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FAO taking steps to help reduce impact of increases
27/08/12

Knock-on effect: Global prices have a swift impact on local markets
The media spotlight is again on rising food prices as the FAO Food Price Index reports sharp increases in recent months. David Hallam (pictured below), director of the trade and markets division, spoke to FAO InTouch about the current situation, including why prices are rising, the potential impact on the poorest people, and how FAO is responding. He also explained why talk of a repeat of the global 2007-08 food price crisis was premature…
First of all, can you explain what we mean by the FAO Food Price Index?
It’s a measure that tracks change in the international prices of a basket of five food product groups – cereals, oilseeds, sugar, dairy and meat. The index is updated on the first Thursday of each month, and is considered a global benchmark for food price trends.
Which goods are most affected by the current increases?
Maize prices have increased by 23 percent during July. Wheat prices have followed while soybean prices had already increased.
Why are prices increasing?
The most important current cause is the worst drought in 50 years in the United States, affecting the maize crop and potentially the soybean crop. Soybean prices were already relatively high because of lower production in the Southern Hemisphere, again due to weather problems. The importance of the US in supplying world markets means serious consequences for the overall international food supply situation. Wheat prices are also increasing – the Russian harvest is being affected by dry weather, while the increased maize prices are also driving up the price of wheat as people turn to it as a substitute.
So climate change is playing a major part here…
The situation provides another graphic reminder that even the most advanced agricultural systems are still subject to the vagaries of the weather, leading to volatility in supplies and prices, not just on domestic markets but also in international trade. Climate change is expected to lead to more instances of extreme weather events in the future, although there is some debate about when these impacts might begin to be felt.
What are the most immediate effects of these increases?
If international prices increase then obviously food import bills increase and low-income, food-deficit countries are hardest hit. Eventually these price increases get transmitted to retail prices in local markets. Other agricultural sectors are also affected. The grain-intensive pork, beef, dairy and especially poultry industries are expected to be particularly affected by rising costs, as the price of feed for their livestock increases. There are reports in the United States and in Europe that the livestock sectors are responding to the more expensive feedstuffs by reducing the size of their operations.
Can high food prices lead to more hunger and undernourishment?
It’s difficult to answer this on the basis of the available data. What we do know is that high food prices impact most heavily on poor people, since they spend a greater proportion of their incomes on food. What we have observed from surveys though is that poor households try to cope in different ways. Some cut back on food intake, and women and children may bear the brunt of this. Some try to maintain the same level of food intake by eating cheaper and sometimes less nutritious food, while others may try to maintain their food intake by cutting back on non-food expenditure such as schooling. However, the effects of these coping strategies do not easily show up in the very aggregated annual data on numbers of undernourished, so it is hard to be precise about the overall impact at global level. In the medium term, higher prices might improve food security if they lead to more investment and higher productivity. But small farmers need support to overcome the many constraints they face.
What is the role of biofuels?
The food versus fuel issue is highly controversial. However, it is an important issue, especially in the context of a shortfall in US maize production and because of the US’s important role as a supplier of world markets. If some proportion of the reduced quantity of maize is claimed by biofuel needs, then the supply for other uses tightens and prices increase more.
This is not a new issue and neither is FAO’s stance on this issue. A 2011 report to the G20 on price volatility, prepared by international organizations including FAO, recommended distortionary biofuel subsidies and mandates should be discontinued or at least made more sensitive and flexible in a situation of sharply increasing food prices. However, biofuel demand is only one of many factors leading to higher food prices and action is needed on all of them.
Can the current situation be termed a ‘crisis’?
It seems like some of the media seems to want to write about a new food crisis but I don’t think it’s an appropriate description of the current situation and it’s irresponsible of them to hype it up like that. A lot of the contributing factors that were present in 2007 to 08 – generally low stocks, strong demand, very high oil prices, big influx of speculative funds – are not present now. However, the price and supply situation, especially for maize and wheat, does mean that there is a high degree of vulnerability and risk and that any further supply side shocks could lead to a serious deterioration. That’s why we are looking rather anxiously towards the coming wheat harvests, especially in Russia where dry weather is causing problems. It’s also why it's vitally important that the balance is not further disturbed by inappropriate and uncoordinated unilateral policy reactions by individual countries.
What can be done and how is FAO involved?
FAO is emphasizing the importance of strong coordination between main importing and exporting countries to prevent the increase in commodity prices escalating into a food crisis. We are also emphasizing policy support to those countries likely to be most affected by a food price spike.
In the 2007/08 food price crisis, panic buying by some countries and the imposition of export restrictions by others made the situation far worse. Better mechanisms are now in place. International response was the focus of G20 governments last year, resulting in the creation of AMIS [the Agricultural Market Information System], which is tasked with improving market information and transparency and promoting coordination of policy responses. FAO houses the AMIS Secretariat, within the trade and markets division.
The division, including GIEWS [Global Information and Early Warning System], produces expert analysis of market developments and the latest information concerning food prices and market developments. These are disseminated through its webpages and publications such as Food Outlook and Crop Prospects and Food Situation. The FAO Intergovernmental Commodity Groups, the Committee on Commodity Problems and the Committee on World Food Security also provide fora for information sharing and policy discussion.
UN agencies are also in close contact to monitor the situation. In mid-August the Director-General co-chaired, with the UN Deputy Secretary-General Jan Eliasson, a special meeting of the UN High Level Task Force on Global Food Security, to discuss the risks and policy implications of the rising food prices.
The Director-General has also written to FAO Permanent Representatives and to G20 Ministers to keep them informed of FAO’s work on this issue, and to further promote a coordinated approach.
What else can FAO do?
FAO is also providing technical and policy advice to member countries on how to respond in terms of managing price volatility and reducing their vulnerability. Many low-income, food deficit countries are now better prepared to cope with price volatility having put safety nets in place. However, others have not, even though price volatility is likely to be a recurrent problem. FAO can help build resilience by improving productivity, especially for small family-farms. The technical cooperation department and others have provided policy and technical advice to member countries through successful regional policy workshops in recent years, for example, and can assist in the development of contingency plans. The international community more generally also needs to support poor countries in their efforts and in devising contingency plans for the most vulnerable.
In addition, it’s important that FAO communicates well with the media at this time, to ensure that public information being circulated is accurate and in context and to highlight FAO’s role. For this reason the Director-General and other staff have being carrying out numerous interviews with worldwide media.
What other information is being provided to staff regarding the issue?
The Director-General has held videoconferences with FAO Representatives and other staff in decentralized offices so they are fully briefed. An intranet site has also been developed for the FAO Representatives, so they are fully informed and in the best position to brief media, and of course their staff, in their own countries. We have prepared a set of questions and answers for those staff dealing with media enquiries. They cover all the main points and will also prove valuable for those employees simply wanting to know more about the issue in general. There are also 10 key messages that FAO is emphasizing, and that staff can access [see below for links]. Employees can also follow the emerging trends via fao.org and in particular the dedicated page on the World Food Situation, which includes the Price Index.
Further information and links:
FAO page on World Food Situation
Media Q&As for staff
Rising food prices – 10 key messages
‘FAO Food Price Index up 6 percent’ (from fao.org)
Director-General opinion piece in the Financial Times
Director-General interview with EFE news agency (in Spanish)
http://intouch.fao.org/news/detail/?dyna_fef%5Buid%5D=13777
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