Current and future challenges for agriculture and food security Kostas G. Stamoulis Director, Agricultural Development Economics Division Food and Agriculture Organization of the United Nations 1

1.02 billion people hungry in 2009 Developed 15m LAC 53m NENA 42m Asia & Pac 642m SSA 265m

Rapid rise in the number of hungry in recent years Source: FAO

Short-term developments

Food price developments, 2003-2009 FAO commodity price indices (2002-2004 = 100) Source: FAO Food Outlook (Dec. 2009)

Food price index development, 1961-2008, adjusted for changes in exchange rates

Paradox 1: No serious production shortfalls Global crop production Source: FAO Food Outlook (Dec. 2009)

Price transmission (1) : International vs. domestic prices Maize prices in important markets in Eastern African countries such as Kenya and Uganda also move together with the world price. On average, in the period 2003–08, world price changes filtered across these markets relatively slowly, with maize prices in Kenya and Uganda adjusting fully to world price changes after about seven months. Nevertheless, the large increase in the world price of maize from July 2007 onwards was reflected in both countries, suggesting that adjustment to world market price changes can be fast, especially when such changes occur simultaneously with low stocks or shocks in regional food supply or demand. In this period, the average monthly rate of growth in maize prices in Nairobi and Kampala amounted to 3.7 and 7.1 percent, respectively, compared with a world price monthly rate of 4.3 percent.

Transmission of International prices : upward movement In the case of maize in Africa, transport costs, a weakening US dollar and consumer preferences hindered the transmission of price signals from the world market, and domestic prices responded slowly. White maize is not readily substituted in consumption with internationally traded yellow maize. Nevertheless, increases in the volumes of maize traded, both formally and informally, across the Eastern and Southern African regions mean that national markets are integrated with one another. Statistical analysis using monthly maize price data for 1998–2008 suggests that both yellow and white maize prices in South Africa, the leading maize exporter in the region, respond slowly to changes in the world market price but that world market price signals do pass through across countries in the region. Between June 2006 and June 2008, the average monthly rate of increase in the world market price for yellow maize amounted to 3.9 percent, compared with white and yellow maize average increases of 1.2 and 1.6 percent per month, respectively, on domestic markets.

The Price Transmisson Paradox(2): Prices Inflexible downward

Paradox 3: Determining the impact of price hikes -4.79 -15.52 -30.03 15.69 3.11 0.94 -40 -30 -20 -10 10 20 Malawi Zambia Uganda Changes in expenditure on maize Changes in quantity of maize consumed Impact of % 50 increase in the price of maize on food expenditure Households adjust differently: Net producers, net consumers extent of separability between consumption and production decisions Production/expenditure patterns Liquidity constraints, investment capacity Fact: Source: FAO

Policy responses to short-term developments Objectives: Ensure affordable access to food for the most vulnerable Increase availability of food Wide spectrum of policy responses, differed by country Source: FAO (2008)

Policy response measures Trade related Imports (e.g. import tariff reductions, tax breaks, financial support) Exports (e.g. export bans) Tax related e.g. Reductions in VAT, removal of transport taxes, tax reductions on fuels Market interventions Management of public stocks Safety nets Food supply-based interventions/input support Trade measures: Import related (include import tariff reductions, tax breaks for importers, financial support for funding imports) Potentially effective, easy to implement and fast (they decrease the cost of imported food; loan guarantees increase traders‘ liquidity) Maybe an inappropriate response. 1) Reductions in tariffs may not be effective – level of applied tariff low; 2) Key component of government revenue, 3) Difficult to increase once lowered Trade measures: Export related (export bans) Protect consumers, but reduce incentives to some producers Implementation of export restrictions by important exporters renders the international market less reliable as a source of food (exacerbates price instability and harms traditional trade partners 25% of Non food insecure developing countries used export bans as a response to the crisis. This particularly worsened the already tight situation for low-income food insecure developing countries Tax related measures: are effective and easy to implement (increase in prices is offset by the reduction in taxes); facilitates the movement of food; in order to work the supply chain needs to be competitive Market measures: management of public stocks (i.e. domestic purchases of food or imports financed by the government, release of stocks at cheap prices). This increases the availability of food, but costs can escalate quickly Market measures: short-term consumer subsidies Safety nets: perform an insurance function. Normally a cash or food transfer mechanism. When prices rise, safety nets protect household assets Food-supply based interventions/Input support: Rural households are consumers and producers of food. Input support systems, that for example remove cash constraints, allow households to access input markets. This enables households to respond to market signals. Enabling rural producers to react to market signals would increase their resilience to price swings hereby also benefiting rural consumers

Could a similar crisis happen again? Can some of the basic drivers be reproduced Shortfall in stock levels ? Energy prices? Financial markets ? Will underinvestment in agriculture continue ? Who will be able to respond to the higher prices Incoherent policy responses Initial reaction of exporters to food price increase (export restrictions) exacerbated price instability : Safeguards ? Longer-term reaction of importers (land acquisition, supply arrangements) could reduce residual market size and further increase market instability Loss in confidence in international markets Energy and agricultural markets will become more strongly interlinked: can food prices be determined by much larger energy markets ? Will new players in international grain markets provide a safeguard ?

