3 2007–2012 Food Price Spikes and Crisis—A Decade and a Half Later

Nearly a decade and a half after the food crisis of 2007–8, this is an opportune time to look back at its causes and consequences and to ask:

These questions need responses. What if similar conditions of successive droughts in major exporting countries, combined with national policies such as support for biofuels, are repeated in the future? And what are the lessons of the current COVID-19 crisis? The first two questions are addressed in this chapter. Lessons for SDG2 are explored in Chapter 4, and financing responses of developing and developed countries are considered in Chapter 7, as well as in Chapters 8 through 12 on the international organizations. Lessons of COVID-19, which were still unfolding as this book was being finalized, are discussed in Chapter 13.

Australia experienced drought conditions throughout the first decade of the new millennium, and as recently as the 2019–20 Australian bushfire season, starting with several serious uncontrolled fires in January 2019, an estimated 18.6 million hectares (46 million acres) had burned as of February 2020, with the largest loss of wildlife known to humankind in modern history, an estimated 1 billion Australian animals (Give2Asia 2020). Strong drought conditions during 2001–5 were due to El Niño, with extreme droughts in 2006 and 2007. Regional droughts and heat waves in the Ukraine and Russia occurred in 2007, then again in 2009, damaging wheat crops and causing global wheat price spikes (Janetos 2017). The record-setting drought in 2011–12 was the worst in the central regions of the United States since the 1930s, and California has had an extraordinary and ongoing drought during 2012–15 (Swain 2015). Since 2015, Australia, California, Brazil, and Indonesia have had some of the worst forest fires, arising out of and contributing to climate change. Figure 3.1 shows the fluctuating export volumes. Is the world prepared for similar circumstances?

The chapter is organized in three parts around these questions. In the first part, “A Perfect Storm,” the first section presents some background, and the second section explores the different causes of the genesis of the crisis. The second part of the chapter, “Global Responses to the Crisis” addresses the proximate responses of international organizations and developed and developing countries to the crisis. The third part of the chapter, “Lessons Learned and Challenges of Implementation” summarizes lessons and implications drawn and challenges among countries. A wide variety of more organized responses of international organizations to the crisis are discussed in Chapters 5 and 8–12, after exploration of food security and nutrition issues in Chapter 4.

Memories are short. Most of our (nonfood expert) interlocutors, while very familiar with the global financial crisis, could not recall the global food (and energy) crisis preceding the financial crisis in 2008. Yet, the food crisis was one of the most dissected events among agricultural economists during and following the crisis. Several factors were identified as villains of the piece, with different weights attached to each of their contributions. Some were completely off the mark. With the benefit of 20–20 hindsight and a telescopic view, new insights, perhaps, can be gained from this review conducted a decade later. We present the facts, as well as the way in which awareness of the causes of the crisis unfolded. The revised understanding, in turn, has affected responses of stakeholders. An important question is whether, with the information revolution, the quality of the information base and the speed with which information is made available to all concerned stakeholders have improved over time? The answer is partially yes.

The onset of the crisis was unanticipated by the development community at large, including by the World Bank Group (WBG) and the International Monetary Fund (IMF), although agricultural prices had been rising since 2000 (Figures 3.2 and 3.3). The in-house independent evaluation of WBG’s response to the food crisis noted this unexpectedness:

The WBG mobilized itself quickly, compared with past crisis episodes. The additional funding it provided [to deal with the impact of higher oil and food prices] was sizable yet modest, compared to the fall in private capital flows to emerging and developing economies and to the assistance provided by some other sources (for example, the IMF and the European Union).

(IEG 2009, v)

The World Bank had been concerned with the neglect of agriculture starting in the 1980s, a phenomenon discussed in detail in Chapter 8 on the World Bank (World Bank 2007; IEG 2013). The 1990s were frequently described as the “lost decade,” and with good reason, as can be seen from the share of official development assistance (ODA) going to the Agriculture, Forestry and Fishing (AFF) sector, which plummeted from the peaks reached in 1983 (Figure 3.4). It is noteworthy, however, that the share of lending to the AFF sector in 2016 was about 5 percent of the total, compared to the 3.7 percent rock bottom reached in 2005–6, but has never reached the peak, 20.4 percent of total lending, which occurred in 1983. Chapter 7 on the financing of structural transformation discusses these domestic and aid investment issues in more detail.

The World Development Report 2008: Agriculture for Development (World Bank 2007), drafted to highlight the importance of agriculture in development strategy, did not anticipate the crisis. The first-ever Independent External Evaluation (IEE) of the Food and Agriculture Organization of the United Nations (FAO), carried out in 2007, fared no better in predicting a crisis at the doorstep. The IEE was prompted by long-term concern among FAO’s donor stakeholders that FAO itself was in crisis (FAO 2007). The IEE zeroed in on the reforms needed within FAO, as discussed in Chapters 6 and 9, but did not anticipate the impending world food crisis. In 2007, FAO’s IEE panel, consisting of Uma Lele and Thelma Awori, visited some countries that were later seen as “crisis” countries. In 2007, these countries were engulfed in different internal political problems of their own, which also affected their agriculture.¹ This is not unusual. Like the attack on Pearl Harbor in the United States in 1941 and the Tet Offensive in Vietnam in 1968, which were not anticipated despite considerable intelligence, the COVID-19 pandemic at the end of 2019 was also not anticipated, notwithstanding repeated predictions by health experts.

Most analysts conclude that, in the short term, the higher food prices that ensued raised the poverty headcount in most developing countries, because poor farming households tend to be net purchasers of food and, generally, do not benefit from higher sales prices of their own production to offset the negative impact of higher food prices that they pay as net consumers. As a result, large numbers of rural households are pushed into poverty (Ivanic and Martin 2008; de Hoyos and Medvedev 2011; Ivanic, Martin, and Zaman 2012).

Estimating the number of poor people affected by the crisis was difficult, as “just-in-time” survey data on countries potentially affected by the crisis were not readily available. The FAO’s iconic Prevalence of Undernourishment (PoU) was not meant to provide just-in-time estimates of the actual number of hungry, even under the best of circumstances, because of its method of estimation (Wanner et al. 2014; Lele et al. 2016) (see Boxes 3.1 and 3.2). FAO’s Global Information and Early Warning System (GIEWS) keeps the world food supply/demand situation under continuous review, reports on the world food situation, and provides early warnings of impending food crises in individual countries (FAO 2020a), but it does not provide global estimates, as some authors have claimed (Headey and Fan 2008, 2010). The World Food Programme (WFP) has its own estimates, but its focus has been on countries in need of food aid, and the estimates were not suited to address a global food crisis (issues discussed in Chapters 4, 5, and 6 on “From Food Security to Nutrition Security for All,” “Changing Global Governance Context for Food Security and Nutrition,” and “Governance of the ‘Big Five’,” respectively).

FAO has since introduced a new measure called the Food Insecurity Experience Scale (FIES), which is a more direct measure of voices of the hungry. It is discussed in Box 3.2 in this chapter and in Chapter 4. The Independent Evaluation Group’s (IEG’s) evaluation of the World Bank’s response to the crisis quoted the Bank’s analysis, “The global crisis is expected to push more than 73 million people into poverty in 2009 alone” (IEG 2009, vi). A subsequent report, based on the work of Ivanic, Martin, and Zaman (2012) noted, “Simulation models suggested that poverty rose by 100–200 million people and the undernourished increased by 63 million in 2008,” with figures later adjusted to 100 million in 2008, and 48 million in 2011 (IEG 2013, x). The work was tremendously influential, with impact on the World Bank strategy of emergency assistance, as discussed later in this chapter and in Chapter 8.

Developing countries initially reacted less to the food crisis than did international organizations. Accustomed to food shortages and confronted with important domestic political developments, our own field visits to Bangladesh, Thailand, and Ethiopia, as detailed in note 1, indicated that developing countries initially reacted to the food crisis in 2007, much as they had in the past, using an array of tools they had at their disposal. Case studies carried out by Pinstrup-Andersen (2015) and colleagues provide details. Hazell, Shields, and Shields (2005) showed that, in general, domestic shocks were a greater source of price variability than border prices.² Freer trade reduced price instability in small African countries, as we discuss later in this chapter. Circumstances of developing countries varied greatly, in terms of population sizes, prevailing per capita food availabilities, food policy histories, and degrees of external orientation, as described here.

The World Food Summit was held in Rome in 2008, with 180 countries participating. The subsequent publication of FAO’s State of Food and Agriculture 2008 (FAO 2008b) concluded that rapidly growing demand for biofuel feedstock, combined with heavy subsidies to biofuel production among the world’s major food exporters, particularly in the United States and Europe, had diverted food production (corn, palm oil) to biofuel production and “contributed to higher food prices, which pose an immediate threat to the food security of poor net food buyers (in value terms) in both urban and rural areas” (FAO 2008b, 8).

Trade-distorting biofuel policies in developed countries may also have created the conditions for unfair competition for developing country producers of biofuels, perhaps also preventing a smooth transition to a lower carbon economy. As oil prices fell, market dynamics for biofuels also changed. Shale gas exploitation in the United States and slower economic growth in China also may have affected energy prices and, ultimately, prices for other commodities including biofuels and farm goods. Differences of opinion among members of the Organization of the Petroleum Exporting Countries (OPEC) on oil price policy, too, may have played a role at the time, as well as other geopolitical considerations (see Babcock [2011]; Meyer, Schmidhuber, and Barreiro-Hurlé [2013]; de Gorter [2014]; Schmidhuber and Meyer [2014]).

