Author Topic: DOUBLE JEOPARDY: RESPONDING TO HIGH FOOD AND FUEL PRICES  (Read 951 times)

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DOUBLE JEOPARDY: RESPONDING TO HIGH FOOD AND FUEL PRICES
« on: September 04, 2008, 05:18:02 PM »
For the first time since 1973, the world is being hit by a combination of record oil and food prices. Such record oil and food prices are a destabilizing element for the global economy because of their potentially severe growth, inflation and distributional effects. In terms of their impact on income distribution, inflation and poverty, high food prices are of greater and more immediate concern than high fuel prices.

However, the challenge of crafting appropriate policy responses to the food crisis is made much harder in a context of rising oil prices and ensuing fiscal and balance of payments pressures. The next few months will be critical for stemming this joint crisis and avoiding any potential ripple effects.

Compared to the earlier price increase in oil that occurred between 2003 and 2005, developing countries are more vulnerable to the recent increases. The terms-of-trade effects of the combined food and energy price increases since January 2007 are in excess of 10% of GDP in more than 15 countries and the room to manoeuvre on the macroeconomic front is limited.

Continued high and volatile food and fuel prices will aggravate inflationary pressures, constrain fiscal expenditures for vulnerable groups and further endanger the poor. As underscored by G8 Finance

Ministers, the high food and energy prices pose a serious challenge to global economic stability and growth, and risk reversing years of progress in many poor countries.

The International Community is facing an unprecedented test: the question is whether we can act swiftly enough to help those most in need. For globalization to work fully, it must be inclusive and sustainable. This means acting now in the interests of the poor who are most affected by this double jeopardy of food and fuel crisis, and who are least able to help themselves. The G8 Hokkaido-Toyako Summit has the potential to spark accelerated action. We call on it to do so.

Prices have risen due to a number of individual factors, whose combined effect has led to an upward price spiral. Underlying structural factors contributing to rising food grain prices include high energy and fertilizer prices; the continuing depreciation of the US dollar; sharply increased use of both cereals and vegetable oils in bio-fuel production; and declining global stocks of food grains due to changes to buffer stock policies in the US and the European Union. Back-to-back droughts in Australia, and growing global demand for grains (excluding for bio-fuel production) have been modest contributors and on their own would not have led to large price increases.

Commodity investors and hedge fund activity also seem to have played a minor role. Although empirical evidence is scarce, the prevailing consensus among market analysts is that fundamentals and policy decisions are the key drivers of food price rises, rather than speculative activity.

The effects of these underlying structural factors have been accentuated by the use of counterproductive policies on the part of key exporters and importers. The introduction of export restrictions and bans––such as those imposed by India and China on rice, or by Argentina, Kazakhstan, and Russia on wheat ? has restricted global supply and aggravated shortages. Unilateral actions by exporting countries prompted others to quickly follow suit, undermining trust in the market and leading to worse outcomes for all. The result has been a self-reinforcing price spiral. The thinly-traded rice market has been especially vulnerable. India’s decision last October to ban rice exports (except for ‘Basmati’ rice) was quickly followed by export restrictions placed by Vietnam and other major players (recently modified to an export price floor in the case of Vietnam), with an immediate impact on prices.

Actions by large rice importers, such as the Philippines, which organized large tenders to obtain needed rice imports against this background of shrinking traded supplies, have further aggravated the problem.

High food prices are likely to persist in the medium term. While forecasts in the current environment are subject to considerable uncertainty, we expect food prices will remain high in 2008 and 2009, before they begin to decline. Prices are likely to remain well above 2004 levels through 2015 for most food crops. These forecasts are broadly consistent with those of other agencies such as USDA and OECD-FAO. While world grain production is forecast to grow, increased utilization is expected to lead to a decline in stocks in the 2007/2008 crop year. FAO predicts that total grain end-stocks will reach a 25-year low by the end of 2008.

The rapid growth of the world economy in recent years has strained capacity of oil markets, resulting in an unprecedented price rise. Since 2001, the price of oil has risen from $20 per barrel to over $140, with prices more than doubling since January 2007. In real terms, oil prices are now higher than at any time in the last century. The run-up in oil prices was driven initially by a demand-driven tightening of market balances, but more recently has been further fuelled by a combination of supply concerns and financial factors. Market tightness is expected to persist because of a sluggish supply response. Projections indicate that although demand pressures will ease as global GDP growth slows, oil prices will drop only modestly over the next two years. Oil prices are also likely to remain volatile, due to a combination of low stocks, limited spare capacity, supply disruptions, and uncertainty over exploiting new reserves and the development of non-oil sources.

Developing countries are facing the recent surges in food and oil prices in an increasingly fragile macroeconomic context, especially in the poorest countries. Many of the economic

buffers that allowed countries to weather the 2003 and 2005 oil price shocks and the initial increase in food prices last year have been depleted. The current account positions of most oil importing developing countries have deteriorated, inflation and interest rates are on the rise – pushed by rising food and oil prices – and both GDP and export growth are slowing. As a result, developing countries – especially those with limited access to financial markets – will be less able to absorb recent price hikes without substantial and painful reductions in consumption, investment and non-oil import spending.

Rising food and energy prices are leading to a substantial redistribution of incomes from consumers to producers and are having significant negative impacts on many individual households, economies, and on global stability. The rise in oil prices has increased the oil bill of developing country oil importers by $971 billion cumulatively since 2003. Because food products are consumed mainly in the country where they are produced, the international wealth transfer from high food prices is less pronounced, but domestic transfers are similarly large. For consumers living in developing countries, the increase in international prices of maize, rice and wheat since January 2006 cost around $324 billion in 2007 alone.

Preliminary estimates suggest that up to 105 million people could become poor due to rising food prices alone. A recent World Bank study in eight countries estimates that the increase in food prices between 2005 and 2007 increased poverty by 3 percentage points on average. Extrapolating these results globally suggests that, as a result of the rise in food prices, total world poverty may have increased by 73 million to 105 million people (lower and upper bounds depend on assumptions on the extent to which world prices are passed through to local prices.

Courtesy, World Bank.

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DOUBLE JEOPARDY: RESPONDING TO HIGH FOOD AND FUEL PRICES
« on: September 04, 2008, 05:18:02 PM »

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