Long-term challenges

Food security in perspective Source: FAO (2009) Year Undernourished in developing countries (Million)

Key challenges Key overall challenge: To eliminate food insecurity Challenges for agriculture: Meet the food and energy needs of 9.2 billion people by 2050 Meet additional demands from energy markets Cope with local resource scarcity and shift to more sustainable production methods Adapt to the agro-ecological changes related to climate change and contribute to the mitigation effort Protection of livelihoods as agriculture transforms and markets are integrated

Demand Outlook : Slow-down in global demand for agricultural commodities Slowdown in Population growth +2.3 billion to 2050 after +3.3 billion over the last 40 years Highest growth in the poorest regions: Sub-Saharan Africa (+114%) Lowest growth in East and South East Asia (+14%) +2.7 billion in urban areas, significant urbanization Optimistic on income growth Overall a richer world by 2050 +2.9% growth per annum for the world a a whole higher in developing countries (5.2%), lower in industrial countries (1.9%) Less poverty (scenarios differ), but low poverty line of US$ 1.25

Change in the composition of diets 2050 Average daily per capita consumption: 3068 kcal Source: FAO

The global food outlook to 2050 Baseline: How much more needs to be produced by 2050? (%) 255 97 63 23 148 70 50 100 150 200 250 300 past future Developing Developed World Agricultural production Source: Bruinsma (2009) past = 1961/63 to 2005/07; future = 2005/07 to 2050

A Baseline Scenario shows that globally we can meet effective demand Globally: 91% from increased yields and cropping intensities In developing countries: 79% from increased yields and croppping intensity Improved seeds More efficient input-use (especially water and fertilizer) Small increase in cultivated area Yield growth: considerable slow down: 0.8% p.a. in the future compared to 1.7% in the past Still considerable untapped/bridgeable yield potentials and increases in yield ceilings BUT R&D needed for crops that are important for the poor (millet, sorghum, R&T, pulses, plantains) Key Challenge : In 27 countries prevalence of food deprivation more than 50% in 2050 not counting climate change and bioenergy demand

Exploitable yield gaps for maize in Africa Source: WDR, 2008, Sasakawa Africa

Agricultural system transformation

Structural shifts in agriculture and agro-industry As economies develop and incomes rise, emphasis shifts to value addition, risk management, quality and safety characteristics Trade liberalization and FDI intensifies the spread of agribusiness Gains from scale economies dominate Knowledge of how to manage complex systems Concerns: Rapid transformations increase risk of smallholder marginalization lack of access to knowledge, capital of all kinds, organisation Agriculture-development-poverty reduction link is broken

Structural transformation (1) Share of agriculture in GDP and per-capita GDP (180 countries) Note:GDP per capita refers to 2005 PPP USD. Source: World Development Indicators, 2009.

Structural transformation (2) A declining share of agriculture in GDP, but a high and rising share of agribusiness in GDP in developing countries Source: World Bank, WDR 2008

Importance of smallholders Who is a smallholder ?? 70 percent of world’s poor concentrated in rural areas where 2 out of 3 bn people reside in about 450 million small farm households. Focus on poverty reduction forces a better look at smallholders Smallholder growth has collateral positive effects on local economies. Generally for smallholders: Lower average education of head Smaller household size in all countries Female headed mostly Less livestock in TLU Reduced access to infrastructure. Smaller average use of organic, inorganic fertilizers and herbicides and insecticides

inclusive commercialization ?? Smallholder participation into markets Traditional constraints ( infrastructure; input markets; information) Which Markets ? Ease of entry depends on market characteristics (e.g. volatility: volumes, prices; integration between rural, urban, regional, global) “Willingnesss” of producers to generate sufficient surpluses Smallholder participation in value-chain development Which Value chain ? Ease of entry depends on the specific value-chain (e.g. capital intensity, knowledge intensity, land intensity; policy induced risks) What is the ultimate objective ( smallholder orthodoxy) Operating through labour markets ( demand and supply)