The Agricultural Outlook 2010, a joint publication of the Organisation for Economic Co-operation and Development (OECD) and FAO, contained projections of higher and more volatile food prices into the future, but food prices had started to decline after 2012 (Figure 3.2) (OECD and FAO 2010). With the low and declining food prices prevailing in 2016, the OECD–FAO Agricultural Outlook 2016–2025 expected no significant changes in real terms until 2025 (OECD and FAO 2016). So much for predictions. As Yogi Berra supposedly said, “It’s tough to make predictions, especially about the future.”³

FAO was not alone. The World Bank and the International Food Policy Research Institute (IFPRI) had also suggested that prices would remain high and more volatile until at least the end of the next decade (World Bank 2013; Kalkuhl, von Braun, and Torrero 2016), and that the prices have resulted from a complex set of interactive factors, including rising energy prices, the depreciation of the US dollar, low interest rates, and investment portfolio adjustments in favor of commodities—all in turn related to a range of underlying global macroeconomic phenomena that have affected both food and nonfood commodities (Headey and Fan 2010).

Notwithstanding the difficulty of making predictions, there are real reasons for concern going forward. FAO’s State of Food and Agriculture 2016 warned of the impacts of climate change on agriculture (FAO 2016).

Since then, the latest reports by Rome-based agencies, as they began to be jointly issued, have stressed the increased incidence of hunger due to climate change and conflict. Such impacts could lead to a similar crisis, and it could well occur much earlier than might be predicted based on the existence of the 30–5-year food price cycle that Timmer suggested, following Bruce Gardner (Gardner 1979; Timmer 2009, 2010). FAO also highlighted the risk of trade policies of large, emerging countries—citing the case of China in destabilizing world markets by unloading their stocks (FAO 2016). India’s export bans following the crisis had already been at the center of controversy (Sharma 2011).

In short, the crisis provided a real challenge to the world food system, shown in Figure 3.5. The diagram depicts the interacting paths that food travels from the farmer’s field to consumers’ plates, involving growing, harvesting, processing, packaging, transporting, and marketing through a combination of production, trade and aid, consumption, and disposal of food. Dynamic changes in the food system have occurred in how inputs such as energy are produced using agricultural lands and agricultural production. These energy inputs compete for cropland for food, influencing composition of output generated and highlighting the competing demands, between food and fuel, on what were previously seen largely as agricultural resources.⁴ Food systems increasingly also highlight the fact that subsidies to biofuels and mandates created to mix ethanol with gasoline, as in the United States, once provided are difficult to withdraw. They also highlight interconnectedness of commodity and financial markets on a global scale. They serve domestic interests, such as for biofuels, which compete with global interests for an assumed global food supply that can meet the needs of consumers in import-dependent countries. As discussed in Chapter 4, the use of food systems as a basis for analysis identifies the inputs needed to undertake the activities that relate to the production, processing, distribution, preparation, and consumption of food, to generate the outputs at each step of the food system, and recognizes that food systems operate within and are influenced by social, political, economic, and natural environments.

It is evident from the preceding discussion that prices were seen as the key barometer of the crisis. Concern about affordable access of the poor to food next ensued. The poor spend 50–80 percent of their income on food. In contrast, an average family in the United States spends 10 percent on food, and a European family, 15 percent (Bread for the World Institute 2013; Swinnen, Knops, and van Herck 2015). There was much confusion in the international discourse between price levels, rises, volatility, and spikes—vocabulary that quickly gained currency as part of the international discourse (Box 3.3) (see, also, Díaz-Bonilla and Ron [2010]; Tangermann [2010]).

Price transmission of producer-to-consumer prices was another issue of interest. Consumers in Europe and the Americas obtain most of their food in processed forms, in which the share of the cost of actual food ingredients at the retail level is relatively small, compared to transport, storage, processing, and packaging costs. Thus, international and domestic farm-gate food prices are not easily transmitted into consumer prices to the same extent as in developing countries, where most of the food sold at the retail level is without much value added.

The degree of transmission is also determined by the extent to which markets operate and the extent of transportation and storage costs, import and export taxes, and physical bans. Food prices play a significant role in domestic inflation in low- and middle-income developing countries because of the high share of consumer expenditures on food, and because both the level of inflation and the rate of change of prices influence consumer satisfaction with the government in power. Hence, food prices affect political stability—consequences range from city riots, as occurred in more than 30 countries during 2007–9, to voting at the ballot boxes. The proverbial onion prices in local markets decide election outcomes in India (Jadhav and Bhardwaj 2018).

There was relatively little mention of nutrition during the crisis—that is, of food quality and composition—even in international discussions, which described food security mainly as the poor’s access to food and in terms of cereal prices and supplies. Nutrition burst onto the international agenda around the time of the crisis in 2007–8 (see Chapter 4). FAO’s “State of Food Insecurity 2011” report briefly discussed impacts on nutrition. It was more the result, however, of the (parallel) advocacy underway by the nutritional community to bring nutrition back onto the global development agenda. Its timing happened to coincide with the crisis (FAO 2011).⁵

Figure 3.2 presents the Long-term Agricultural Commodity Price Index, from 1900 to 2016, and Figure 3.3 shows the Real Energy, Food, and Fertilizers Price Index from 1960 to 2017. After decades of decline, world food prices had begun to rise from about 2000. The food price rise and volatility reached the first peak in 2008, and following a short lull during 2009, surpassed its 2008 peaks. In early 2011, the World Bank’s Food Price Index, which had declined by 30 percent from mid–2008 to mid–2010, rose sharply, reaching a peak again in February 2011. Then, in mid-2012, food prices escalated again, with the Food Price Index rising by 14 percent from January to August 2012, as world maize prices soared to an all-time high in July 2012 (surpassing their 2008 and 2011 peaks)—rising 45 percent within a month. Hepburn noted that different commodities exhibited different market dynamics, particularly rice and wheat (personal communication, Jonathan Hepburn, February 19, 2018). Nevertheless, price peaks in the recent period have not reached the high levels they did in 1974. Yet, the phenomenon came to be known as the “world food crisis,” with much debate about the extent and causes of price rises, volatility, and spikes, and impacts on the poor (see World Bank [2017b]).

According to the analysis of de Gorter, Drabik, and Just (2013, 82), “the price increase in the corn market had a spillover effect on the wheat market and caused policy responses and speculation, including hoarding, which caused rice prices to spike.” This situation led the researchers to conclude that “because of the sudden increase in commodity prices, the developing countries were unable to benefit from the higher prices, even though they have comparative advantage in biofuels production” (de Gorter, Drabik and Just, 2013, 82). The authors note that their conclusion was true of only a few developing countries.

The striking difference is the sharp rise in fertilizer prices in 2008, compared to the past, moving closely with food prices and steeply increasing the cost of production for fertilizer import-dependent countries.

Impressive strides had been made in poverty eradication in developing countries since the 1980s, with a decline from 1.85 billion people living in poverty in 1990 to 767 million in 2013, and the share of poor people falling by three-quarters. The poor are defined as those earning incomes of less than US$1.90 a day in 2011 PPP (World Bank 2020). (For details on how poverty thresholds and levels have changed over time, with multiple poverty lines introduced in 2017, see Chapter 4.) Real food prices have seen a secular decline since 1900, with occasional price increases (Figure 3.2). The COVID-19 pandemic has at least temporarily changed this direction (Laborde, Martin, and Vos 2020). The real food price decline explains a huge progress in food security, with food production growth outstripping population growth. However, most of this improvement in food security has occurred in East Asia and Southeast Asia, particularly in China, and more slowly in South Asia (SA), as we noted in Chapter 2. Thirty-four percent of the remaining global poverty and 34 percent of the hungry are in SA, compared to 51 percent of global poverty and 26 percent of the hungry in sub-Saharan Africa (SSA) (FAO 2020a). Such “just-in-time” estimations are hampered by lack of data in least developed countries (LDCs).⁶

Lipton stresses that subsistence and semi-subsistence farmers should be helped to increase their domestic production, even production that does not leave the farms, rather than focusing only on markets and trade (Lipton 2017). This should be done by increasing productivity. It is the most cost-effective way to increase their food security and nutrition. There is clear evidence of progress on several other dimensions of SDGs, beyond the decline in poverty and hunger, which are discussed in Chapter 4.

Beyond the effects of food price increases on real incomes, many other factors intervene to affect poverty: family illnesses; unexpected epidemics of human, animal, and plant diseases; droughts, floods, variable and unpredictable rainfalls, rising temperatures, and loss of coastal areas; and conflict and terrorism (Krishna 2010). Those at the margin of subsistence fall into poverty as frequently as they get out of poverty, and these movements are not measured in the World Bank’s type of poverty measurement. These transitory shocks are increasing with: (1) population pressure (UN 2015); (2) climate change; (3) soil degradation and loss of organic matter by erosion, salinization, nutrient depletion, and elemental imbalance; (4) decreased availability of water; (5) competition for land by biofuel and nonagricultural uses, including urbanization and brick-making; and (6) increased preferences toward more diversified diets, including fruits, vegetables, dairy, and animal-based diets, prices of which are rising far more rapidly than cereal prices (Sen 1987a, b; Lal 2013; Ganguly and Gulati 2015).

Again, at least two competing narratives about movement out of poverty exist, both relating to trends in farm sizes in developing countries. A CGIAR study presented a narrative of land consolidation in Asia (Masters et al. 2013), which also holds for China. The other concurrent narrative argues that farm sizes in major parts of the developing world have been declining, particularly in Asia and SSA; some farms amount to the size of “postage stamps” (Vyas 2016). Chand also provided evidence of declining and highly fragmented farm holdings in India (Chand 2016). Headey (2016) documented this global evolution of farming land, based largely on FAO data: “The spatial distribution of global farming land has changed dramatically, with developed countries substantially reducing their share of global agricultural land, and land-abundant developing countries [in North and South America] substantially increasing their share. In per capita terms, we see … average farm sizes increasing in rich and more commercialized agricultural systems, and generally declining or staying constant in poorer and less commercialized systems” (Headey 2016, 185).

