Lessons from the food price crisis: Questions & Answers

The recent sharp increase in food prices should have benefited millions of poor people who make their living from agriculture. However, decades of misguided policies by developing country governments on agriculture and trade have prevented poor farmers and rural workers from reaping the benefits.

As a result, the crisis is hurting poor producers and consumers alike. To help farmers get out of poverty while protecting poor consumers, developing country governments should invest now into smallholder agriculture and social protection.

Sound complicated? We've put together this Q&A to help make things clearer.

Q. What’s the problem with global food prices?

A. Higher food prices have pushed millions of people in developing countries further into hunger and poverty. There are now 967 million malnourished people in the world, according to the World Bank – nearly a sixth of the world’s population. Small farmers in developing countries have failed to benefit from higher prices, due in part to flawed agriculture and trade polices.

Q. What is the main cause of the price increases?

A. The causes are multiple and analysts disagree on the relative strengths, but key drivers are (1) increased demand, both for biofuels and from developing countries such as India and China (especially for meat); (2) reduced supply due to erratic weather, linked to climate change (e.g. extreme drought in Australia and other countries) and decline in stocks; (3) increased energy prices and financial speculation in commodity markets.

Q. Who’s winning?

A. Big food trading companies have reported increased profits; supermarkets, seed and fertilizer companies are also doing well. Some big agribusinesses, which operate along the supply chain, and have a strong position in markets, are well placed to reap the benefits of higher prices.

Q. Who’s losing?

A. Vulnerable people in developing countries (as well as poor people in developed countries) are being hit hardest. Urban consumers who are net consumers of food (i.e. they buy more than they sell) are struggling to afford enough to eat. The poorest people in developing countries spend between 50-80% of their incomes on food. But people in rural areas are also suffering, as many are also net consumers of food.

Women are particularly hard hit: they often work the land but do not own it and do not have access to credit. At the same time they tend to bear the burden of feeding the family, and may take on extra work to try to supplement incomes. They will often cut their own rations when there is less to go around.

Q. Why are small farmers not gaining?

A. Many small farmers are still net consumers of food. Many are not well integrated into markets, and so are not well placed to take advantage of higher prices. They are often ‘price takers’. They often sell through middle men and may only have one buyer for their produce, who can dictate the price. They are vulnerable to changes in the weather, are often not able to store their food, and poor roads and other infrastructure can block them from getting to market.

Farm workers are even less likely to benefit from higher prices. Even if the people they work for are benefiting, it is unusual for the gains to be passed on in the form of higher wages. These people are vulnerable as they are often working on short term contracts, with poor labour rights: they are very exposed as consumers to higher prices, but have little hope of getting a better wage for themselves.

Q. What is the net effect on developing countries?

A. Overall the impact on poor people in developing countries has been overwhelmingly negative. There are some countries that are food exporters, like Brazil and Argentina, which have gained at the macro level, but even in these countries poor individuals are being hit hard by higher prices. In countries that are net food importers and have high levels of poverty, like Haiti, Bangladesh, and much of Sub-Saharan Africa, higher prices are a major threat to efforts to reduce hunger and poverty.

Overall, the World Bank estimates that 119m more people have been pushed into hunger by food price rises. This represents very worrying backwards progress on Millennium Development Goal of halving hunger.

Q. What do you want governments to do?

A. Developing country governments must invest more in supporting agriculture, focused on small farmers and women. They should have social protection policies, such as minimum income guarantees, and support for schooling and health.

Developed country governments and other donors like the IMF, World Bank and other multilateral agencies and NGOs, should support developing countries to implement these policies and not pressure them to open up their markets too quickly or adopt other polices that could expose their vulnerable populations. Global aid to agriculture – which has been falling dramatically – must be increased.

Q. What has the impact been on farmers in developed countries?

A. Overall, farmers in developed countries are much more likely to have gained from higher prices than those in developing ones. Even if they haven’t gained, or have been negatively affected, they are much more likely to have government support or other protection such as insurance or other sources of income.

Q. Food prices are now falling. Does this mean the crisis is over?

A. It’s true that food prices are falling. The FAO Food Price Index fell by 6% in August, to a seven-month low of 201. The index fell largely on sharp drops in international prices of cereals, vegetable oils and dairy products. However, the food price index was still up 13 percent from its value in August 2007 and 60 percent from August 2006.

Experts suggest that food prices are unlikely to fall back to previous levels, partly due to structural shifts that have taken place (e.g. changed consumption patterns, migration to the cities, volatile weather patterns). Even if prices do fall further, 119m more people have already been pushed into hunger by the price rises and they need help now. Furthermore, the current crisis has exposed an unacceptable level of vulnerability that must be addressed.

Q. How else is this situation affected by the global financial crisis?

A. The rise in the price of food and fuel has had negative effects on poor people in developing countries. The global financial crisis may exacerbate the negative impacts for poor people who are always most vulnerable to shocks. In the medium term, global aid may fall in response to the downturn, which would be disastrous. Lower oil and commodity prices may ease the pressure but the underlying vulnerability remains and must be addressed.

Q. Are you saying that companies should not make profits?

A. We are not saying the companies should not make profits but when those profits are at the expense of millions of poor people who cannot afford to eat, we think there is something wrong with the system.

All companies have a responsibility to operate in an ethical and accountable way. We are not implying that these companies have done anything wrong, however, their power in markets is part of the reason that poor farmers are not able to benefit from higher prices.

This is something that governments could address through better regulation. Trade agreements that limit the ability of governments to regulate foreign companies are problematic for this reason.

Q. Oxfam is calling for countries to spend more on agriculture and social protection but with limited budgets what should governments cut in order to pay for this?

A. The percentage of total global aid spending devoted to agriculture has fallen from 18% to just 4%, despite evidence that spending on agriculture pays dividends in terms of reducing poverty and inequality, promoting sustainable growth and protecting the environment. Oxfam believes strongly that overall aid spending should be going up, in line with promises made by developed countries. Aid should also be targeted and coordinated better, in order to increase its effectiveness. Less could be spent on consultants for example.

Q. Where can I get more detailed information?

Check out our report: Double-Edged Prices – Lessons from the food price crisis: 10 actions developing countries should take