Food Prices and Security
Exploding myths, highlighting lessons

Rizwanul Islam
.....................................................

star

Although the crisis caused by the sharp increases in the prices of foodgrains during 2007-08 brought the issue of food security to the centre stage, it appeared to have gone to the back burner when the global economic crisis took the limelight and prices declined sharply towards the end of 2008 and in 2009. However, the issue is far from being resolved -- as is clear from the sudden increase in prices during recent weeks. In low income food deficit countries suffering from high incidence of poverty such as Bangladesh, ensuring food security is a major concern even in normal times. The concern gets heightened when prices of foodgrains rise, and the situation assumes crisis proportion when prices rise as sharply as we saw in 2007-08. However, the sharp increases in prices in recent years have given rise to certain myths concerning food security which need to be exploded. The main purpose of the present article is to dispel those myths and draw appropriate lessons from the crisis caused by food price increases.

The first myth concerns the notion of food security itself _ that it is only (or even mainly) a matter of increasing the production and availability of food grains. It may be recalled that more than two decades ago, Professor Amartya Sen (later, Nobel Laureate) convincingly demonstrated that hunger and famine are not caused by food availability decline alone, and that the ability of the poor to get access to food is a major factor. By now, this is quite well-recognised; and yet, in most discussions on food security and the impact of food price rise on food security, there is a tendency to focus only on production and availability of food at the aggregate level. It needs to be remembered that adequacy of food at the aggregate level does not guarantee food security for all. Had that been so, India, a food exporting country (in years of normal production), would not have any problem of food security and hunger. But it is well known that large numbers of the poor in that country still suffer from these problems.

The second myth concerns the role of prices -- that high and rising prices of foodgrains make it difficult to ensure food security. It needs to be noted that prices play a dual role in the food security equation. On the one hand, appropriate prices (especially in relation to the cost of production) are important for maintaining incentives for producers to make necessary investments and keep raising productivity for meeting the growing demand. On the other hand, prices influence consumption, especially of those who are net buyers of food in the market. The ability of the poor to buy foodgrains may be seriously affected by a sharp rise in the prices, unless there are measures to raise their real incomes. But as mentioned already, low prices may not be so good from the point of view of producers. It is, therefore, important to maintain a balance between the interests of producers and consumers. And from that point of view, it is necessary to maintain stability in prices rather than low levels. This, of course, is not to say that high prices are desirable and may not have an adverse effect on food security. I shall get back to that issue in a moment. But before that, a point about stability.

Why is it important to maintain stability in prices? First, in deciding on cultivating a particular crop and in making necessary investments (e.g., in water, fertilizers and other inputs), producers need to know what the returns would be. If the returns in terms of prices fall short of their expectation based on the cost of inputs, they may lose incentives to make similar investments in future, and production/availability in the subsequent cycle may suffer. The farmers in Bangladesh were about to face a situation like this when a bumper boro harvest was produced after the price rise of 2007-08, and prices started falling sharply in the second half of 2008.

Sudden and sharp increases in prices of foodgrains can of course endanger food security. It may be recalled that in the wake of the food price crisis of 2007-08, the number of people suffering from hunger in the world went up from 800 million in 2007 to over 1 billion in 2009. In Bangladesh, the trend of poverty reduction was reversed during those years. But it should be noted that there are different categories of poor, e.g., wage workers in agriculture and those engaged in non-farm activities in rural areas, wage workers in urban areas, and the self-employed in rural and urban areas. Different types of interventions are needed to ensure food security of different categories of poor.

There were three different types of factors that caused the sharp rise in the prices of foodgrains observed during 2007-08: (i) long term factors, (ii) creeping factors, and (iii) the sparking factors. The long term factors include years of neglect of agriculture throughout the world and inadequate investment that followed the success of the Green Revolution and the subsequent fall in the prices of foodgrains, decline in the growth of yield of crops on the one hand and increases in demand on the other. The creeping factors include the unprecedented rise in the prices of petroleum (from US$ 50 per barrel in early 2007 to US$ 120 in the spring of 2008) and the associated rise in the prices of fertilisers (price of Urea per tonne increased from about 101 US Dollars in 2000 to nearly 500 US Dollars in 2008), over-dependence on trade and a gradual but substantial decline in the global stock of rice. The sparking factors included restrictive trade policies (e.g., outright ban on exports by certain important exporters like India, Pakistan, Vietnam) and speculative behaviour.