In their volume entitled Rising Global Interest in Farmland, Deininger and Byerlee (2011) noted that data on land tenure and operational holdings are very poor. They indicated, “Data from country inventories highlight serious weaknesses in institutional capacity and management of land information. … Official records on land acquisitions are often incomplete, and neglect of social and environmental norms is widespread” (Deininger and Byerlee 2011, xxxii). With unclear boundary demarcations, tenure security is necessarily reduced and potential for conflict increased.

John Gibson noted that many studies have sought to measure the impacts of higher food prices on the welfare of consumers. He noted the lack of reliable data:

Real welfare levels in poor countries are rare since surveys prioritize collecting nominal living standards data over price data. Narrower questions about the impacts of prices on food quantity consumed and on the availability of nutrients are poorly answered. Most studies ignore coping responses that involved downgrading food quality to maintain quantity and therefore overstate nutritionally harmful effects of rising prices. A full accounting for the impacts of food prices on food security requires spatially detailed food price data and household survey data on both the quantity and the quality of foods. Surprisingly few developing countries have these required data.

(Gibson 2013, 97)

Although the bulk of the poor still live in rural areas, a growing number are making their livings from diversified, nonfarm income. They depend on the market for food and are moving to urban areas to improve their livelihood prospects—or, with growing population densities, rural areas are being transformed into densely populated townships. With vast regional differences in endowments, stages of development, and histories of public policies, it is not surprising that the responses of developing countries have differed greatly. This raises major policy issues, which we take up in later chapters.

Analysts from FAO, IFPRI, and the World Bank, as well as scholars like C. Peter Timmer (2010), Brian Wright (2011b, 2012, 2013, 2014a), Will Martin (Lin and Martin 2010), Per Pinstrup-Andersen (2015), and many others contributed actively to the understanding of the crisis and its impacts. The list of factors that analysts believed to have contributed to the crisis is long. It includes high energy prices, conversion of corn to biofuels, poor harvests in major exporting countries, low public sector stocks, export bans by a number of countries, poor information, an outsized financial bubble caused by the greatest recession since the Great Depression of 1929, the ensuing commodity speculation, and macro policies in a more integrated world, but also some misdiagnosed factors such as rising demand from China and India. FAO’s SOFA 2009 noted, “Each one of those causes commonly cited cannot of itself explain the pattern and extent of recent price movements. It is their coincidence and combination that accounts for the dramatic changes. While disentangling their separate effects is problematic, the evidence does point to biofuel demand and oil prices as the principal drivers” (FAO 2009, 22).

The initial tendency in developed countries was to attribute the food price rise of 2007–8 to the growing demand from China and India. It showed confusion between long-term demand growth and spikes caused by short- and medium-term factors. Asian policymakers were aggrieved at the G8 meeting in Japan in 2008, after US President George W. Bush and US Secretary of State Condoleezza Rice attributed the crisis to the rapidly growing Asian demand (Huang et al. 2008).⁷ In particular, increase in meat consumption in China was believed to have created a derived demand for animal feed, contributing to the price increase. FAO and several others, in thorough analyses, pointed to the broadly stable shares of China and India in agricultural food commodity consumption, stressing that the two countries are largely food self-sufficient, with a declared policy of self-sufficiency, and are expected to remain so (Alexandratos 2008; FAO 2008a; Lustig 2008; FAO 2009; Baffes and Haniotis 2010; Headey and Fan 2010; Sarris 2010; Alexandratos and Bruinsma 2012). Furthermore, they did not change their net trade (Wright 2014b; Fukase and Martin 2020). Analysts from China and India also countered these observations early, noting the confusion between the long-term growth trends of Asian food demand and the consequences of the policies of biofuel subsidies and mandates in developed countries (Huang et al. 2008). The World Bank similarly noted that secular growth in China and India was not responsible for the sudden price increases (Mitchell 2008). Later, China and India each contributed to rising prices by imposing export bans, as described later. Subsequently, China also modified its biofuel policy (Huang et al. 2008).

By 2008, and continuing well into 2012, a strong consensus had emerged that biofuels were the game changer during 2005–15. FAO’s SOFA 2008: Biofuels: Prospects, Risks and Opportunities emphasized:

The rapid recent growth in production of biofuels was based on agricultural commodities, [and] the boom in liquid biofuels has been largely induced by [varied] policies in developed countries, based on their expected positive contributions to climate-change mitigation, energy security and agricultural development. The growing demand for agricultural commodities for the production of biofuels is having significant repercussions on agricultural markets, and concerns were mounting over their negative impact on the food security of millions of people across the world. … [T]he environmental impacts of biofuels are also coming under closer scrutiny.

(FAO 2008b, back cover)

The United States, one of the largest world food exporters, diverted more than 40 percent of its corn in 2007 to biofuel production (US EIA 2012; Wise 2012). Babcock (2011) showed that US corn ethanol was mostly market driven, but government policies did play a role; Elliott (2015) found US governmental policies of subsidies and mandates were key to the rapid expansion of corn ethanol. High oil prices made ethanol a competitive substitute for gasoline. While the US Congress declined to extend the tax credit and tariff at the end of 2011, the Renewable Fuel Standard and blending mandate remained, keeping a floor beneath ethanol demand, though corn ethanol expansion slowed in the following years (Wisner 2014).

Other countries also contributed to this diversion of cropland to production for biofuels. US import quotas and internal, insulated sugar price supports initially depressed world sugar production and prices, leading Brazil to reallocate sugarcane production from sugar to ethanol markets. Brazilian sugar ethanol production also responded to increases in crude oil prices that have occurred since the mid-1970s. Wisner (2014) similarly showed the relationship between ethanol, gasoline, crude oil, and corn prices, including the role of US mandates to use ethanol in the crisis.

Maltsoglou, Koizumi, and Felix (2013, 104) in their paper, “The Status of Bioenergy Development in Developing Countries,” noted that, with the exception of the United States, some European countries, and Brazil, bioenergy production “and more specifically, liquid biofuels … is still limited, especially in the case of Africa where the sector is still in its infancy.” The authors provided a “detailed overview of production in the African, Asian and Latin American regions, illustrating how the three regions of the developing world are working toward bioenergy development, the strategies and policies, and the main hurdles being encountered” (Maltsoglou, Koizumi, and Felix 2013, 104).

As Hertel (2015) and others have noted, and Wright (2011a) concluded in his presentation to the annual Forum for Agricultural Risk Management in Development in Zurich in June 2011: “Food competing with biofuels can do more harm to the welfare of the poor and landless, globally, than the greatest conceivable aid efforts or productivity increases could compensate.”⁸ Other consequences of the US biofuel policy, even after the end of the crisis, include increasing the cost of livestock feed to farmers, inadequate supply of ethanol to meet the mandated requirements for mixing with gasoline in automobiles, and unanticipated delays in the second generation of cellulose biofuels (Elliott 2015).

In an earlier paper, “Market-mediated Environmental Impacts of Biofuels,” Hertel and Tyner (2013, 131) noted, “despite all the research that has been done and all the advances made, there remains considerable quantitative uncertainty surrounding biofuels induced land use change. Obtaining precise estimates of these impacts is likely beyond the reach of current models and data.”

Indonesia is critical in the biofuels debate. It is the largest producer of palm oil and contains some of the most carbon-rich peatlands and forests in the world. It also has the highest rate of tropical deforestation globally, caused largely by the drive for palm oil. This mix has contributed to Indonesia becoming one of the world’s top 10 greenhouse gas emitters and the highest among them in terms of emission intensity: that is, emissions in relation to gross domestic product (GDP) (Ge, Friedrich, and Damassa 2014). According to some sources, the use of palm oil for European biofuels has increased sixfold since 2006 (Gerasimchuk and Koh 2013; Khairnur 2015). With decline in energy prices in 2019–20, others have dismissed the role of Indonesia in biofuels.

Higher fuel prices, as noted previously, encourage the switch to biofuels, and thus, reduction of crop production. Since biofuel policies in the United States and other OECD countries interact with fossil fuel energy markets, the level and variability of crop prices are highly susceptible to changes in oil prices, especially those that cause major shifts in transportation fuel demand. US fiscal and monetary policies magnified the crisis (Rausser and de Gorter 2015); beyond contributing to the 2007–8 food price volatility, the macro policies increased aggregate demand for food, fertilizers, and transportation services.

The net effect of these new causal mechanisms is that US biofuel policies ultimately increased, rather than lowered, world prices (without reducing volatility). High oil prices elevated crop prices in 2006–8; lower oil prices in 2008–9 spurred crop prices to plummet. Crop prices rose again to nearly the levels of the 2008 peak, and some studies have even argued that oil prices have led to increased food grain commodity prices (see, for example, Baffes and Haniotis [2010]). Rausser and de Gorter (2015) further noted that US agricultural and biofuel policies have not been the sole influences on commodities’ prices, especially corn, soybean, and wheat prices.

Food prices spiked in 2008, and then again in 2013; and in 2020, they were at their lowest. Energy prices have had two important effects, by increasing (or decreasing) the price of fertilizers and by diverting corn to the production of ethanol, in addition to direct effects on farm sector costs of transport, heating, refrigeration, storage, and use of farm equipment. Although incentives for corn ethanol have weakened considerably, the mandates have remained in place. The US ethanol exports have increased by nearly 10 times in volume since 2006, and in 2013 they were slightly more in volume than those of Brazil (Roberts and Schlenker 2010; WTO 2016). With low gasoline prices, new stricter emission standards for automobiles, and the prospect of electric cars, the justification for investment in biofuels is weaker today than it was in the early 2000s, when the policies were introduced.

