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Strong developing country producer response to the 2008 food price crisis eases global cereal price pressures

03 August 2014

Analysis from ODI, published in its “Food prices 2013/14: Annual review” of May 2014, has highlighted how “world grain production increased more than twice as much since 2008 than in the seven years previously”, with poorer countries having added more than 240 million tonnes (74%) of this increased production. This, it is argued, is “saving the world from feared prolonged periods of instability and huge price rises of… maize, wheat and rice”.

According to the report, “farmers, especially in developing countries, have finally adjusted to the roller-coaster ride of instability in cereal prices.” The authors of the report maintain that this will create a new norm for cereals prices above pre-2008 levels, but below the higher price levels of recent years.

The report observes that sub-Saharan Africa, where it was feared that the production response would be muted, “has increased its grain production by over 24 million tonnes since 2008, three times more than it achieved in the seven years before the spike”, accounting for 7.6% of the total increase. Asia has boosted its production by 100 million tonnes (or 31.5% of the increase), while Latin America has boosted its production by 15 million tonnes (4.7% of the increase).

According to the report, “increased production comes partly from farmers reacting to higher prices, but also from successful international and national efforts to boost supply’, notably the 2009 G8 pledge to provide US$22 billion for agriculture, rural development and food security in developing countries.

The authors argue that the production response of developing country farmers “calls into question some radical proposals put forward after the 2008 price spike, including creating global public cereal stocks and curbing the futures market in maize and wheat”. The analysis plays down the likely impact of the Ukraine prices on the underlying global cereals supply situation, maintaining that the political uncertainty “probably does not pose a major threat” to global cereals availability.

The analysis considers that the period of high and volatile cereal prices experienced in recent years may be ending, observing that the 2008 conjuncture of short-term production shocks and long-term demand trends, coupled to panic responses, have increased the sensitivity of world cereals markets to harvest failures and supply concerns, giving rise to sharp price responses. It argues that the surge in demand growth provided by biofuel policies has now levelled off, while inputs costs are now stabilised, thus allowing producers to establish a new equilibrium. While price instability will still be a feature of cereals markets, this is now likely to be less dramatic than during the immediate post-2008 period, since stocks have been rebuilt and governments are less prone to panic responses, with improved information on supply and demand trends.

Editorial comment

One issue of concern in the ODI report is that the past trend of growth in food supplies exceeding growth in demand may change in the future, with global supply expansion failing to keep up with growing demand and prices consequently soaring. A second issue of concern relates to the ability of ACP countries to manage price volatility in such a way that it neither undermines domestic production nor exacerbates food insecurity. And a third issue of concern relates to the medium-term level to which prices return after each price spike, and how quickly the adjustment takes place. This is important in terms of how quickly price signals are taken up by farmers and, consequently, how quickly global production responds to any price spike.

The ODI analysis is encouraging in respect of the latter. Sub-Saharan Africa had the second best improvement in its maize production response following the 2008 price spike (after the countries that made up the former Soviet Union), and has seen the greatest improvement in rice production following the 2008 price spike. Evidently, African markets are transmitting price signals and African farmers are responding, often with the benefit of donor-supported input supply programmes.

However, it is premature to conclude that the situation in the ACP is completely satisfactory. Three issues arise in this regard:

  • How in the long term are input support programmes to be sustained once donor assistance is terminated?
  • What policies are needed to ensure that internal marketing structures operate efficiently in linking expanded cereals production to profitable national markets?
  • What trade policies are required to allow the regular profitable export of expanded cereals production that may be surplus to current national requirements?

If these issues are not addressed, then the consequences of periodic price volatility may erode the benefits gained to date, particularly in smallholder-based farming systems.

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