1. Poverty, Climate Change, Rising Food Prices, and the Small Farmers Joachim von Braun Director General International Food Policy Research Institute International Fund for Agricultural Development Rome, April 22, 2008

2. Joachim von Braun, IFPRI, April 2008 Price developments and causes

3. Joachim von Braun, IFPRI, April 2008 The new situation: Surge in prices Source: Data from FAO 2008 and IMF 2008 Source: Data from FAO 2008 and IMF 2008. Commodity prices (US$/ton) New trend?

4. Joachim von Braun, IFPRI, April 2008 India and China: World vs. domestic prices India January 2005 = 100 China Source: Data from Reserve Bank of India 2008, National Bureau of Statistics of China 2008 and FAO 2008 Source: Data from Reserve Bank of India 2008, National Bureau of Statistics of China 2008 and FAO 2008.

5. Joachim von Braun, IFPRI, April 2008 World prices reach into East African countries Ethiopia, corn Kenya, corn Uganda, corn Ethiopia, wheat US$/ton Source: Data from FEWS 2008, EAGC 2008, FAO 2008 Source: Data from FEWS 2008, EAGC 2008, FAO 2008.

6. Joachim von Braun, IFPRI, April 2008 IFPRIs scenarios [Models for changes in structural supply and demand factors (2000-05 and 2006-15)] Source: M. Rosegrant (prelim. results with IMPACT-WATER). US$/ton

7. Joachim von Braun, IFPRI, April 2008 Food price related protests 2007-2008 1Argentina 2Bangladesh 3Burkina Faso 4Cameroon 5China 6Cote d'Ivoire 7Egypt 8Ethiopia 9Guniea 10Haiti 11Honduras 11India 12Indonesia 13Italy 14Jordan 15Madagascar 16Malaysia 17Mauritania 18Mexico 19Morocco 20Mozambique 21Pakistan 21Philippines 22Senegal 23United Kingdom 24Uzbekistan 25Yemen

8. Joachim von Braun, IFPRI, April 2008 Summing up: causes of imbalances and volatility in the world food equation 1.Income growth 2.Biofuels* 3.Lack of supply response* 4.Low stocks and trade policy* 5.Climate shocks* 6.Population growth

9. Joachim von Braun, IFPRI, April 2008 Biofuels

10. Source: Global Subsidies Initiative 2007 The biofuels boom Ethanol production 1975 - 2007 (billion liters) Biodieselproduction Biodiesel production 1991 - 2007 (billion liters) Ethanol > 90% of biofuel production; Brazil and US dominate the market Biodiesel: EU is the largest producer and consumer

11. Joachim von Braun, IFPRI, April 2008 Biofuels: fundamental change in world food price determination Energy prices always affected agricultural prices through inputs, i.e. P of fertilizer, pesticides, irrigation, transport Now, energy prices also affect agricultural output prices strongly via opportunity costs Large and elastic energy demand creates price floors and price bands for agricultural commodities Source: Schmidhuber 2007.

12. Joachim von Braun, IFPRI, April 2008 Corn breakeven prices for ethanol (2007) Crude oil ($bbl) w/o ethanol subsidy ($/bu) w/ ethanol subsidy ($/bu) 20 <01.50 400.962.56 602.013.62 803.084.68 1004.145.74 1205.206.81 Source: Birur, Hertel, and Tyner 2007.

13. Joachim von Braun, IFPRI, April 2008 World price changes: 2008 biofuels moratorium on food crop use compared to baseline Source: IFPRI IMPACT Model. % change

14. Joachim von Braun, IFPRI, April 2008 Lack of production response

15. Joachim von Braun, IFPRI, April 2008 World cereal production: Not growing enough Source: Data from FAO 2003, 2005-08. * Forecast. Million tons Total Million tons

16. Joachim von Braun, IFPRI, April 2008 Source: World Development Report 2008. Productivity growth is declining

17. Joachim von Braun, IFPRI, April 2008 R&D investment in developed countries is too low Annual growth rates in public agricultural research spending (% per year) 1991-2000 China5.0 All developing countries 2.9 All developed countries -0.6 Source: Pardey, 2006

18. Joachim von Braun, IFPRI, April 2008 Majority of the worlds farms are small Farm size (ha) % of all farms Number of farms (millions) < 2 85451 2 - 10 12 62 62 10 - 100 2.7 14 14 > 100 0.6 3 Total100530 Source: FAO Agricultural World Census.