Biofuels may have less impact on food prices in the future, as alternative sources of energy become more attractive. By 2015, investment in biofuels fell by 35 percent to US$3.1 billion, whereas solar energy became the leading sector by far, in terms of money committed, accounting for US$161 billion (up 12 percent over 2014), or more than 56 percent of the total new investment in renewable power and fuels.

Derek Headey and Shenggen Fan, in Reflections on the Global Food Crisis, concluded:

A major effect of rising energy prices was the consequent surge in demand for biofuels. Demand for biofuels had a stronger effect on maize than on other biofuel crops (such as oilseeds), although knock-on effects for other food items may have been substantial (especially for soybeans). Interestingly, … the surge in U.S. maize production for biofuels was of an order-of-magnitude equivalent to the primary explanation of the 1972–74 crisis—the surge in U.S. wheat exports to the Soviet bloc.

(Headey and Fan 2010, xiii)

Consequently, food prices have become intertwined with oil prices and are affected by policies that affect the demand for oil.

Since the crisis, there have been proposals for the United States to end biofuel subsidies or mandates (Elliott 2015), or to make them more flexible (FAO 2008a; G20 2011), so that in periods of crisis, more food supplies could be released to the world markets; or for the establishment of a global food safety net program, along the lines of the US food stamp program to protect the poor (Josling 2011; Díaz-Bonilla 2014).

Several policy changes concerning biofuel markets were finalized in Europe in 2015. In the European Union (EU), these included revisions to the Renewable Energy Directive and to the Fuel Quality Directive, with a 7 percent cap on renewable energy to come from food and feed crops in the transport sector by 2020. The United States, after a long delay, issued mandates in November 2015, higher than those that had been proposed earlier in the year, but considerably lower than the initial levels proposed in 2007 (OECD and FAO 2016).

Indonesia, previously one of the top biodiesel producers worldwide, saw production decline by roughly 60 percent. China’s biodiesel production increased, almost overtaking Indonesia’s 2015 levels (REN21 2016). According to the OECD–FAO Agricultural Outlook 2016–2025:

Indonesian exports of biodiesel are expected to remain marginal …

The future evolution of energy markets, as well as possible policy changes are key uncertainties attached to the Outlook for biofuel markets over the next decade. However, given recent policy decisions, uncertainties concerning the future of biofuel markets should ease somewhat, at least over the short term.

(OECD and FAO 2016, 117)

Payment for environmental services (PES) could arrest some of this land conversion. There is not yet a significant alternate market for environmental services. What exists is small and fragmented, based on aid resources (for example, Norway’s funding for Brazil and Indonesia of US$1 billion each) and on domestic financing by middle-income countries—most notably, by China, which has brought nearly 35 million hectares of land under forests through PES (Uchida, Rozelle, and Xu 2009; Xu, White, and Lele 2010). More financing for environmental services and cost-effective alternative sources of energy, such as solar and wind energy, will reduce the economic attraction of biofuels. Expansion of wind and solar energy resources has occurred more rapidly than that of biofuels in recent years (REN21 2016).

The greater global market integration in 2007–8, relative to the 1970s, was an underlying factor in linking US markets with EU markets, and EU markets with those in Asia. Although the growth in agricultural trade has not been as rapid as trade in manufacturing, agricultural trade has grown considerably since the 1970s (Aksoy 2004; Xu 2015; Bouët and Laborde 2017). Developing countries have been important players as agricultural exporters and importers (Bouët and Laborde 2017). The policy responses of developing countries to the crisis were closely intertwined with their development concerns, no matter how poorly they were designed, implemented, and criticized by analysts, as we show here.

Whereas the food price rise (in 1972) preceded an oil price increase in 1973, as shown in Figure 3.3, and was accompanied by the huge monetary expansion to finance the Vietnam War and the largest US grain exports to the Soviet Union in history (Graefe 2013), the increasing price of oil also had another effect on food production. From 2000, the steady rise in fertilizer prices, caused by the rise in energy prices (Figure 3.3), has adversely affected the cost of food production. Currently, this is not the situation, as oil prices are very low. This situation was well documented in the case studies of developing countries in Food Price Policy in an Era of Market Instability: A Political Economy Analysis, edited by Pinstrup-Andersen (2015).

A major area of debate about food price increases in 2007–8 concerns the grain stocks-to-use ratios. Cereal stocks-to-use ratio reached an all-time low (20.7 percent) in 2007–8. Stocks and stock-to-use ratios were higher in 2017–18 (see Figure 3.6) (Lyddon 2017; FAO 2018). Equally important, information on stocks was not as readily and broadly available (Ghanem 2011).

In his article, “The Economics of Grain Price Volatility,” Brian D. Wright argued:

In 2007/08 the aggregate stocks of major grains carried over from the previous year were at minimal levels, much less than they would have been without mandated diversions of grain and oilseeds for biofuels which were so substantial that they could not be made up by a few years of yield increases, even if yields had not suffered due to years of global underfunding of research and diversion of resources from production-increasing research. Lack of stocks rendered the markets vulnerable to unpredictable disturbances such as regional weather problems, the further boost to biofuel demand from the oil price spike in 2007/08, and the unprecedented extension of the long Australian drought which would not, absent the mandates, have caused any great concern.

(Wright 2011b, 56)

When stocks decline to a minimum feasible level, however, a modest supply reduction creates price volatility simply because it must reduce consumption demand, which requires a large increase in prices because consumption demand is inelastic. The resulting volatility may be exacerbated by hoarding and price insulation. Timmer (2010) contended that the export restrictions imposed by some of the major exporting economies induced panic buying by importers, such as in the Philippines, and hoarding by governments and other agents—and this caused the rice price spike. The sentiment has been echoed by others (Gilbert and Morgan 2010; Dawe and Slayton 2011; Wright 2011b).

The export bans, taxes, and hoarding raised prices more than they would have otherwise. The bans and taxes cut off importers from their usual suppliers. Timmer (2010) noted the same phenomenon with regard to rice in Asia, discussed later in this chapter in terms of the responses of developing countries. Timmer (2010) and Wright (2011b) argued, independently of each other, that hoarding keeps stocks from the needy in times of global stress on supplies, such as the period of excessive support of biofuels production.

The role of speculation has been controversial. Increased financialization of commodity markets meant that stockholdings and operations in future markets had to yield returns similar to other financial instruments. Among other causes, Headey and Fan (2010) attributed the crisis to exchange rates and speculation.⁹ Modeling by Torero (2012) and others attributed increased stocks to significant financial flows into commodity markets. Cooke and Robles (2009); Robles, Torero, and von Braun (2009); and Gilbert (2010) showed that futures positions have huge effects on commodity markets (for details, see Kalkuhl, von Braun, and Torero [2016]). Similarly, Frankel (2008) noted, “A monetary expansion temporarily lowers the real interest rate (whether via a fall in the nominal interest rate, a rise in expected inflation, or both—as now).” Although the precise channels of transmission have remained in dispute, the latest evidence suggests that changes since 1995, in the intensity of financial speculation in grain and livestock futures and the world business cycle, taken together, have been an important driver of co-movements between food and financial markets, especially after 2005 (Bruno, Büyükşahin, and Robe 2017). Others have argued that the focus on the futures market is misplaced (Irwin, Sanders, and Merrin 2009).

Wright (2011b) argued, however, that speculation was not as important. He posited that if speculation were the cause of the price increases, then one should observe increased stocks, but the precise opposite had occurred.

Countries in East and Southeast Asia and South Asia have used food price stabilization as an important part of their development strategy. And stabilization has remained a highly debated strategy, as we can see in the discussion here. Dawe and Timmer (2012) noted that most academic economists have objected to this strategy on at least four grounds:

First, … that trade restrictions reduce economic efficiency. Second, … trade restrictions are not targeted to the poor and thus waste scarce resources. Third, … [with] persistence of shocks to world prices, it is not possible to stabilize domestic prices without substantial fiscal costs. Fourth, … trade based domestic stabilization policies destabilize the world market, thus making it worse for consumers in other countries relative to the counterfactual of no trade restrictions (see Anderson [2012]). [Dawe and Timmer argued that] while all of these objections have merit, they are all overstated.

(Dawe and Timmer 2012, 128)

The sharp spikes in food grain prices in 2007–8, 2010–11, and 2012 provided motivation for the argument put forward by Dawe and Timmer. They argued that food price stability is crucial for macroeconomic stability and growth, because it protects the incomes of the poor who spend a large share of their income on food, particularly rice in the diets of most Asians (Dawe and Timmer 2012). They further suggest that:

… in poor countries, consumer and producer welfare should not serve as the shock absorber …

Probably the most serious objection to price stabilization programs is the practical difficulty that many governments have in implementing them in a cost-effective manner without destabilizing expectations ([G20 2011]; HLPE 2011 … . Price stabilization, which should ideally lead to domestic prices being equal to world prices on average over the medium-run, can also lead to domestic prices being consistently above world prices for extended periods of time, which hurts the poor because most of the poor are net buyers of food (FAO 2011). In the Philippines, price stabilization has turned into price support for farmers, even though it worsens poverty.

(Balisacan, Sombilla, and Dikitanan 2010)

The countries most successful at this task are in East and Southeast Asia, although the experience in South Asia discussed in this chapter also has been instructive.

In a personal exchange with Madhur Gautam, however, he commented, “in a more general equilibrium sense, in the long run stabilization erodes farmer incentives to improve productivity and production, and a slow rate of growth persists. This was observed in other places, too (for example, in Tanzania), where governments imposed ad hoc export restrictions to keep the price from rising, and hence, the domestic production levels never reached [the] 110 percent (or whatever) self-sufficiency levels the policymakers wanted. Clearly, with closed borders, any increase in production leads to a lower domestic price” (Madhur Gautam, personal communication, June 17, 2020).

