Cheap food: bad. Expensive food: terrible. Why the FAO’s glass is always empty

It’s interesting to look back a few years – to when the world was worried that food was too cheap, not too expensive.

In 2004, the UN Food and Agricultural Organization looked back on a long bear market for food: forty years in which real prices of agricultural commodities had fallen 2% per year, or 50% between 1961 and 2002.

Innovation had driven up yields and productivity; growing numbers of suppliers had flooded onto global markets; and subsidies were keeping production levels artificially high. It was good news for consumers, but bad news for farmers and for poorer countries reliant on food exports, where low prices had “battered income, investment and employment.”

In his introduction to the State of Agricultural Commodity Markets 2004, the FAO’s director general, Jacques Diouf, delivered a homily on the chronic oversupply of food. Prices in the mid-1990s were lower than at any time since the Great Depression, he complained, eroding the viability of rural communities and fuelling migration to cities.

There were winners and losers of course, but more of the latter than the former:

The main beneficiaries of lower food prices have been consumers in developed countries and in urban areas of developing countries.

However, for the vast majority of the world’s poor and hungry people who live in rural areas of developing countries and depend on agriculture, losses in income and employment caused by declines in the prices of the products they market generally outweigh the benefits of lower food prices when commodity prices fall.

FAO wanted the problem of oversupply fixed. It called for rich countries to cut subsidies and take land out of production. Poor countries needed to stimulate demand for food, it said, and equip their farmers to export cash crops – preferably processed ones – to the West.

The next State of Agricultural Commodity Markets came out in 2006, by which time the FAO could see that times were a-changing. In real terms, food prices had bottomed out in May 2002, and had jumped 34% by the end of 2005. Good news? Well, no.

Oversupply had not been tackled as the FAO had recommended. “Concern is rising among [food exporters] about the short-term sustainability of the current market situation,” it warned, “for market analysts anticipate that the price bonanza may not continue.” (In his preface to the volume, Dr Diouf did not mention prices at all, but stuck to safer ground: how to make a success of the Doha trade round.)

The price bonanza not only continued, however, it intensified. Prices peaked in June 2008 – 2.6 times higher than they were in 2002 and at the highest level for thirty years. The result was a catastrophe. In his foreword to the 2009 State of Agricultural Commodity Markets (understandably, the publication had skipped a year), Dr Diouf instructed us to:

Imagine the impact on the poor in developing countries who were already spending, in some cases, up to 80 percent of their meagre incomes on food. FAO estimates that soaring food prices pushed another 115 million people into chronic hunger in 2007 and 2008. This means that today the world has nearly one billion hungry people.

Now, leave aside the fact that we know these numbers to be pretty shaky, surely by Diouf’s own logic, there should have been some upside (“for the vast majority of the world’s poor and hungry people who live in rural areas of developing countries and depend on agriculture,” for example.)

Unfortunately, not. “High food prices were not an opportunity seized by the majority of poor farmers in developing countries,” the FAO informed us. “Their supply response was limited in 2007 and virtually zero in 2008.”

So for the rural poor, it was all downside when prices fell for forty years and all downside when much, but not all (see graph) of that fall was wiped out in just six years. How so? The FAO gives two reasons.

First, it simply reversed its position from 2006 that declining commodity prices ‘generally outweigh’ the benefits of cheaper food for the rural poor:

The evidence suggest that most households in the developing world and especially the poor are net buyers of food, and this holds even for rural households that are mostly engaged in agriculture.

For net sellers of food in rural areas, “the impact could in principle be positive” (note the weak formulation). But for net buyers, including those in rural areas, “the impact is unequivocally negative” (no doubt there, then).

Second, it found that, while a few large landholders had benefited from higher prices, the majority of developing country farmers had not. The expected supply response had not materialised, with cereal production up only 1% in 2008 in developing countries and most countries cutting production.

FAO gives a number of reasons for the lack of a supply response. Across the developing world, smallholders are isolated from global and regional markets, with price increases at these levels having ‘no effect’ on them. Input prices had risen as fast as food prices – and these are passed on ‘fully and quickly’ to producers.