19. Joachim von Braun, IFPRI, April 2008 And average farm sizes are smaller IndiaChinaEthiopiaTanzania Hectare Average farm sizes in selected countries Sources: Fan and Chan-Kang 2003, FAO Agricultural World Census and Indiastat.

20. Joachim von Braun, IFPRI, April 2008 Competition for land Field and pastures: ~40% Forests: ca. 10 million km 2 ( ~ 20%) Cities, roads: 2% Foley et al., SCIENCE 309, 2005

21. Joachim von Braun, IFPRI, April 2008 Rising farmland values (US Midwest) Annual increase in 2007 (+16 %) largest in 30 yrs Source: Federal Reserve Bank of Chicago 2008.

22. Joachim von Braun, IFPRI, April 2008 DAP, US Gulf World Fertilizer Prices, 2000-2008, US$/mt Urea, Arab Gulf, prilled MOP, Vancouver Higher input costs: Global fertilizer prices tripled in 2007 Jan-00Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06 Jan-07Jan-08 100 200 300 400 500 600 700 800 0 Source: IFDC 2008.

23. Joachim von Braun, IFPRI, April 2008 Expanding supply: High maize yield response to increased fertilizer use Yield response (kg) to 1 kg N fertilizer Pixel Count Distribution of Maize Yield Response to N application Increased fertilizer use can significantly raise productivity growth in smallholder agriculture Source: Harvest Choice, IFPRI.

24. Joachim von Braun, IFPRI, April 2008 Poor small farmers are hard hit with increasing input and marketing costs Marketing costs in SSA are up to 70% of crop retail values reducing the effective price farmers receive for their productsMarketing costs in SSA are up to 70% of crop retail values reducing the effective price farmers receive for their products (Minot and Hill 2007) (Minot and Hill 2007) Transport costs represent 50 to 60% of total marketing costs in Benin, Madagascar and Malawi (Fafchamps et al. 2005)Transport costs represent 50 to 60% of total marketing costs in Benin, Madagascar and Malawi (Fafchamps et al. 2005)

25. Joachim von Braun, IFPRI, April 2008 Expanding supply: High returns to roads and irrigation investments Bangladesh - improvement in rural feeder roads: - reduced transport costs by 36 to 38% - lowered fertilizer prices by 45 to 47% - Increased staple crop prices by 3 to 5% - Increased per capita expenditure by 11% Kenya: - A 1.0 percent increase in irrigation investments decreases poverty by 3.9 percent - A 1.0 percent increase in rural road investments decreases poverty by 2.4 percent

26. Joachim von Braun, IFPRI, April 2008 Trade policy and stocks

27. Joachim von Braun, IFPRI, April 2008 Small quantity changes have large effects on cereal prices 100 D 2000 S 2000 D 2007 S 2007 204 P 2,120 million tons 2000=100 1,917 Q Source: Based on data from FAO 2003, 2005-08. 2,070 153 S 2006 D 2006

28. Joachim von Braun, IFPRI, April 2008 Cereals: The world eats more than it produces Source: Data from FAO 2003, 2005-08. * Forecast. Million tons Total cereal stocks China

29. Joachim von Braun, IFPRI, April 2008 Major producers and net exporters (2004-06) Cereal producers China USA * India * Russia * Indonesia France * Brazil* Canada * Germany * Vietnam*Kazakhstan* Source: FAO 2008. Note: * Indicates that the country is a net exporter of cereals or oilseeds. Oilseed producers USA * IndonesiaChinaMalaysia Brazil * India * Argentina * in red = restricting exports

