Severe Droughts Drive Food Prices Higher, Threatening the Poor

Global food prices soared by 10 percent in July from a month ago, with maize and soybean reaching all-time peaks due to an unprecedented summer of droughts and high temperatures in both the United States and Eastern Europe, according to the World Bank Group’s latest Food Price Watch report.

From June to July, maize and wheat rose by 25 percent each, soybeans by 17 percent, and only rice went down, by 4 percent. Overall, the World Bank’s Food Price Index, which tracks the price of internationally traded food commodities, was 6 percent higher than in July of last year, and 1 percent over the previous peak of February 2011.

“Food prices rose again sharply threatening the health and well-being of millions of people,” said World Bank Group President Jim Yong Kim. “Africa and the Middle East are particularly vulnerable, but so are people in other countries where the prices of grains have gone up abruptly.”

Overall, food prices between April and July continued the volatile trend observed during the previous 12 months, which halted the sustained increases between mid-2010 and February 2011. Prices increased in April, came down in May and June, and sharply increased in July.

Sharp domestic price increases have continued in this quarter, especially in Africa. Sub-Saharan Africa, in particular, experienced the highest price increases in maize, including 113 percent in Mozambique. Meanwhile, the Sahel and eastern Africa regions experienced steep price increases of sorghum: 220 percent in South Sudan, and 180 percent in Sudan, for instance.

According to Food Price Watch, weather is the critical factor behind the abrupt global price increases in July. The drought in the US has resulted in vast damages to the summer crops of maize and soybeans, for which the country is the world’s largest exporter. Meanwhile, the dry summer in the Russian Federation, Ukraine, and Kazakhstan has contributed to projected wheat production losses.

The abrupt food price increases turned favorable price prospects for the year upside down. World Bank experts do not currently foresee a repeat of 2008; however, negative factors -- such as exporters pursuing panic policies, a severe El Nino, disappointing Southern hemisphere crops, or strong increases in energy prices -- could cause significant further grain prices hikes such as those experienced four years ago.

Droughts have severe economic, poverty and nutritional effects. In Malawi, for instance, it is projected that future severe droughts observed once in 25 years could increase poverty by 17 percent, hitting especially hard rural poor communities. And in India, dismal losses from droughts occurred between 1970 and 2002 to have reduced 60-80 percent of households’ normal yearly incomes in the affected communities.

“We cannot allow these historic price hikes to turn into a lifetime of perils as families take their children out of school and eat less nutritious food to compensate for the high prices,” said Kim. “Countries must strengthen their targeted programs to ease the pressure on the most vulnerable population, and implement the right policies.”

“The World Bank has stepped up its support to agriculture to its highest level in 20 years, and will keep helping countries respond to the food price hikes,” continued Kim.

The World Bank’s support for agriculture in FY12 was over US$9 billion—a level not reached in the past two decades. The Bank is also coordinating with UN agencies through the High-Level Task Force on the Global Food Security Crisis and with non-governmental organizations, as well as supporting the Partnership for Agricultural Market Information System (AMIS) to improve food market transparency and to help governments make informed responses to global food price spikes.

Should the current situation escalate, the World Bank Group stands ready to go even further to assist client countries protect the most vulnerable against future shocks. Measures can include increased agriculture and agriculture-related investment, policy advice, fast-track financing, support for safety nets, the multi-donor Global Agriculture and Food Security Program, and risk management products.

Programs and policies to help mitigate food price hikes include safety nets to ensure poor families can afford basic staples, sustained investments in agriculture, the introduction of drought-resistant crop varieties--which have provided large yield and production gains--and keeping international trade open to the export and import of food.

According to Food Price Watch, prices are expected to remain high and volatile in the long-run as a consequence of increasing supply uncertainties, higher demand from a growing population, and the low responsiveness of the food system.

How the World Bank is helping

• In FY12, which ended June 30, new World Bank Group (WBG) commitments to agriculture and related sectors reached over US$9 billion. This exceeded projected lending in the Bank’s Agriculture Action Plan, which foresaw an increase from an average of US$4.1 billion annually in FY06-08 to US$6.2-US$8.3 billion annually in FY10-12. IBRD/IDA assistance in FY12 was the highest in 20 years.

• From July 2012 onwards the Bank’s emergency response to severe food price shocks in the poorest countries will draw on IDA16 resources, including those available through IDA’s Crisis Response Window, as well as undisbursed resources available under the recently approved Immediate Response Mechanism. For instance, in response to drought in the Horn of Africa, IDA is providing US$1.8 billion, to save lives, improve social protection, and foster economic recovery and drought resilience.

• IFC will invest up to US$1 billion in the Critical Commodities Finance Program, aimed to support trade in key agricultural and energy-related goods, to help reduce the risk of food and energy shortages, as well as improve food security for the world’s poorest.

• A first-of-its-kind risk management product provided by the IFC will enable protection from volatile food prices for farmers, food producers, and consumers in developing countries.

• The Bank is supporting the Global Agriculture and Food Security Program (GAFSP), set up by the WBG in April 2010 at G20’s request. Eight countries and the Gates Foundation have pledged about US$1.2 billion over 3 years, with US$777.4 million received.

• The Global Food Price Crisis Response Program (GFRP) has reached 40 million people in 47 countries - through US$1.6 billion in emergency support.

• The WBG is coordinating with UN agencies through the High-Level Task Force on the Global Food Security Crisis and with non-governmental organizations.

• Supporting the Partnership for Agricultural Market Information System (AMIS) to improve food market transparency and help governments make informed responses to global food price spikes.

• Advocacy for more investment in agriculture research–including through the Consultative Group on International Agriculture Research (CGIAR) – and monitoring agricultural trade to identify potential food shortages.

• Supporting improved nutrition among vulnerable groups through community nutrition programs aimed at increasing use of health services and improving care giving. As part of its response to the food crisis, the Bank has supported the provision of some 2.3 million school meals every day to children in low income countries.

• The Scaling Up Nutrition (SUN) framework for action to address under-nutrition was endorsed by over 100 partners, including the World Bank.

• Improving global collaboration in the generation and sharing of knowledge between agriculture, food security, and nutrition, through the SecureNutrition knowledge platform: www.securenutritionplatform.org