High Food Prices: Latin American and the Carib

Executive Summary

HighFoodPrices

Latin American and the Caribbean Responses to a New Normal

High Food Prices Latin America and Caribbean Responses to a New Normal

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nternational food prices have jumped by more than 43 percent since June 2010, igniting con-

cerns about a repeat of the 2008 food crisis and its consequences for the poor. While both the spike in prices and their volatility are expected to stabilize somewhat in the coming months, all indications suggest they are not likely to go away entirely in the future and that the low food price levels of the 1980s and 1990s are a thing of the past.

Several aspects of food markets will make the more recent price developments less extraordinary

in the future:

Due largely to longterm policy changes in high-income countries, current food stocks relative to consumption – the so-called stock/use ratio – have been around 20 percent since 2003.

They used to hover between 30 and 35 percent in the 1980s and 1990s. What’s more, stocks of some critical nations are now at all-time lows.

■■ Global stocks no longer sufficient to buffer shocks in production.

Land and water constraints are more binding than in the past.

Also, longer-term trends in climate change add to the uncertainty, particularly since a larger share of grain exports are produced in areas more subject to climate variability.

■■ Natural causes.

Just as in 2008, higher oil prices have impacted agricultural commodity prices. Meanwhile, biofuels, especially in developed countries, are consuming more of the supply of basic food products and thus contribute to an overall price hike.

■■ The fuel factor.

As incomes rise in places such as China and India, demand for more animal protein is rising. This places increased demand on global grain and livestock consumption and contributes to higher food prices.

■■ Change in eating habits.

Credits: Design: Alejandro Espinosa / www.sonideas.com Photos: cover, ©istockphoto/ htstvr; ; backcover @World Bank Photo Collection/vCurt Carnemark

High Food Prices, LAC Responses to a New Normal

Diverse Responses to Diverse Effects Around 93 percent of the population in Latin America and the Caribbean and 97 percent of its

economic activity are in net-exporting countries. As a result, the region as a whole has benefited from recent high levels of commodity prices, including food. In response, the agricultural powerhouses in the region — Brazil and Argentina at the top — have ramped up production, increasing their global market shares.

Yet, most Latin Americans, not only in urban but also rural areas, are net consumers whose pur-

chasing power is eroded by higher prices of food products. While the negative impacts on poor consumers in rural areas may be somewhat attenuated by indirect employment effects, the urban poor — who spend a very large share of their incomes on food — will lose.

Policy responses would need to be tailored to both mitigate the impacts on poor consumers and

support the supply response of producers.

Reducing the impact in vulnerable groups The latest acceleration of food prices may not lead to a dramatic increase in poverty levels in Latin

America. However, certain vulnerable groups and countries are expected to experience rising poverty and negative welfare shocks. Based on previous crises, those most likely affected will be the urban poor throughout the region, and vulnerable households particularly in Mexico, Central America and the Caribbean.

In the short term governments in the region should focus on efforts to mitigate potentially serious

impacts on those most at risk. The urgency of their responses may be greater this time around taking into account the fact that many of these vulnerable households have confronted three separate crises in the past four years.

The specific concern here is that they may have exhausted their coping mechanisms.

And as a consequence they may be left only with the worst alternatives: take their children out of school or sharply diminish their nutritional intake.

Such actions could translate into the large and lasting effect of lower levels in human

capital accumulation. Children who withdraw from school in times of hardship rarely return to the classroom, and stunted growth caused by poor nutrition has repercussions throughout a lifetime.

The simplest response is to increase the benefit and/or coverage of existing poverty-

Latin America and the Caribbean region has a high potential for expanding production as a result of its natural endowments.

targeted social programs. Where programs exist, are well targeted and have good coverage, a simple stroke of a pen can increase benefit levels and provide significant protection for those most vulnerable. During the 2008 food crisis, Brazil increased the basic benefit of its conditional cash transfer program, Bolsa Familia, by 8 percent and the transfer per child by 13 percent. Subsequent evaluation showed that while the response was not large enough, it did improve the situation of those covered. Even where programs have limited coverage, the having some system already in place can facilitate the roll out of more assistance.

But there is a great deal of variability in the type of safety nets available and their readiness in the

region. Even in countries with a strong base to respond, coverage is imperfect and may leave out populations at risk, such as the urban poor or poor families without school-age children. What’s

High Food Prices, LAC Responses to a New Normal more, in most Caribbean countries and countries with high poverty and malnutrition rates such as Bolivia, programs are still highly fragmented.

In other words, despite the region’s reputation for good safety net systems, a medium term agenda

remains. This should include implementing at least one sound poverty targeted program in countries still lacking such initiatives; developing agile targeting systems; and ensuring that the mix of programs are suitable for crisis response as much as they are for combating chronic poverty and inequality.

