Urban poor hardest hit by soaring global food prices

Thursday, May 29, 2008

OTTAWA - The urban poor in developing countries are bearing the brunt of soaring global food prices, and will continue to do so as food prices remain elevated over the coming decade, a major international economic think-tank warned today.

While there will eventually be some easing in global food price inflation, as historically has happened following previous periods of soaring food prices, the easing following the current period will be less than in the past, according to the Organization for Economic Cooperation and Development.

"This will not last and prices will gradually come down because of the transitory nature of some of the factors that are behind the recent hikes," the research arm of the world's 30 industrial countries said. "But there is strong reason to believe that there are now also permanent factors underpinning prices that will work to keep them both at higher average levels than in the past and reduce the long-term decline in real terms."

In fact, the OECD is projecting substantially higher prices over the coming 10 years than in the past decade, stating that beef and pork prices will be rise by around 20 per cent, while raw and white sugar will be about 30 per cent higher. Wheat, maize and skim milk powder will rise 40 per cent to 60 per cent, butter and oilseeds more than 60 per cent, and vegetable oils more than 80 per cent, it said.

While Canadians so far have largely been insulated from global food inflation thanks to the strength of their currency against the U.S. dollar - the currency in which global commodities are generally priced and the source country for most of Canada's imported food - that won't last, analysts here are warning.

CIBC World Markets - in a recent report titled Food Inflation: Coming to a Grocery Store Near You - said the strong appreciation of the Canadian dollar won't continue.

"It's clear that Canada's good luck on food prices is likely to run out in 2009," it said, forecasting that Canadians will see food inflation reaching 3.5 per cent by 2010 from a low of just 0.4 per cent earlier this year.

In fact, Canadians got their first real taste of what's to come last month when prices for bakery products surged 10.4 per cent from a year earlier, the steepest rise since 1981.

The OECD report, meanwhile, noted that the "dramatic" increase in global food prices to what are record high levels is partly the result of adverse weather conditions in major grain-producing regions in the world, with spill-over effects on crops and livestock that compete for the same land.

Such conditions, however, are not new and -as in the past - prices are expected to come down once more normal conditions prevail and as markets respond to shortages, it said.

There is also increasing global demand for food but that will also eventually be offset by increases in the supply, thanks mostly to improved yields, it said.

However, global food stocks have dropped to record low levels to a point that any shortfall in production cannot be buffered and will have a much greater impact on prices, it noted.

And export restrictions by some countries to protect domestic supplies have further reduced world supplies.

"But stacked on top of this is now the fast-growing demand for feedstock to fuel a growing bioenergy sector," it said. "While smaller than the increase in food and feed use, biofuel demand is the largest source of new demand in decades and a strong factor underpinning the upward shift in agricultural commodity prices."

"In addition, prices may also be more volatile than in the past," the OECD warned, as demand is becoming less sensitive to price changes at the farm level, as the commodity share in the final food bill falls and as industrial demand grows.

Potentially adding to swings in prices will be the impact of climate change on weather conditions, as well as the supply of agricultural products and the flow of speculative investment funds into and out of agricultural futures markets, it added.

Regar dless of whether the factors pushing up prices are temporary or permanent, the OECD said that the policies of governments need to take into account the "needs of the hungry and the poor."

"High prices are good for some and bad for others," it said, noting they benefit many commercial producers in both developed and developing countries.

"However, many farmers in developing countries are not linked to markets and will draw little or no benefit from currently higher prices," it said. "But the poor, and in particular the urban poor in net food importing developing countries, will suffer more."

In many low-income countries, food eats up more than 50 per cent of income and the higher prices being projected will leave more of the world's poor suffering from "undernourishment," it said.