Rough weather
Among the cyclical factors that have been at work are random adverse weather conditions that have reduced harvests in key producing countries. World wheat production declined in 2006 because of a 60% reduction of output in drought-hit Australia. Flooding in parts of South Asia and pest infestation and cold weather in Vietnam reduced harvests as well in 2007, particularly for rice.
Depreciating rupee
Depreciation of the US dollar against currencies of major Asian rice exporters had the effect of raising dollar prices. The steep decline of the US dollar against all major currencies in the past one year and its declining to record lows have contributed to increase in the prices of ‘soft’ commodities including wheat, whose prices are denominated in US dollars.
Hoarding of food grain
Precautionary demand for food stocks in many countries is contributing to food grain price increases. Public food grain agencies and private traders in many countries are replenishing their depleted stocks in the wake of the surge in international prices of rice and wheat. There have been many instances of raids on private traders who are accused of hoarding food grains to push up prices and create opportunities for making windfall profits in the domestic markets. Such options to contain price hikes are difficult to implement and have increased prices in the domestic market of many countries including that of Bangladesh and the Philippines.
Policy responses
Sustained policy responses (export bans, price floors etc.) of key rice-exporting countries including China, Pakistan, Vietnam, and India have increased price volatility and uncertainty in the international rice market. Export bans and price controls imposed by some countries have reduced supplies in the world rice markets and increased uncertainty about future rice supplies, contributing significantly to the surge in rice price especially since the end of 2007. Although Kazakhstan, Ukraine, and Uzbekistan also imposed bans on wheat exports, the latter two have withdrawn the bans recently. Nonetheless, this contributed to wheat price volatility. Lack of efficient logistics systems and infrastructure for food grain marketing and distribution in several countries tightened the market further as experienced by Afghanistan, Bangladesh, Nepal, Philippines, and Tajikistan.
Rising energy cost
Rising energy prices and energy intensity of the agricultural sector have increased the cost of critical inputs like fertilizer, fuel, and power. World energy prices have increased rapidly in recent years, with per barrel oil prices rising by an average of about $10 per year between 2002 and 2007 in nominal terms and by slightly less in real terms (ADO 2008). Both irrigation and fertilizers are critical inputs to the production of high-yielding varieties of food grains, and these are energy intensive.
Attention bio fuel
The diversion of cereal use from food to produce alternative fuel (bio fuel) is increasing as oil prices become higher. Bio fuel demand has contributed to the food crisis in several ways. Since 2000, cereal use for food and feed increased by 4% and 7%, respectively, while cereal demand for industrial purposes like bio fuels jumped by more than 25% (FAO 2007). Annually 100 million tons of food grains (corn) are being converted into bio fuel. In the US, ethanol subsidies have increased the use of corn for bio fuel production from 6% of total crop production to 23% in the past 3 years.
Diversion of land
Land is also being diverted to urban/industrial uses and competition for scarce freshwater resources between agriculture and industry and residential uses also has adversely impacted the supply growth that is structural as societies undergo urbanization and industrialization. An ADB study 31 shows that the water available for agriculture has already declined sharply over the past several decades, particularly in Asia. Water scarcity will be increasingly challenging for China and India, where irrigation water consumption as a share of total consumption is projected to decrease by 5-10% by 2050 compared with 2000.
Weak policies
Policy inadequacies and weak institutions undermine incentives for agricultural production. Policy interventions such as food grain support prices, input subsidies, involvement of public agencies in food grain imports, marketing, and distribution tend be ineffective over the medium term and inhibit supply increases. Food subsidies currently amount to $1 billion in Bangladesh and $16 billion in India. Such subsidies have also contributed to wasteful use of water resources, degradation of land, and imbalances in fertilizer use. Indian states of Punjab, Haryana, and Western Uttar Pradesh, the main success “stories” of the Green Revolution era in India, are now suffering from severe soil degradation, groundwater depletion and contamination, and declining yields.