On the other hand, several countries experienced the fastest poverty reduction between 2005 and 2012—and many people complained that this was not “real,” but driven by higher food prices. What happened? After the initial shock (bad for consumers but good for farmers), the supply response kicks in and, in turn, higher food prices translate into higher wages, resulting in more widespread poverty reduction. Seemingly counterintuitive, it actually makes a lot of economic sense. This is also what happened in India. While the prices were kept stable, over time there was a translation of global price increases to the Indian market as well. An excellent study by Hanan Jacoby (2016) showed how the rise in rural wages in India outpaced urban wages during this period, with wages rising faster where output price increases were higher. In other words, the empirical evidence, at least in this case—as well as for Bangladesh and Nepal—bears out the theory that dynamic general equilibrium results.

Of the 81 developing countries surveyed by FAO to assess their responses to the crisis, 43 reduced import taxes, and 25 (mostly in Asia) either banned exports or increased taxes on them (Demeke, Pangrazio, and Maetz 2009). Forty-five developing countries implemented measures to provide relief or partial relief from high prices to consumers. Having failed in curbing exports by imposing an export tax (that is, a minimum export price higher than the world price), India announced a complete ban on exports of non-basmati rice in April 2008—a policy that the government could enforce (Saini and Gulati 2015). Other rice-exporting countries followed suit with their own controls, and rice prices started to spike. For imposing a complete ban, India became a whipping boy of donors, in 2005–6, when its wheat stocks reached an all-time low due to bad weather and excessive exports, and when India’s milder approach of discouraging exports by imposing export taxes, which it tried first, did not work (Figure 3.7) (Hindu Business Line 2017; MoneyControl.com 2017a, 2017b, 2017c; Mukherjee 2017).

Indonesia similarly tripled its domestic stocks from 1 to 3 million. Timmer (2010), an ardent supporter of price stability, argued after the crisis that China, India, and Indonesia, collectively, protected 2 billion people in a second-best world, and that Indonesia and India, both democratic governments, were richly rewarded in the 2009 elections for having imposed export bans and maintained price stability. Anderson, Ivanic, and Martin (2014) estimated that their price insulation contributed about 60 percent of the upward pressure on world rice prices.

Indonesia’s overall trade regime has been relatively open, with low tariffs. Yet, in the case of rice, the country established a complete ban on rice imports in April 2006, leading to a 30 percent increase in rice prices over the April 2005 level. The World Bank argued that the import ban led to a significant upturn in poverty during 2006 (World Bank 2008). Timmer, in his previous writings, had explained China’s agricultural policies of keeping producer prices high as a way to contain rural unrest. Jikun Huang, founder and director of the Center for Chinese Agricultural Policy of the Chinese Academy of Sciences, confirmed this in a personal communication (July 2015). Given China’s history of political movements beginning in rural areas, the avoidance of restlessness in rural populations is an understandable concern for a country that does not tolerate political instability. The defeat of the Bharatiya Janata Party government in India, in the 14th Lok Sabha (general) election of 2004, was often explained by the hollowness of the campaign slogan “India Shining.”

Beyond the role of agriculture in macroeconomic impacts, there is extensive debate about the effectiveness of the price stabilization programs in achieving anti-poverty objectives, and considerable experimentation is underway in Asia, as discussed later in this chapter. The general conclusion in the case of Asian countries is that price stabilization policies have been effective and important for political stability as well, albeit at huge fiscal costs.¹⁰ The latter concern is leading to reforms in making stabilization more cost-effective.

A political consensus has emerged in large Asian countries, such as India, Indonesia, and China, that stable consumer and producer prices are essential for political stability and that a combination of trade and stabilization policies is essential to achieve price stability. Asian countries have largely attempted to smooth out fluctuations in international prices, rather than be out of line with them. Dawe and Timmer (2012) provided a thoughtful case for this argument. Saini and Gulati (2016) argued that this alignment is truer with respect to India than to China. (See, also, an analysis of public stockholding programs for food security [Montemayor 2014].) Free traders agree that Asian countries have often succeeded in stabilizing domestic prices but claim that, with better policies for stabilization, costs could have been lower (Gouel, Gautam, and Martin 2016). We return to these arguments at the end of the chapter. Furthermore, Will Martin notes that whereas this argument applies to countries individually, if advising the minister of a small country, he would agree that price insulation is an effective, low-cost way of stabilizing domestic prices relative to world prices. The problem occurs when almost everyone does it, so it does not actually stabilize prices much, or at all, unless a country stabilizes more than the average. And everyone cannot stabilize more than the average (Will Martin, personal communication, May 17, 2020). Critics of public intervention have also argued that trade insulation increased prices and volatility in international markets (FAO, IFAD, and WFP 2011).

In the case of SSA, import dependence for rice and wheat has steadily increased, but the imports are still small in the context of world markets. Jayne and Minot (2014) and others (including case studies from Pinstrup-Andersen [2015]) have argued that domestic price stabilization policies in Eastern and Southern Africa have had the contrary effect of destabilizing prices. “By accepting a moderate level of price fluctuation within established bounds under a rules-based approach to intervention, African governments will reduce their chances of facing severe food crises” (Jayne 2012, 143).

OECD policies of protection, on the other hand, first caused a decline in international agricultural prices, thus providing disincentive to production of commodities such as sugar and cotton in developing countries, and later, by diverting production to biofuels, caused a rise in prices for which developing countries were not prepared.¹¹

Use of export quantitative restrictions (QR) is a continuing problem in Africa. Governments continue to look at food availability, rather than access, and use QR policies that create volatility both at home and abroad. While this is similar to India’s QRs during the 2008 food crisis, African countries do not have the ability to stabilize their markets via costly storage, so they end up with increased price volatility at home and abroad (Will Martin, personal communication, May 17, 2020). For an example of a ban on exports from Zambia, see Koo, Mamun, and Martin (2020).

Small, import-dependent countries in Africa were thus deeply affected by the food and economic crises. The countries most exposed to price swings on international markets were typically poor and food importers, and most were in Africa (FAO, IFAD, and WFP 2011; Konandreas 2012; Valdés and Foster 2012). The countries had few reserves and inadequate budgetary means to procure food at high prices; generally, they also lacked the option of restricting exports, although some, such as Malawi, Ethiopia, Kenya, and Zambia, did so (Chirwa and Chinsinga 2015). They had to bear the brunt of the crisis, and domestic staple food prices rose substantially in these countries. For example, rice prices increased considerably in Senegal, following the export bans on rice imposed by several Asian countries. Some researchers on Africa have shown, however, that unlike in Asia, public intervention has not stabilized African food prices (Jayne 2012; Jayne and Minot 2014). On the contrary, it has contributed to instability by untimely and unpredictable behavior of marketing parastatals.

Structural adjustment led to the elimination of government interventions in food markets, with the expectation that the private sector would take its place. After liberalization in the 1980s, however, the private sector did not effectively take the place of marketing boards as fast and as effectively as external reformers had expected in Africa (Lele 1991a, 1991b). This was due in part to the very limited infrastructure, high internal transportation costs, poor market information, and landlocked nature of some countries: for example, Malawi and Zambia. Markets work when (1) there is competition in trading; (2) farmers have free and unfettered market access; (3) transportation costs are low; and (4) information flows effectively (Lele 1990). Far too often these conditions have not prevailed in Africa. Ethiopia’s large investment in physical infrastructure is paying off in improving market access (Bachewe et al. 2015).

In addition to promoting a privatized market setting (Byerlee, Jayne, and Myers 2005), the World Bank promoted new market-based institutions and private risk management institutions, including futures markets, crop insurance, and forward pricing, arguing that trade liberalization was an important component of the strategy. These have been implemented in many countries with somewhat mixed success. A key problem is that they find it difficult to manage shocks arising from unpredictable government policies, such as export bans.

The need for some seasonal storage by the public sector is recognized (see, for example, Basu 2015). Storage by farmers, using warehouse receipts to get credit, is also recognized and increasingly encouraged: for example, in Ethiopia (Minot and Mekonnen 2012). International trade can help mitigate production shocks through intra-annual response, reducing commodity inventories and storage costs, improving efficiency, and reducing the variance of crop prices. The dynamic, long-run implications of these effects on global food markets could be considerable (Lybbert, Smith, and Sumner 2014).

African market development needs a consistent, predictable, gradual approach, including substantial investment in physical infrastructure, information, storage, and access to credit, among other requirements. Because markets do not work, traders lobby to keep control of markets. Critics have argued that government intervention can exaggerate price instability, unlike in Asia where it has stabilized prices. Since it is unlikely that public intervention in markets will disappear completely anytime soon, public policy needs to focus on cost-effective public interventions, transition to public and private partnerships, economic analysis, transparent rules, and routine improved management of public sector interventions (Lele 1971). There have been analytical/advisory efforts to this effect in Asia, as we discuss later in the chapter.

Even though many countries in Latin America are major exporters, Krivonos and Dawe, editors of Policy Responses to High Food Prices in Latin America and the Caribbean, concluded:

Governments in Latin America applied an array of policy measures in reaction to skyrocketing food prices, attempting either to contain the pass-through of world prices to consumers or to mitigate the negative consequences of high food prices through transfers and food distribution. Market interventions to influence domestic prices ranged from border measures to direct state purchasing and distributing of staple foods, primarily cereals. At the same time, the vast majority of the countries in the region reinforced programmes to stimulate production, typically by providing farmers with inputs, access to credit and technical assistance. Some countries [most notably, Brazil and Mexico] counteracted the negative implications of the price spikes by expanding safety nets to compensate for the loss of consumers’ purchasing power … Other mitigation strategies included the development of local markets and rural infrastructure to improve the flow of food products from farms to cities, encouraging the diversification of consumption to include traditional and locally produced products …

Policy makers … focused on the reduction or elimination of import tariffs and the imposition of export restrictions on some key products.