Policy interventions/ VCD initiatives to alleviate constraints Characteristics of the constraint/market failure will determine appropriate delivery mechanism/intervention Public/merit good research, extension, quality assurance, market intelligence, trade facilitation, dialogue, coherence Private good access to/affordability of inputs (subsidies, distribution) output price support (level/volatility) When to deliver support/service? Who and how to deliver? Trade Policy Target primary product ? Protect processed or raw material ? Characteristics of industries to be protected

Sources of Failure in Agricultural Markets Source of market failure: What is the constraint to private sector involvement? Possible PPP Solutions 1. Lack of enabling environment Unstable macro-economic environment; Inadequate physical infrastructure; Weak property rights and/or contract enforcement PPPs for provision and/or maintenance of infrastructure 2. Public goods Non-excludability, non-subtractability Contracting out for service delivery; Facilitate private coordination 3. Merit goods Lack of effective demand, hence market “under-provides” Contracting out for service delivery; Subsidies 4. Barriers to entry Lack of access to: Capital, Training (technical information) Market information - 5. High transaction costs/risks Imperfect information about attributes or actions of other actors and/or attributes of goods being sold Certification; Publicly supported assurance schemes; Risk sharing schemes 6. Coordination failures (complementary investment) Asymmetric information, no mechanism to enforce commitments; hence lack of trust Deliberative fora

Policy challenges..and opportunities

Key Conclusions The world can produce enough food to feed itself in the long-run – if appropriate policies and investments are put in place also to deal with wild cards ..biofuels and CC Producing enough food will not eliminate hunger – access to food must also be increased Improving the performance of agriculture is necessary to increase both food production and access to food Rapid transformation of the agri-food sector creates risks of marginalisation of “small “ producers.

Interventions vs initiatives More creative role for public sector that goes beyond creation of basic enabling environment Mechanisms by which public sector support can be used to leverage greater private sector participation State seeks to align incentives facing private sector with public policy goals such as service provision to poor groups Public sector risk sharing to encourage greater participation and investment Counterproductive interventions Crowding out Policy environment (e.g. ad hoc use of trade restrictions)

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Interventions vs initiatives More creative role for public sector that goes beyond creation of basic enabling environment Mechanisms by which public sector support can be used to leverage greater private sector participation State seeks to align incentives facing private sector with public policy goals such as service provision to poor groups Public sector risk sharing to encourage greater participation and investment Counterproductive interventions Crowding out Policy environment (e.g. ad hoc use of trade restrictions)

How much land is available now and in 2050? Source: Schmidhuber (2009); Data from Bruinsma (2009) Source: Schmidhuber (2009); Data from Bruinsma (2009)

Energy market challenge Oil prices per barrel versus food price per ton Source: World Bank, Global Economic Prospects 2009

Climate change Emissions from agriculture account for roughly 14% of global greenhouse gas emissions. 74% of the emission from agriculture and most of the technical and economic mitigation potential from agriculture are in developing countries Climate change will have a significant impact on agricultural productivity Source: IPCC (2007) Major impacts of climate change on crop and livestock yields, and forestry production by 2050 based on literature and expert judgement of Chapter 5 Lead Authors. Adaptation is not taken into account.

Population growth and urbanization, 1950-2050 Source: United Nations Population Division

Importance of smallholders Population and land distribution ( rural land) Land distribution: threshold is the acre weighted median: proportion of farmers that own half of cultivated land (sorted by farm size) Land distribution issues become evident in these figures, which presents the share of rural land operated by each group and the proportion in the rural population. We see that land is distributed unevenly in Bangladesh Nicaragua and Guatemala, where about 10 percent of the rural population are large holders operating about 50 percent of the land. In Malawi, small holders being 77% of the rural population operate about 51 percent of the land. Poverty: Guatemala and Tajikistan small farmers less poor. In all other countries small holders are poorer relative to large holders. Source: Karfakis and HammamHowe, 2009

Public and global policies Private investment is key but.. increased public investment and appropriate policies are crucial for attracting private investments Infrastructure, research, safety nets Quality is as important as quantity Resilience and risk management Sound regulatory framework Fundamental changes are needed in the global governance of the food and agricultural system based on all stakeholder participation Development plans need to be country-owned and country-led, but strategic coordination with development stakeholders needs to be enhanced Political will is essential at both national and international levels to address challenges that transcend traditional decision-making horizons.

Public sector roles in facilitating private sector investment Developments should be private sector driven, but with significant role for public sector (e.g. investments in infrastructure, improved output and input markets to increase the productivity of staple food crops) Strategies depend on whether agricultural growth is intended to be driven by smallholder or commercial sector. Focus on smallholders will require more inclusive policies Pessimism about smallholder market integration, especially integration into higher value chains may reflect lack of innovative approaches to service delivery