Among the cyclical factors that have been at work are random adverse weather conditions that have reduced harvests in key producing countries. World wheat production declined in 2006 because of a 60% reduction of output in drought-hit Australia. Flooding in parts of South Asia and pest infestation and cold weather in Vietnam reduced harvests as well in 2007, particularly for rice.
Depreciating rupee
Depreciation of the US dollar against currencies of major Asian rice exporters had the effect of raising dollar prices. The steep decline of the US dollar against all major currencies in the past one year and its declining to record lows have contributed to increase in the prices of ‘soft’ commodities including wheat, whose prices are denominated in US dollars.
Hoarding of food grain
Precautionary demand for food stocks in many countries is contributing to food grain price increases. Public food grain agencies and private traders in many countries are replenishing their depleted stocks in the wake of the surge in international prices of rice and wheat. There have been many instances of raids on private traders who are accused of hoarding food grains to push up prices and create opportunities for making windfall profits in the domestic markets. Such options to contain price hikes are difficult to implement and have increased prices in the domestic market of many countries including that of Bangladesh and the Philippines.
Policy responses
Sustained policy responses (export bans, price floors etc.) of key rice-exporting countries including China, Pakistan, Vietnam, and India have increased price volatility and uncertainty in the international rice market. Export bans and price controls imposed by some countries have reduced supplies in the world rice markets and increased uncertainty about future rice supplies, contributing significantly to the surge in rice price especially since the end of 2007. Although Kazakhstan, Ukraine, and Uzbekistan also imposed bans on wheat exports, the latter two have withdrawn the bans recently. Nonetheless, this contributed to wheat price volatility. Lack of efficient logistics systems and infrastructure for food grain marketing and distribution in several countries tightened the market further as experienced by Afghanistan, Bangladesh, Nepal, Philippines, and Tajikistan.
Rising energy cost
Rising energy prices and energy intensity of the agricultural sector have increased the cost of critical inputs like fertilizer, fuel, and power. World energy prices have increased rapidly in recent years, with per barrel oil prices rising by an average of about $10 per year between 2002 and 2007 in nominal terms and by slightly less in real terms (ADO 2008). Both irrigation and fertilizers are critical inputs to the production of high-yielding varieties of food grains, and these are energy intensive.
Attention bio fuel
The diversion of cereal use from food to produce alternative fuel (bio fuel) is increasing as oil prices become higher. Bio fuel demand has contributed to the food crisis in several ways. Since 2000, cereal use for food and feed increased by 4% and 7%, respectively, while cereal demand for industrial purposes like bio fuels jumped by more than 25% (FAO 2007). Annually 100 million tons of food grains (corn) are being converted into bio fuel. In the US, ethanol subsidies have increased the use of corn for bio fuel production from 6% of total crop production to 23% in the past 3 years.
Diversion of land
Land is also being diverted to urban/industrial uses and competition for scarce freshwater resources between agriculture and industry and residential uses also has adversely impacted the supply growth that is structural as societies undergo urbanization and industrialization. An ADB study 31 shows that the water available for agriculture has already declined sharply over the past several decades, particularly in Asia. Water scarcity will be increasingly challenging for China and India, where irrigation water consumption as a share of total consumption is projected to decrease by 5-10% by 2050 compared with 2000.
Weak policies
Policy inadequacies and weak institutions undermine incentives for agricultural production. Policy interventions such as food grain support prices, input subsidies, involvement of public agencies in food grain imports, marketing, and distribution tend be ineffective over the medium term and inhibit supply increases. Food subsidies currently amount to $1 billion in Bangladesh and $16 billion in India. Such subsidies have also contributed to wasteful use of water resources, degradation of land, and imbalances in fertilizer use. Indian states of Punjab, Haryana, and Western Uttar Pradesh, the main success “stories” of the Green Revolution era in India, are now suffering from severe soil degradation, groundwater depletion and contamination, and declining yields.