(Krivonos and Dawe 2014, 189)

Most importantly, with disorderly international markets and a lack of timely market information, developing countries lost confidence in the reliability of the international food markets, leading to increased support for the rhetoric of food self-sufficiency, some of which has since receded into the background. Indeed, even donors were beginning to change their stance. For example, the US State Department and the US Agency for International Development (USAID) were advising policymakers in countries like Morocco to focus more on food self-sufficiency and less on export orientation, quickly reversing their own earlier advice and astonishing aid recipients (interviews with national policymakers in Morocco and Bangladesh). This experience brought home the need to establish market information. The Agricultural Market Information System has been one of the few significant responses to the crisis, among the many recommended by the two interagency reports addressed to G20 after the crisis (G20 2011; Bioversity et al. 2012) (Box 3.4).

The high level of OECD support (Producer Support Estimates) has been a disincentive to production in developing countries, and it is good that the support has been declining (OECD 2016). The IMF’s independent evaluations have noted its unequal treatment of developing countries with regard to agricultural subsidies in the course of loan negotiations. In comparison to the light or nonexistent treatment of agricultural policies in developed countries—where historically, the IMF only conducted surveillance—in developing countries, it provided loans for stabilization programs (IMF 2009). Having reduced their protection in the 1990s, however, emerging countries in recent years have begun to provide significant levels of support, particularly for import-competing commodities, which are converging with the levels of support provided by OECD countries (Figure 3.8) (Anderson 2010b; OECD 2017). Norway, Switzerland, Iceland, Korea, and Japan still have high levels of protection, and among emerging countries, China, Indonesia, Turkey, the Philippines, and Colombia have protection levels about half the size of the former group of countries.

In the case of China, prices are higher, compared to the world market prices. Furthermore, whereas the EU has largely moved to non-production-distorting income support, the United States has moved in the opposite direction, to a form that distorts commodity production (OECD 2017). Anderson (2010b) supported the argument that protection of import-competing commodities leads to higher food prices, and its overall impact on poverty is generally adverse. Martin argues that, in the longer term, exogenously higher prices tend to lower poverty (Ivanic and Martin 2014).

Citing Ivanic and Martin (2008), Anderson (2010a, 3244) elaborated, “A new proposal for agricultural protectionism in developing countries … is based on the notion that agricultural protection is helpful and needed for food security, livelihood security, and rural development. This view has succeeded in bringing ‘Special Products’ and a ‘Special Safeguard Mechanism’ into the multilateral trading system’s agricultural negotiations, despite the fact that such policies, which would raise domestic food prices in developing countries, could worsen poverty and the food security of the poor.” Hertel has argued that special products are a disastrous idea. A key problem is that they are a quantitative restriction that would destabilize markets (Hertel, Martin, and Leister 2010).

Among emerging countries, Brazil and South Africa have had relatively open agricultural trade policies. Protection of small farmers through input subsidies and minimum prices has been an important feature of agricultural policies in China and India, each with high levels of grain stocks (see Box 3.5). India and China, joined by the “G–33” countries (actually 47 World Trade Organization [WTO] member countries) have been involved in an extended dispute with the United States and the EU, described subsequently in the chapter. Separately, the United States launched a complaint against China in September 2016, for providing domestic support to wheat, rice, and corn (Mehra 2018). The complaint was joined by the EU and a number of Asian and Latin American countries, including India.

Critics of the Indian food policy have argued that, instead of supporting agriculture by distortionary input subsidies, India should invest more in agricultural support of the Green Box variety,¹² particularly in public goods, in support of smallholder agriculture (Meijerink and Achterbosch 2009)—a criticism with which we concur and that we discuss further in Chapter 7 on the financing of agriculture.

OECD’s monitoring of price behavior included 49 countries that contributed 88 percent of value-added to world agriculture, but it did not include India, the world’s second largest producer of rice, wheat, and other cereals. A major global trader, India was at the center of the export ban controversy during the crisis in 2007–8, and in the negotiation of the Bali Package at the 9th WTO Ministerial Conference (FAO 2014). Countries like India sought to achieve a “permanent solution” on public food stockholdings at Buenos Aires but talks ended with no conclusive agreement (see Box 3.6 on the WTO and the controversy). India joined in the OECD monitoring of price behavior in 2017.¹³

With substantial accumulated experience in price stabilization and trade, many lessons have emerged.

Many developing countries have stabilized their domestic prices through stabilization policies. Hence, domestic prices in low- and middle-income countries have typically increased less than world prices (Dawe et al. 2015), and have been less volatile than world prices, while broadly following world price movements, as many developing countries, particularly those in Asia, now tend to do.

Movements in domestic prices are influenced by many factors, including public investment in R&D, policies that promote private investment, domestic and international trade policies, and year-over-year changes in weather, as well as by stabilization policies. Finally, domestic price changes have varied widely across countries. Thus, not all price changes in domestic policies are necessarily caused by increases in world market prices.

International organizations have advocated government purchases at MSPs to promote and accelerate adoption of new technologies. India provides a good case study, because it was the largest recipient of World Bank loans and credits and US food and financial aid, the latter in the 1960s and 1970s, with considerable interaction between external advice and domestic policy. Some of India’s experience is generalizable to other developing countries. Purchases of wheat and rice at guaranteed prices were meant to reduce the risks of adoption of the new Green Revolution technologies. Indeed, the World Bank and the United States (Orville Freeman, the US Secretary of Agriculture, at the direction of President Johnson) helped to institute the organizational infrastructure of the Food Corporation of India (FCI) and made other public sector interventions: for example, directing credit to farmers in the Punjab and Haryana and MSPs for rice and wheat, conditional on lending to India during the 1960s. During the 1970s, the World Bank supported parastatal marketing in Africa, inherited from the British and French colonial period. Since the era of structural adjustment, international organizations have promoted trade as the first-best solution.

In his book, An Economist in the Real World: The Art of Policymaking, Basu (2015), who served as the Chief Economic Advisor to the Government of India and later as the Chief Economist of the World Bank (2012–16), explained why producer and consumer price stabilization is necessary in countries such as India, where agriculture contributes 14 percent of GDP, and yet, 59 percent of the population live in poverty. Most of the poverty is found in rural areas and limits poor people’s abilities to take risk. A large proportion of the poor depend on the market for food. Basu argued that the government needs to pay a higher-than-market price to command supplies, and it needs to offer food to the poor at lower-than-market prices. The nonpoor would pay a price higher than the market without government intervention. The difference and the extent of subsidy would depend on the amount the government undertakes to provide to the poor, both in quantity per person and in coverage of the population, and how efficient the government is in its task—a relatively simple piece of arithmetic that is affected by the political economy of a country.

Minimum support prices (MSPs) are a very rigid device that can easily cause programs to collapse. Australia had one of these for wool, and it collapsed, as did all the international agreements that used this approach. India combines stockholding with trade policy, which makes it more sustainable than the US loan rates or Australian wool prices. An important question, however, is whether it is cost-effective. A similar degree of stabilization without the rigid floor would cost much less and avoid the risk of collapse. See Gouel, Gautam, and Martin (2016).

India’s price stabilization policy has been closely related to its safety nets, discussed later in the chapter. Basu (2015) and others considered the problem of mounting stocks that India, like China, has faced to be one of timing and the extent of release of the procured grain, which requires cabinet approval and lacks transparent rules for the timing and amount of releases, rather than problems with procurement or physical or financial losses. Evidence seems to suggest otherwise.

Basu (2015) made a useful distinction between price stabilization programs and anti-poverty programs, although historically they are closely linked. In addition to the US$18.5 billion annual spending, India will spend US$4 billion annually under the right to food law, in theory providing affordable food to 800 million people. Basu (2015) and others have noted that price stabilization has been successful in India (Gouel, Gautam, and Martin 2016), but as an anti-poverty program, it is deeply flawed, making only a small dent in poverty (Basu 2015). Others argue the Public Distribution System (PDS) was only relevant for urban areas. The poor accessed PDS food either directly or indirectly through the families they worked for. This situation distorts figures that are used to argue that the middle class benefits, but the poor do not (FCI 2015).

Stabilization policies entail a combination of MSPs, food procurement and distribution, and trade policies. If FCI’s storage costs are four times higher than long-run costs estimated for other countries, then it raises questions about justification of public storage (Box 3.5) (World Bank and FAO 2012; Gouel, Gautam, and Martin 2016). Critics in India have disputed these storage and transaction costs (Drèze and Khera 2013).

Academic research has begun to catch up with policy concerns, but some recent studies have addressed only high or rising prices, and others, volatility. Some look at impacts on consumers and others, on small subsistence producers. Holistic studies by economists with policy experience, which we review later, provide a different perspective. Based on the analysis of food prices and riots in cities of developing countries, including the toppling of governments in Tunisia and Madagascar, Barrett and Bellemare (2011a, 2011b) acknowledged that high price levels did indeed adversely affect poor consumers and even explained social unrest. Anderson, Martin, and Ivanic (2017), on the other hand, argued that temporary high price spikes matter more to consumers than price volatility—that volatility has positive welfare effects on high-income consumers.