30. Joachim von Braun, IFPRI, April 2008 Basics of price trends:Basics of price trends: - supply & demand - rising expectations - market behavior e.g. speculation & hoarding In 2007, volume of globally traded grain futures & options by 33 & 48%In 2007, volume of globally traded grain futures & options by 33 & 48% Governments increasingly curb hoarding (e.g. India, Pakistan, Philippines)Governments increasingly curb hoarding (e.g. India, Pakistan, Philippines) Commodity exchanges can help create fair, orderly, and efficient food markets Speculation driving prices up? (Chicago Board of Trade)

31. Joachim von Braun, IFPRI, April 2008 More speculators 1.Capital investors 2.Governments 3.Traders (small and large) 4.Farmers 5.Households

32. Joachim von Braun, IFPRI, April 2008 A new global coordinated grain reserve policy is needed Past arrangements e.g.:Past arrangements e.g.: - 1950s: Global Emergency Food Reserve proposal by FAO Council - 1975: Intl Grain Reserve proposal by US Congress delegation - I976: Intl Emergency Food Reserve created (IEFR) pending 75 negotiations - 1980s: Proposals to strengthen IEFR were not approved - 1990s EU surpluses - 2000s ??? none

33. Joachim von Braun, IFPRI, April 2008 Climate Change – getting ready for the long run

34. Joachim von Braun, IFPRI, April 2008 Impacts and vulnerability to climate change and variability Rich countries emit majority of GHGRich countries emit majority of GHG Poor countries are more vulnerablePoor countries are more vulnerable - Geography (hotter, less rain, more variation) - Greater dependence on agric. and natural resources - Limited infrastructure - Low income, poverty and malnutrition - Thus, lower adaptive capacity (also including inadequate complementary services, like health and education)

35. Joachim von Braun, IFPRI, April 2008 Climate change risks for production 1990-2080 (% change) World –0.6 to –0.9 Developed countries 2.7 to 9.0 2.7 to 9.0 Developing countries –3.3 to –7.2 South Asia –18.2 to –22.1 Sub-Saharan Africa –3.9 to –7.5 Latin America 5.2 to 12.5 5.2 to 12.5 Source: Adapted from Tubiello and Fischer 2007 Source: Adapted from Tubiello and Fischer 2007. Expected impact on cereal production This will have further price increasing effects

36. Joachim von Braun, IFPRI, April 2008 Effective adaptation strategies Requires judicious selection of measures within a policy context and strategic development frameworkRequires judicious selection of measures within a policy context and strategic development framework Must go beyond good development policy to explicitly target the impacts of climate change, particularly on the poorMust go beyond good development policy to explicitly target the impacts of climate change, particularly on the poor Market signalsMarket signals - essential factor in determining the necessary responses to a changing environment - but involves potentially expensive time lags and overlooks equity - but involves potentially expensive time lags and overlooks equity Climate change adaptation must therefore be proactive, not merely reactive

37. Joachim von Braun, IFPRI, April 2008 Critical step toward mitigation: Post-Kyoto International Climate Change Regime Emissions targets, rates of convergence, and rates of growth in developing-country emissionsEmissions targets, rates of convergence, and rates of growth in developing-country emissions Level of emission allowances for developing countriesLevel of emission allowances for developing countries Level of caps by sector and industryLevel of caps by sector and industry Sector-specific mitigation optionsSector-specific mitigation options Incentives for international carbon tradeIncentives for international carbon trade Transparency and complexity of administrationTransparency and complexity of administration All influence the regimes impacts on economic growth, agriculture, food security, and poverty in developing countries All influence the regimes impacts on economic growth, agriculture, food security, and poverty in developing countries