The sharp decline in food prices witnessed in the second half of 2008 may have made many to think that the food price crisis is behind us. Is that really the case? First, one has to note that the decline in the prices of food grains came in the wake of global recession that was associated with declines in the prices of many commodities including that of petroleum and fertilizers. And there is no guarantee that prices of petroleum and fertilisers (that were in large part responsible for the rise in the prices of food grains in 2007-08) will not rise again once the global economy comes out of the recession and starts recovering on a more confident note than at present. Secondly, despite a decline in prices in global markets, prices faced domestically by the consumers have not returned to their pre-crisis level. Indeed, in Bangladesh, prices started rising again in recent weeks. Third, as mentioned earlier, sharp fluctuations in prices as witnessed in recent years and months may not be conducive to incentives for producers. So, now there is the dual challenge of ensuring access to food by the poor and maintaining incentive for producers. This challenge has been exacerbated by the decline in overall economic growth and the adverse effects on the employment and labour market situation.

A few lessons emerge from the experience of recent years.
* It is clear that the international market and trade cannot be relied on as a source of food grains, especially when there is a shortage. The international market for rice in particular is small, and restrictive practices followed even by a small number of countries can lead to sharp rises in prices. Hence, the urgency of raising domestic production to meet the growing demand for foodgrains.

* Constant monitoring of prices as well as the movement of possible contributory factors is essential so that appropriate measures may be taken in anticipation of possible future crises rather than in reaction to a crisis when that hits.

* The choice of instruments, their application and timing would be critical from the point of view of success in ensuring food security. On the side of production, it is important to maintain incentives for farmers to make necessary investments. Subsidies on inputs (e.g., on fertilisers, power, etc.) and interventions for providing price support are key in this respect. Small and marginal farmers must get the benefit of any support (be it in the form of subsidies on inputs or price support on outputs) provided by the government.

* On the side of consumption, it needs to be understood that it is difficult (if not impossible) to control prices. More practical is to ensure that the poor have the means to buy food in the market or have access to food through other means. There are different ways of doing so. One consists of social safety net schemes like employment generation schemes in infrastructure and VGD and VGF type programmes for the ultra poor. But there are many, e.g., wage workers, the poor self-employed and fixed income earners in urban areas who cannot be reached by such programmes. Different porgrammes are needed to help them, especially at times of sharp rise in prices. Open market sale of food grains is one way. Another way would be to transfer money directly to the poor, for example, through food stamps/vouchers. There are experiences in this regard from which Bangladesh can draw on.

* Open market sales and price support through government procurement involve a prudent build up and management of stock of food grains. Given the constraint on capacity to stock, and the need to change the stock periodically (because the quality of food grains starts deteriorating after a certain period), management of stocks assumes critical importance.

* Public intervention and budget management are of utmost importance in ensuring food security in a country like Bangladesh. It has been amply demonstrated that the market cannot be relied upon for maintaining necessary incentives for producers and ensuring that the poor have adequate access to food that may be available. Provision of subsidy and price support and interventions to make food available to the poor will require budgetary allocation. When prices of inputs are low in the international and domestic markets and prices of food grains are also low, the required budgetary allocation may also be low. And the situation may be easy to handle from a budget point of view (as is the case now in Bangladesh). However, the pressure on budget may increase when prices (of inputs as well as outputs) rise, and the government would do well to remain prepared to face that kind of a situation. One way of doing so without a sudden increase in the pressure on budget would be to build up a fund for expenditure on various items relating to food security. Such a fund (which may be called “food security fund”) could be built up during periods of low prices (when the demand for budgetary allocation is low) and could be utilised during periods of high prices so that the pressure does not fall on a particular year's budget.

The author, an economist, is a former Special Adviser, Employment Sector, International Labour Office, Geneva.

© thedailystar.net, 2010. All Rights Reserved