There seems to be a consensus emerging among economists that small producers and net buyers of food are adversely affected by increased price volatility, since it increases risks in their production decisions. Whether to stabilize prices or incomes is a matter of debate. In India, where the average farm size is less than 1 acre and declining, and where less than 50 percent of farm income and food supply comes from own production, Chand, Saxena, and Rana (2015, 143) attributed “farmers’ distress” and even farmer suicides to the decline in farmer incomes and heightened income volatility. Bellemare (2015) confirmed that high food prices and political instability tend to be particularly high in low-income countries, as also addressed by Arezki and Brückner (2011), but Bellemare did not address volatility. Barrett and Bellemare (2011a) argued the need for different policy responses, depending on whether the objective is to protect consumers from high (not volatile) food prices or to protect producers (from low and volatile) prices. They, like others, have noted that policies such as export bans, price controls, and price stabilization schemes, aimed at curbing food price volatility, are misguided if the policymakers’ goal is to increase the welfare of the poor or to avert political unrest in the country. Such policies have a poor record in achieving those objectives. Instead, policymakers should consider policies that prevent sharp rises in food prices, such as removing barriers to international agricultural trade—although open trade may not help when the crisis is a result of supply shortages (such as in 2007–8, when shortages were due to diversion of production to biofuels) or of decreasing investment in scientific research on crop productivity improvement, on soil and water conservation, on reducing postharvest losses (some studies have argued these losses run to nearly 50 percent in many low-income countries) (HLPE 2014), or on renewable energy sources that do not compete with food for land and harvests (Barrett and Bellemare 2011a, 2011b).

Minten et al. (2016) also demonstrated that African countries with more open trade regimes experienced less volatility than those without. They further noted that these measures are the best long- and short-run policy responses, not only to high price levels but also to high price volatility. This is generally true for countries with small imports. When large countries go on the world market, it typically leads to increased prices. While it is true that food price volatility today encourages farmers to reduce inputs, as a hedge against price risk, thereby helping drive higher price levels tomorrow, it is equally true that expanded production—or reduced harvest loss to spoilage, waste, and diversion to biofuels production—drives down prices and encourages stockbuilding, which stabilizes prices. Stocks depend, however, on expectations. Stocks will go up if expected prices, corrected for storage costs and interest rates, rise and vice versa.

Most economists in donor organizations support the positions of Barrett and Bellemare (2011a, 2011b) and have considered public storage and stabilization to be wasteful and a bad idea (Larson 2014). Plenty of evidence supports their concerns, including India’s officially produced report on FCI (FCI 2015) and the Policy Research Working Paper of the Agriculture Global Practice Group of the World Bank, prepared by Gouel, Gautam, and Martin (2016).

Not all economists share the view that stabilization should be avoided at all costs, particularly for large countries. As noted earlier, Timmer (2010) argued that price stabilization in Asia has served an important purpose of protecting 2 billion people, most of them poor consumers, and maintaining political stability, even if that meant exporting instability abroad. “In terms of aggregate global welfare, stabilizing domestic rice prices in these large countries using border interventions might be an effective way to cope with food crises, even after considering the spillover effects on increased price volatility in the residual world market” (Timmer 2010, 6). Timmer did not explore, however, the high fiscal cost of these policies and their limited impact on intended beneficiaries, and their contributions to global market price volatility, as described here.

Wright (2013) and others have argued also that if large countries like China had not had stabilization policies, and if they had relied completely on the international market, the food price crisis of 2007–8 would have been much worse. Apart from stabilizing urban prices, high rural prices are also set by governments out of concern about rural unrest.

In food-importing countries, pressure on the balance of payments increased due to (1) the higher cost of imports; (2) the added fiscal pressures from increasing input subsidies and price supports to compensate for price increases; (3) the hardship on import-dependent consumers (for example, in the Philippines and Bangladesh) from export bans imposed by neighboring exporting countries (for example, China and India); (4) the cushioning of domestic prices from international price rises, leading to a muted supply response; and (5) the exaggeration of international price rises by countries pursuing policies to protect domestic consumers (for example, the Philippines entered into long-term rice import contracts). Indonesia (rice) and Egypt (wheat) maintained their domestic prices by subsidizing imports, and had to use export bans to stop this wheat flowing out.

Most industrialized countries have promoted stable food supplies and prices through extensive public interventions. In Europe, the Common Agricultural Policy (CAP) was set up explicitly for this purpose and succeeded in meeting this objective, though at a high cost until it was reformed following the Uruguay Round. Agriculture also has been heavily subsidized in Japan and in the United States, the latter as “a national security issue” (Bush 2001, 920).

Import dependence also has a political dimension. Basu (2015) noted that the United States denied rice exports to Bangladesh in 1974, in a critical time of its need, because Bangladesh was trading with Cuba. President Johnson’s “short tether” policy in India—food aid shipments were conditional on India keeping silent about the Vietnam War—and known in India as the “ship-to-mouth existence” of the 1960s, instilled a strong resolve in India to never again put itself in the situation of being at a disadvantage (Lele and Goldsmith 1989). The United States similarly restricted food aid flows to Bangladesh for political reasons.

Critics of the free trade policy argue that liberalized trade leads to import surges of a food staple, displacing the domestic market and, thereby, decreasing domestic production and employment by startling percentages. Anuradha Mittal argued that Indonesia’s import liberalization, prompted by multilateral organizations following its economic crisis in 1998, resulted in a huge increase in imports, leading to farmer distress and to the government reimposing import controls in 2002 (Mittal 2009). Others have a different take on the impact of the import surge: a big surge in imports occurred before import controls were loosened and was due to a massive El Niño that led in turn to a massive decline in production. Throughout these years, domestic rice prices were higher than during the period 1969–96, so it is hard to say that farmers were in distress because of additional imports. Perhaps they were in distress because of bad weather and political instability (personal communication, David Dawe, February 2019).

Internationally, social safety nets were clear targets for cuts in the 1980s, during the decade of structural adjustment. Yet, a broad consensus has emerged, particularly in the Bretton Woods institutions, of the importance of safety nets in protecting the poor. Concurrently with increased recognition that growth is necessary but not sufficient to reduce poverty, institutionalization of safety nets has been increasingly advocated. The domestic dynamics of safety nets, however, tends to be quite different.

India’s right to food law, the National Food Security Act (NFSA) of 2013, is an example of the political economy of policymaking (Government of India 2016a, 2016b). Supported and promoted by UN resolutions and covering two-thirds of the population—nearly 800 million people—NFSA is the largest such safety net program. In reality, it typically distributes only a third of the production. NFSA has had strong support in the United Nations and FAO, influenced in part by Amartya Sen’s ideas of capabilities of the poor (Sen 1985), and is supported by Indian nongovernmental organizations (NGOs) and economists on the left (Drèze and Sen 2013). Passed by Parliament in September 2013, on the verge of the departure of the long-standing Centre-Left United Front Parties, the Act aims to provide coverage far larger than existed previously.¹⁴

The right to food law has been questioned by economists on the right who advise the Modi government currently in power (Bhagwati and Panagariya 2013). There is an active debate on the merits of cash transfers versus food distribution, particularly with the passage of the “Aadhaar” (the unique electronic identity card) bill in the Indian Parliament in March 2016¹⁵ and universal bank accounts, which enable transfer of funds directly into the bank accounts of women, reducing intermediaries and greatly increasing savings.

Drèze and Khera (2013) noted that the public distribution of food has reduced the poverty gap index, and rural poverty has declined by a fifth nationally and by considerably more in better functioning Indian states. They acknowledged, however, that the PDS still has very little impact on rural poverty in a number of large states such as Bihar, Jharkhand, Uttar Pradesh, and West Bengal, where PDS reforms are long overdue. PDS suffers from exclusion error, as well as inclusion error (Parikh 2013). Identifying the target group and scaling up are the real challenges. Drèze and Khera (2013) also favored in-kind food distribution, rather than cash transfers, since cash transfers can be spent on things other than food. Gulati, on the other hand, has often forcefully argued that in India, there is huge scope to improve the efficiency of public distribution, ensuring that benefits reach the neediest, targeting direct payments more sharply to beneficiaries, and shifting to cash transfers (see Saini and Gulati [2015]).

Indian states are beginning to experiment with cash transfers and to use information technology to monitor distribution of publicly distributed grain, to minimize “leakages” (inclusion and exclusion errors, meaning those not intended as beneficiaries benefit from the program and those intended to be beneficiaries tend to be excluded): for example, in Kerala and Bihar. Under “competitive federalism,” the Government of India sets MSPs for 23 commodities but leaves to the states the responsibility of setting examples of good practice, which others may emulate. States have had a mixed record on the implementation of MSPs (Chand 2018).

The role of public procurement and distribution of food relative to cash transfers and the role of much needed investment expenditures in agriculture and related sectors to increase farm productivity, relative to the amount of resources spent on safety net programs, will continue to be debated in a country in which the majority of farmers are smallholders and experience food deficit.

The level of food distribution commitment in India has led to a de facto nationalization of purchases of rice and wheat in surplus states, including Punjab, Haryana, Western Uttar Pradesh, and Andhra Pradesh. Recognizing the carbohydrate-centric diet of the Indian population and the decline in pulse consumption, India has adopted a new pulse mission to diversify agriculture beyond cereals, accompanied by price support and trade policies toward pulses (Aditya et al. 2017). Basu (2015) did not question the objective of price stabilization, across seasons or across poor years, nor the objective of providing food to the poor at lower than market prices. He faulted the policy for not recognizing its full implications. The policy has not been so clearly devised. Furthermore, the problems are more in the release of stocks than in procurement, and in the way the policy is executed. There is a need for clear rules and transparency, not for more cabinet meetings.

Cash transfers are more cost effective than in-kind transfers, but NGOs working on the ground do not accept this. The use of identity cards in India is the largest such experiment in the world, but the debate will likely continue on the merit of alternative approaches. There are still problems with identity cards, which need to be resolved.

Drèze and Khera (2013) argued that aid in-kind is more likely to lead to improved food consumption. Others have argued that cash transfers—even when made directly to women—are captured by the men of the household, and worse, often used for alcohol. A recent survey of Indian women indicated they prefer food distribution to cash transfers. Clearly, the precise forms of social safety nets are context specific. The efficiency of transfer programs will certainly be better informed by independent impact evaluations of different types of safety nets—payments in-kind or in cash—with results widely disseminated to influence policy.