38. Joachim von Braun, IFPRI, April 2008 Pro-poor climate mitigation policy Climate change policy can generate income for small farmers and investment flows for rural communitiesClimate change policy can generate income for small farmers and investment flows for rural communities Requires effective integration:Requires effective integration: from global governance of carbon trading, from global governance of carbon trading, to sectoral and micro-level design of markets and contracts, and to sectoral and micro-level design of markets and contracts, and investment in community management investment in community management

39. Joachim von Braun, IFPRI, April 2008 Policy and programs

40. Joachim von Braun, IFPRI, April 2008 Price-effects for Bangladesh five-person household living on one dollar-a-day per person Spend…their $5 $3.00 on food $.50 on household energy $.50 on household energy $1.50 on non-foods A 50% increase in food and energy prices requires them to cut $1.75 of their expenditures A 50% increase in food and energy prices requires them to cut $1.75 of their expenditures Cuts will be made most in food expenditures: Reduced diet quality, and Reduced diet quality, and Increased micronutrient malnutrition Increased micronutrient malnutrition

41. Joachim von Braun, IFPRI, April 2008 970 mln people live on $1 or less a day Subjacent poor ($0.75 and <$1): 485 mln in 2004 Ultra poor (<$0.50): 162 mln in 2004 Medial poor ($0.50 and <$0.75): 323 mln in 2004 Source: Ahmed et al. IFPRI, 2007.

42. Joachim von Braun, IFPRI, April 2008 Impacts of high prices on the poorest The consequences of increased prices for the poorest and hungry are driven by some initial conditions and by adjustments in labor, finance, and goods markets, and… Level of inequality below the poverty line (up)Level of inequality below the poverty line (up) Exclusion and discrimination (women)Exclusion and discrimination (women) Level of diet (high) and nutritional deficiencies (low)Level of diet (high) and nutritional deficiencies (low) Wage rate adjustments among unskilled labor to changing prices (slow)Wage rate adjustments among unskilled labor to changing prices (slow) Capability to respond to market opportunities (small)Capability to respond to market opportunities (small)

43. Joachim von Braun, IFPRI, April 2008 Policy actions to correct and mitigate the food price problem Global policies and international aid 1. Trade: Eliminate agricultural trade barriers, and export bans; revisit grain based biofuels 2. Agriculture growth: Expand aid for rural infrastructure, services, agricultural research and technology (CGIAR) 3. Protection of the vulnerable: Expand food and nutrition related development aid, incl. safety nets, child nutrition, employment programs

44. Joachim von Braun, IFPRI, April 2008 A production components of a program Taking global action with international organizations, national governments, regional and sub-regional organizations, private sector now Taking global action with international organizations, national governments, regional and sub-regional organizations, private sector now 1.Crash programs for key production areas with subsidized seeds, fertilizer, and credit, and guarantee the purchase of outputs. [Worked in the early Green Revolution. A start, but not sustainable, not viable] 1.Crash programs for key production areas with subsidized seeds, fertilizer, and credit, and guarantee the purchase of outputs. [Worked in the early Green Revolution. A start, but not sustainable, not viable] 2.Rely on the current high food prices to give a jump start in the short run, but immediately move to a investment plans for agriculture: agricultural research, rural roads, irrigation infrastructure, etc.

45. Joachim von Braun, IFPRI, April 2008 What will it cost? Investments for agric. production growth to meet MDG 1 (requires about 50% agric. productivity growth): A 2005 IFPRI estimate (to be updated): Incremental investments: $16 billion per year, 2005-15 for agric. research, rural roads, irrigation infrastructure [assumes continued policy reform and enhanced economic growth]. Of this approximately $8 billion for SSA, $5 billion for South Asia, & $3 billion for others 2008 updated estimate would need to take account of of changed US$ valueof changed US$ value changed economic and poverty circumstanceschanged economic and poverty circumstances might be up to twice the above quoted valuesmight be up to twice the above quoted values