The situation was bleakest in Africa (as always). Farmers tend to be “elderly with little or no knowledge of farming practices”, lack access to credit, and to make “minimal use of inputs (including fertilizers)”. They also are suffering from decades of underinvestment in technology and infrastructure.

Now, it is hard to resist poking fun at FAO’s prophetic abilities. I especially enjoyed Dr Diouf slapping himself on the back for warning of impending crisis “as early as July 2007”. Prices, after all, were already up by 88% by then.

But there’s a more serious point. Was FAO wrong when it decried low prices as a disaster for the rural poor? Or will a shift to somewhat higher prices indeed have a medium-term benefit for rural areas?

It is easy to accept that, in the short term, a price spike is mostly a bad thing (people who have very few reserves are left with little or no time to adjust). However, I am less convinced by the relentlessly negative slant of FAO’s argument.

I find it hard to believe there won’t be a supply response. Indeed, we are already seeing one. The FAO made much of only seeing a 1% increase in cereal production in developing countries 2008, but there have been big changes since then. Crops were 6% higher in 2010 than the average for 2007-2009, with another 2.3% increase projected for 2011. African cereal production was up a whopping 13% in 2010, although a 1.5% decrease is projected for 2011. It’s hard to be sure whether this is a long-run trend (although FAO had no such scruples in 2009), but the results seem encouraging. And it’s developing countries that have benefited. Rich world cereal production is flat or falling.

It’s unsurprising to see a lag before the supply response kicks in. Agricultural markets have always been bedevilled by the time it takes for supply to match demand. Less sophisticated producers are also likely to react more slowly than sophisticated ones, for all the reasons FAO cites (weaker connection to markets, less credit, etc.). But that doesn’t mean the price signal won’t get through eventually – especially if prices stay high for longer periods. As Africa has the most potential to increase yields (and the most available land), its medium or long-term gains could be the greatest.

Not all the impacts on the rural poor can be negative. Higher prices could be good for agriculture in Africa and other poor countries, but still have a net negative impact on poverty. Even here, I am not fully convinced by the FAO’s case, which relies heavily on (and sometimes stretches the findings of) a 2008 working paper by its in-house economists.

The paper explores the impact of rising prices on the poor in eleven countries (four in Asia, three in Latin America, and two each in Africa and Eastern Europe/Central Asia). It finds that between 7.2% (Malawi) and 67.9% (Vietnam) of rural households are net sellers of the three main tradable food staples in each country.

Broadly speaking, households with land, and those that use more fertilisers and other inputs, do well when food prices go up; poorer households, the landless, and large, poorly educated families are the least likely to benefit.

There are a few caveats in the way that this paper has been interpreted, however:

  • It excludes all farmers who don’t grow one of three tradable crops. Net consumers of food must be earning money from somewhere. Presumably some, at least, are selling cash crops and buying staples.
  • It also excludes the impact of rising wages. A landless labourer may spend more on food, but this could be fully or partially offset if rural wages increase, which is plausible if agricultural economies are expanding.
  • It careful to limit its conclusions to the very short term. Its findings are only relevant to a price shock. None of its finding exclude the possibility that rural areas will become richer if the long slump in agricultural commodities is indeed over, not that this would benefit the rural poor over time. The trend could be positive, in other words, even if the shock has been catastrophic.

There are two bigger questions:

  • What is the right price for food? Would a return to very low prices for commodities (and for oil-based inputs) be more likely to feed eight and nine billion people (and to do so sustainably)? Or are somewhat higher prices required to drive the investment this is going to need (with more efficient use of inputs as well)?
  • How do we increasing resilience to price shocks? It is important to disentangle long-term price trends from sudden price movements. How can the losers from volatility be best protected? We also need to discuss both growth and poverty. Higher prices could be very good for Africa’s economic prospects, even if the poor suffer in the short term.

The FAO’s next report on the State of Agricultural Commodity Markets should be with us before the end of the year. It has moved from depression about low prices in 2004, through confusion in 2006, to even despair about high prices in 2009. I wonder what its mood will be like in 2011.