on the rise; Rising oil prices are also eroding
consumer spending power. The price of oil reached US$112 p.bl in
March 2011
 For food importing LDCs [36] Rising food prices increase import
bills negatively affecting trade and current account deficits
 For food exporting LDCs [14] limited benefit from higher prices
due to inadequate access to land, weak productive capacities and
higher costs linked to higher oil prices
26
Impact of rising prices & volatility on farmers 1
 Producers struggle to generate high returns and thus
stabilize market supply due to lack of long-term support to
agricultural production.
 Given uncertain market opportunities and unpredictable
prices, insecurity pushes farmers to adopt risk
minimization strategies that discourage investment in
intensification.
27
Impact of rising prices & volatility on farmers 2
 Farmers struggle to plan their economic activities, as price
volatility makes it difficult to obtain a reasonable price every year.
Often farmers invest (blindly) speculatively as they do not know
whether they will cover production costs, which often leads to
further indebtedness and less capacity to access loans for
investment purposes.
 The instability means that prices often do not serve as signals for
farmers to make decisions on what to plant and when.
28
Impact of rising prices and volatility on LDC
poverty
 Rapidly rising international food and energy prices in 2010 and
early 2011 will have negative effects on poverty trends in LDCs:
 Rising food prices are restricting the ability of households to
meet essential subsistence needs
 Rising food prices will have second-round effects on economic
growth with farmers squeezed because of rising input and
transport costs
 For 20 LDCs, the price rises will exacerbate already-existing
food emergencies
29
Implications for policy
30
Government reactions
 Govts, net importers - high import prices and BOP difficulties; in
the of case higher food prices, food insecurity.
 Policy response, food insecurity:
 safety nets
 food reserves (national/regional)
 increased productivity enhancing investments to address vulnerability
through increased incomes, etc and increases resilience to shocks
31
Policy responses to rising commodity prices in selected
African LDCs, 2008-2010
Consumption
Asia-Pacific
Burkina Faso
Burundi
Chad
Ethiopia
Mali
Food
Cash Food for
assistance transfers work
•
•
•
•
•
Niger
Rwanda
•
•
•
Price
controls
Lower
taxes
Prod /
Input
subsidies
Lower
taxes
Lower
import
tariffs
Export
bans/
tariffs
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Tanzania
•
Management & regulation of food markets
Price
subsidies
•
•
•
Senegal
Uganda
•
Production
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Build-up Price Import bans
food support or raise
reserves
tariffs
•
•
•
•
•
•
•
•
•
32
Policy responses to rising commodity prices in
selected Asian and Pacific LDCs, 2008-2010
Consumption
Asia-Pacific
Afghanistan
Bangladesh
Cambodia
Kiribati
Production
Food
Cash Food for Price
Price Lower
assistance transfers work subsidies controls taxes
•
•
•
•
•
•
•
•
•
Management & regulation of food markets
Prod / Lower Other Lower Export Build- Price Import bans
Input taxes support import bans/ up food support or raise
subsidies
tariffs tariffs reserves
tariffs
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Myanmar
Nepal
Timor Leste
Yemen
•
•
•
•
•
•
•
•
•
•
•
33
Addressing the impact of price volatility 1
 Some strategies used by Farmer organizations’ include:











Collective storage and marketing
Warrantage
Contract farming
Agricultural exchanges
Contractual relationship with processors
Establishment of regional cooperatives
Production support: input credits and training (IT, CEF)
Guarantee fund
Price and Volume controls
Buffer stocks
Security fund
34
Addressing the impact of price volatility 2
 Government can play a key role in their operations, often serving
as the major trading partner for their products. The current
challenge is to develop a joint public-private partnership approach
to market regulation and agricultural development.
35
Addressing the impact of price volatility 3
 This could involve:
 (i) the introduction of a combination of instruments that aim to anticipate
market behavior (e.g. G20 AMIS),
 (ii) a consultative decision-making approach that brings together supply
chain stakeholders and government actors,
 (iii) price negotiations between public and private players.
 FOs often take care of the production support needs of their
members, but the government still has a role to play in facilitating
access to agricultural finance.
 Although FOs often test new contractual forms to market their
products, the government may need to improve trader regulation
and take steps to create a secure environment (by registering
contracts, offering possibilities to take legal recourse, etc.).
36
Addressing the impact of price volatility 4
 Governments needs to improve its capacity to stock food in case
of crisis or price volatility.
 Trade organizations offer a potential / adequate framework for
negotiations to improve dialogue between the private and public
sectors. They exist in several agri-food industries. It would be
useful for them to develop their potential to: (i) to oversee
contracts between sector actors and (ii) negotiate with
government authorities.
 Regional integration, the free movement of goods and the
implementation of a regional agricultural policy should be
considered as driving forces for domestic agricultural production.
 Improved agricultural productivity and technological adaptation
and innovation remains the sine qua non of future African food
security.
37
Policy implications
 Agrarian development programmes are needed to raise investment and
stimulate agricultural productivity
 Increased public spending on R&D to improve agricultural technology and
raise productivity is essential
 OECD countries should avoid reducing aid to LDC agriculture. Recent trends
with ODA for agriculture declining from 18% to 4% of total ODA needs to be
reversed
 Social protection measures for poorest food consumers will be required
 Strengthen mechanisms to manage and cope with risk among smallholder
farmers, notably a range of financial and insurance tools
 Promote sustainable approaches to agricultural intensification, which are
both adaptable and resilient to shocks that affect food supply and result in
price volatility
 The G20 must deliver on its L`Aquilla commitments and this year respond
positively to the need to reduce commodity price volatility
38
UNCTAD actions to help address the
challenge of volatility
39
UNCTAD actions: Warehouse Receipt Systems (WRS)
 UNCTAD are developing new warehouse receipt systems
(WRS) in Africa
 EU-funded All ACP Agricultural Commodities Programme (AAACP):
1. Best practice sharing and capacity building on WRS/warrantage;
2. Developing WRS/warrantage for specific agricultural
commodities, such as gum Arabic in Mali and coffee & cocoa in
Cameroon.
3. Commissioned two studies to review the recent development of
warehouse receipting, warrantage and similar initiatives in six
Eastern & Southern African countries and five West African
countries.
40
UNCTAD actions: Supply chain finance and MIS
•
UNCTAD has also organized regional workshops and
provided direct technical assistance on supply chain
finance and market information systems, for example:



Atelier De Validation De L'etude De Faisabilite Sur La Creation
d'un Fonds De Garantie Pour La Filiere Coton en Cote D'ivoire.
28-29 Juillet 2010, Abidjan, Cote d’Ivoire
Factoring/Receivable Discounting: A Financing Tool for
Agriculture Sector Development - Organized by UNCTAD and
the Caribbean Development Bank. 4-5 November 2009 - Christ
Church, Barbados (Savannah Hotel).
CARICOM/UNCTAD/CARDI Workshop on the Establishment of
a Regional Market Intelligence System & Development of a
Sustainability Claims Portal for the Caribbean, 17 - 19 February
2011, Port of Spain, Trinidad and Tobago.
41
UNCTAD actions: Support to the improvement and
development of LDC commodity exchanges
 Since 2010, UNCTAD has organized regional workshops and
provided direct technical assistance to Commodity Exchanges
in several countries:
 UNCTAD and the Securities and Exchange Commission of Ghana (SECGhana) Joint Workshop on "Charting the Way Forward Toward the
Implementation of a Commodities Exchange and a Warehouse Receipt
System in Ghana", 15-16 September, 2010, Accra, Ghana.
 Further development and upgrade of the Dominican Republic’s
Commodity Exchange performance (BOLSAGRO), and link to regional
electronic exchange, December 2010.
 Stakeholder consultation Workshops with representatives of the
Capital Markets and Securities Authority, CFC, and the Tanzanian
Ministry of Finance and Economic Affairs on “The creation of the
Tanzania Commodity Exchange (TCX)”, Tanzania, June 2010.
 Regional capacity building workshop on “Enhancing the functioning of
cereals markets in West Africa”, 9-11 December 2010 in Accra, in
partnership with the ROPPA and the CILSS.
42
UNCTAD actions: Consensus building through its
intergovernmental machinery



Contributions to the inter-agency G20 report on: Price Volatility in Global
Food and Agricultural Markets: Policy Responses, 2011.
UNCTAD’s Multi-Year Expert Group Meetings both in 2010 and 2011
have discussed price volatility of agriculture commodities and its
implications for developing countries.
Both UNCTAD Global Commodity Forums of 2010 and 2011 have
specifically addressed these issues:





Price Volatility, determinants, potential developments and impact,
Policy options to Reduce Price Volatility: Market information and
transparency, Stocks, Use of Futures markets, Domestic and trade policies
Coping with volatility in the short run: Emergency food reserves, international
and national safety nets
Coping with volatility in the long run: Market-based mechanisms to stabilize
food import bills
Coping with volatility in the long run: Measures to increase resilience of
agriculture
43
UNCTAD actions: Infocomm partnerships
 UNCTAD through its e-portal INFOCOMM develops
partnerships with specific authoritative sources of
information (e.g.: ICAC for cotton).
 INFOCOMM has also partnered CIRAD (Centre de
coopération internationale en recherche agronomique pour
le développement), to deliver a market report on latest
trends on the world rice market on a monthly basis CIRAD
will also help UNCTAD deliver an upgraded version of
Infocomm e-profile on rice.
44
 Thanks for your attention!
 For more information on the UNCTAD SUC’s research
and technical assistance activities see:
http://www.unctad.info/en/Special-Unit-on-Commodities
 For UNCTAD activities under the AAACP see:
http://www.unctad.info/en/Special-Unit-on-Commodities/Events-andMeetings/All-EU-ACPFor more information see:

Price volatility in food and agricultural markets: Policy responses (Downloadable http://www.oecd.org/dataoecd/40/34/48152638.pdf)

Comprehensive framework for action, July 2008 (Downloadable:
http://www.un.org/issues/food/taskforce/Documentation/CFA%20Web.pdf)
45