Gouel, Gautam, and Martin (2016, 3) argued that the current stock and hold policy is costly, and furthermore, high costs “make it difficult to justify any level of public storage in the country without significant overall loss in welfare” (Gouel, Gautam, and Martin 2016, 4). It is well worth exploring whether the private sector would be willing to store across crop years, without engaging in excessively speculative behavior, and what policies would be needed to achieve it.

In India, past governments have passed food security laws to supply subsidized grain at Rs.1, 2, and 3 per kg to two-thirds of the population. To run PDS, food procurement is required. The three pillars of food security in India were globally applauded: namely, food procurement for MSPs, buffer stock-for-price stability, and the PDS.¹⁶ A Senate committee found that if losses of FCI are included and one compares economic costs with market prices charged by private traders in deficit states, the two are at par. So, the question becomes whether to bear the so-called inefficiency of FCI or the exploitation by India’s smart petty traders and middlemen. If market reforms are accomplished and prices are competitive, the need for MSP procurement will decline or even become unnecessary. Then, cash transfers rather than physical distribution of food would be preferable. China is also wrestling with issues of public–private partnerships in its policy reforms, so it could be beneficial for China and India to exchange experiences.

The crisis highlighted the vulnerability of developing countries to a combination of factors: policies of large countries with global reach in trade, such as the US biofuel policies; and successive crop failures and responses of large individual countries, such as China, India, and Indonesia, to protect their domestic consumers and producers from external shocks. Import-dependent countries became particularly vulnerable. Trade is important to reduce this vulnerability, but it has its limits. The recent debacle of medical supply chains, in the context of the COVID-19 pandemic, shows that excessive focus on efficiency and cost-effectiveness needs to be balanced with resilience.

The crisis also made more acceptable the concept of “food self-sufficiency” and protection of the domestic food sector, which China and India have practiced over decades, as they emerged as important agricultural producers and traders. WTO discussions in Argentina continued to show the limitations of the Doha Development Agenda (DDA). The United States—traditionally, the strongest champion of free trade—moved toward protectionism, questioning the North American Free Trade Agreement (NAFTA) and exiting from the TPP (Strait Times  2018). Global trade rules were already in trouble, as biofuel policies had demonstrated. The new US–Mexico–Canada Agreement was supposed to fix some of the problems the Trump administration perceived in the old NAFTA, but it is too new to know how well it will work (Mauldin and Salama 2019).

The most important challenge is to invest much more in R&D than many developing countries are currently doing. As economies grow and diets diversify, relying on imports is much less of a concern. Singapore produces no food but is very food secure, as is Hong Kong. Japan has reduced its agricultural protection without loss of food security—although its farmers still use food security as an argument for support.

Two key issues that the crisis highlighted, on which there has been relatively little progress, are:

The Uruguay Round is credited with cleaning up the previously abysmal CAP price insulation that pushed world price volatility onto much more vulnerable producers in poor countries. The one area in which there has been considerable progress but could be more, with greater financial investment in data, is information on production, food systems, and trade (via AMIS), ranging from household to global levels, given the increased risk of climate change and trade uncertainty.

The combination of factors, however, which ensued over time—the “perfect storm”—compounded the impacts of the actions that developing countries took, including, in particular, the export bans that several Asian countries imposed. Both the genesis of the crisis and the bans highlighted how the solutions to the crisis seemed very different from various national perspectives, particularly of major exporting countries like the United States, India, and other developing countries trading in grain, and of other countries impacted by their actions. In the end, all policymakers were responding to consumers and producers in their individual countries, and there was little concern about spillover effects of their actions beyond their national borders and little progress on agreements such as export bans, in the interest of all.

To maintain the political legitimacy of their domestic stakeholders, policymakers of OECD continue to respond to their lobbies in support of biofuel policies, for which there is little justification. Preoccupied with concerns about food prices and domestic inflation, developing countries have pursued import and export strategies, and safety nets have acquired increasing importance (World Bank 2015b, 2017a). The crisis highlighted many of the long-standing issues between OECD countries and developing countries with respect to free trade and development concerns, which stalled the DDA, notwithstanding the economic logic of free trade. These issues were more significant in 2007 than they had been in 1972, at the time of the first global food crisis, because food and energy markets were more integrated in the new millennium than they had been in the 1970s, and developing countries were more significant economic players on the world stage in 2007–8.

A number of useful steps have been taken since the latest crisis. At the WTO meeting in Argentina, China reaffirmed economic globalization as an irreversible historic trend, and its staunch support for economic globalization and the multilateral trading system as critical safeguards for prosperity and development. More than 100 countries backed a joint proposal by China and India for eliminating the trade-distorting farm subsidies of US$160 billion in the United States, EU, Japan, Canada, Norway, and Switzerland, among other nations at WTO’s 11th trade ministerial summit in Buenos Aires (ICTSD 2017c, 2017d). Another mandated issue concerned the permanent solution for public stockholding (PSH) programs in developing countries, which had been agreed to four years previously in Bali, Indonesia. India and China have pushed on the issue jointly with other developing countries (see more at ICTSD [2017a]). Reflecting differences between exporting and importing countries, Argentina, hosting the summit, warned that the China–India proposal was a recipe for the breakdown of the Buenos Aires meeting (ICTSD 2017b). India could easily solve this invented “problem” simply by changing its procedures, which would allow India to focus on real problems, in contrast to trying to break these rules to avoid making slight changes in its stockholding and PDS procedures. Interest groups at the FCI are not interested in a solution, but India at large would be much better off with such a solution.

India also took the position that new issues such as e-commerce and trade in services should not be considered until the old ones, such as OECD subsidies and permanent stockholding, had been addressed. The Trump administration refused to pursue the PSH issue, while pushing ahead with talks on e-commerce and trade in services (ICTSD 2017e; Kanth 2017). We have reviewed these developments in this chapter and in the rest of the book, and it is unclear what the future holds for the global governance of food and agriculture, including, particularly, agricultural trade rules, following the growing protectionist tendency in the United States and WTO discussions in Argentina in 2017 (WTO 2017). The future of WTO is unclear. Much will depend on whether Trump is reelected. If he is, many fear for WTO’s future. Will the crisis of 2006 repeat itself in 2020?

IFPRI projected that for any one percentage point slowdown of the global economy, the number of poor—and with it the number of food-insecure people—would increase by 1.6 to 3 percent. Due to the paralysis of economies caused by COVID-19 containment measures, global poverty may increase by 14 million people based on a 1.9 percent increase in total factor productivity (TFP) (and possibly much more depending on the nature of the economic trade disruptions) (Vos, Martin, and Laborde 2020). This was a conservative estimate. In April 2021, IMF estimated an additional 95 million people had entered the ranks of the extreme poor in 2020, as compared to the pre-pandemic projections, and found considerable divergence in the rates of economic recovery—that is, in 2020, growth of 6.4 percent in the United States and 8.4 percent in China, but losses of 5.4 percent in LICs and 4.4 percent in emerging countries (IMF 2021).

Kharas and Hamel noted 12 countries that are likely to see an increase in poverty of over 1 million people in 2020, as a result of COVID-19. These vulnerable countries—Afghanistan, Bangladesh, Brazil, Democratic Republic of the Congo (Kinshasa), Ethiopia, India, Indonesia, Nigeria, Pakistan, the Philippines, Sudan, and Zimbabwe—are mainly located in Asia and Africa. Brazil is the exception in the Latin American region. India and Nigeria are likely to add 10 million and 8 million, respectively, to the poverty rolls in 2020. “In all these countries, COVID-19 has demonstrated the vulnerability of people who have only recently been able to escape poverty” (Kharas and Hamel 2020). (See, also, Lele, Bansal, and Meenakshi [2020].)

Schmidhuber, Pound, and Qiao (2020) of FAO note that with most countries more dependent on food imports today than they were 20 years ago, disruptions caused by COVID-19 could trigger a repeat of the food crisis of 2007–8, when a sharp rise in prices led to panicking governments, which imposed trade restrictions (Schmidhuber and Qiao 2020).

However, there are some major differences between 2007 and 2020. Both agricultural and energy prices in 2020 are low, and agricultural trade is much larger than in 2007, with the numbers of both importers and exporters higher than in 2007, and with considerable competition among exporters and importers. “Today cereal stocks are twice as high as they were then. Bulk shipping is 20 times cheaper and crude oil is just $30 a barrel. That makes all manner of inputs cheaper and pushes the price of fuel feedstocks like corn and sugar lower still … ” (Economist  2020b).

Another important difference is that due to scale economies, and economies of agglomeration, a few multinational suppliers supply most of the volume of processed grains, livestock, and poultry; due to well-developed global value chains, they are able to purchase unprocessed agricultural materials from sources of cheapest supply and then ship, process, and package them elsewhere. Due to uncertainty, consumers have been stocking up more supplies than usual. However, due to a loss of demand from restaurants and the absence of scale purchases, there also has been huge wastage of food in the short run—this could result in farmers planting less and food prices rising. Another difference between 2007–8 and 2020 is the fewer trade barriers in 2020. The Economist briefing further notes:

In 2007–2008, 33 countries declared export controls. Those bans caused most of the 116% rise in rice prices seen then. This time 19 states have so far limited exports and the impact is much less. 2007–08’s control affected 19% of the world’s traded calories; this year’s so far affect just 5 percent.

(Economist  2020b)

Fortunately, the COVID-19 crisis has led to a variety of innovations in the areas of food supply, delivery, small business enterprises, use of digital tools, food-related safety nets, cash and food transfers, among others, to deal with the drop in consumer demand, detailed in IFPRI’s COVID-19 and Global Food Security (Swinnen and McDermott 2020).

The crisis has also reinforced the G20 support for AMIS, keeping market information flows accessible to all and at center stage. It will also further spur the development of the nexus between food systems and health systems, and the broader discussion on food systems that will emanate from such a connection.