One key ingredient for both short and mid-term policy responses is nutrition. When households face

restricted purchasing power, they tend to lower dietary diversity and with it access to micronutrients.

Micro-nutrient initiatives gain importance as dietary diversity declines. If food is distributed in kind as part of safety net programs, it is desirable that it be fortified or of high nutrient value. The focus of these actions should be on the ‘first 1000 days,’ covering the pre-natal period up to age two. That is the window when biological vulnerability is greatest, the consequences of under nutrition most damaging, and the cost-effectiveness of action greatest.

Multiplying the Positive Latin America and the Caribbean region is a net food

exporter, with a share in gross world agricultural exports larger than its share in production (about 10 percent of ©World Bank Photo Collection/Flore de Préneuf global agricultural GDP). The region accounts for almost one third of world corn exports, 52 percent of soybeans exports, 44 percent of beef exports, and 42 percent of poultry. In 2006-2009, LAC’s share of world agricultural exports reached 14 percent, up from 11 percent in 1995-1999.

As such it is well positioned to benefit from high prices and increased food production. Even some

countries and sub-regions that are net food importers have a comparative advantage in other kinds of agricultural production (e.g., Central America with coffee), and some countries with a low degree of comparative advantage as measured by agricultural trade are nonetheless important producers (e.g., Mexico).

The region has a high potential for expanding production

as a result of its natural endowments, particularly the key ingredients for agricultural production: land and water.

Worldwide there are 445.6 million hectares of land that could be suitable for sustainable expansion of cultivated area (i.e., land with high agro-ecological potential, non-forested, unprotected, and with population density less than 25 per hectare), and 28 percent are in Latin America, more than in any other region except Africa (45 percent).

Latin American potential improves when you factor in acces-

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©World Bank Photo Collection/Julio Pantoja

sibility: 36 percent of suitable hectares within 6 hours of travel time to the closest market are in the region. What’s more, about one third of the renewable water resources worldwide is in the region.

percent of worldwide hectares of land that could be suitable for sustainable expansion of cultivated area are in Latin America.

Also worth mentioning is the region’s agricultural support

policies. After several decades of reforms, with some exceptions, incentives today are perhaps the least distorted in the world. Meanwhile, many countries in Africa continue to tax agricultural exports, while the developing countries in Asia have followed the pattern of the industrialized world, and subsidize agricultural production.

These and other factors combine to allow the region to

respond efficiently to higher prices and adopt appropriate investments to scale up production.

Tapping Latin America’s potential will require different

agricultural development strategies. For countries with a high percentage of suitable land that is currently uncultivated (Argentina, Uruguay, Paraguay, and Brazil), the strategy should focus on broad and sustainable expansion of production. For countries with a high yield gap (Ecuador, Bolivia, Paraguay, and parts of Central America), the strategy should focus more on raising productivity per hectare.

High Food Prices, LAC Responses to a New Normal Some countries in the region have already revolutionized food production. In the scope of 30 years,

Brazil turned its most unproductive region (Cerrados) into one of the world’s largest food reserves.

Embrapa, the Brazilian agricultural research center has developed global cutting edge expertise.

Because Brazil has a lot in common with Africa (geographical similarities in climate and soils),

it launched in 2010 a south-south cooperation initiative with African nations to enhance their agricultural productivity, which the World Bank supports with a three year US$1.5 million grant.

To take advantage of their full potential, Brazil’s neigh-

bors can also learn from its experience. Rates of return to public spending in agricultural research are clearly high, yet with the exception of Brazil and Uruguay, Latin American countries spend only a little over 1 percent of agricultural GDP on research. Though appropriate level of funding for R&D is related to the stage of development, a level of 2 percent of agricultural GDP is often considered as a desirable target for developing countries.

ŠWorld Bank Photo Collection/Curt Carnemark;

Constraints in distribution are still a challenge to overcome. Costs of handling, storing and trans-

porting food drive a wedge between the prices consumers pay and the prices farmers receive, penalizing both. The World Bank has estimated Latin American logistics costs as percentage of GDP to be between 16 and 26 percent compared to the OECD benchmark of 9 percent.

Poor infrastructure not only affects export but import prices as well. In the case of U.S. corn

exports to Nicaragua, for instance, the combined cost of U.S. transport, ocean transport, and additional logistics for getting the grain to the country is lower than the cost of transporting it within Nicaragua.

To both lower costs to consumers and maximize contribution to global food supply, Latin America

clearly needs to do much more to lower distribution costs. By taking appropriate policy actions and making critical investments to relieve bottlenecks in areas such as road and port infrastructure, customs, warehousing and storage, the region will be far better positioned to meet its full potential for doing well while doing good.

www.worldbank.org/lac