The socio-economic and environmental impacts of

soaring food and oil prices

Alicia BárcenaEXECUTIVE SECRETARY

Economic Commission for Latin America and the Caribbean

ECONOMIC AND SOCIAL COUNCIL DIALOGUE WITH THE EXECUTIVE SECRETARIES OF THE REGIONAL

COMMISSIONSNew York, 7 July 2008

90.00

130.00

170.00

210.00

250.00

2006 2006 2006 2007 2007 2007 2007 2008

Apr-Jun Jul-Sep Oct-Dec Jan-Mar Apr-Jun Jul-Sep Oct-Dec Jan-Mar

Ind

ex 2

005

= 1

00

Energy AgricultureFood Fats and oilsGrains Non-energy commodities

QUARTERLY AVERAGE PRICE INDEX FOR ENERGY, AGRICULTURAL COMMODITIES AND FOOD(II Q 2006 – I Q 2008, annual average 2005 = 100)

What is the problem?

Source: Economic Commission for Latin America and the Caribbean (ECLAC).

FOOD PRICE INCREASES(Percentages)

-40

-20

0

20

40

60

80

100

120

140

160

180

200

220

240

Food index Wheat Maize Rice Soybean Soya oil

April 2008-April 2007 April 2008-April 2006

INTER-ANNUAL GROWTH RATES IN THE CONSUMER PRICE INDEX, BY COUNTRY, 2002-2007

During the last five years food inflation has been higher than general inflation in most

LAC countries

0.0

5.0

10.0

15.0

20.0

25.0

30.0

PE PA EC CL SV MX BR HN CO BO GT NI JM UY AR CR PY TT DO HT VZ

CPI Food CPI General

Source: Economic Commission for Latin America and the Caribbean (ECLAC).

Causes

• Multiple socio-economic and natural factors, both structural and temporary in nature

• Financial volatility and slowdosn in world growth

• Global surge in inflation (6%-2006 to 10%-2008 in LAC)

• Increased world demand generated by Asia (China and India)

• Supply shocks: key countries stopped exporting (Indonesia)

• Rise in prices of oil and oil-based agrochemicals (100%-fert)

• Growing demand for biofuels and effect of subsidies (US+EU)

• Speculative purchases on future markets

• Climate-related factors

THE WORLD

• A dry spring in Northern Europe with floods during the harvest period

• Second consecutive year of drought in Ukraine and Russian Federation

• Third consecutive year of drought in Australia; the worst multi-year drought in a century

Climate-related factors affected production in 2007

THE REGION

• A late frost in some important wheat-growing areas in the United States

• An unusually hot and dry summer in Canada during the harvest period

• A late frost in Argentina followed by a drought

These factors are partially responsible for poor yields of maize, wheat and oats in the last few years.

BiofuelsEthanol: rising production from maize in the United States from 2003 onwards

Biodiesel: rising production in the European Union since 2004 and in the United States since 2006

Source: R. Trostel, Global Agricultural Supply and Demand, May, 2008.

The region is a net food exporter, but most of the countries are net importers and at least one faces a critical situation

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of A. Valdés and W. Foster, “Agricultural Trade Liberalization and the Rural Economy in Latin America and the Caribbean”, document presented at the workshop Rural Development and Agricultural Trade, Washinhton, D.C., Inter-American Development Bank, 2005.

FOOD AND AGRICULTURAL NET BALANCE IN LATIN AMERICA AND THE CARIBBEAN(Averages 2000-2002, in United States dollars)

-6000 -4000 -2000 0 2000 4000 6000 8000 10000 12000 14000

Mexico

Venezuela

Peru

Colombia

Haiti

El Salvador

Dominican Republic

Chile

Jamaica

Honduras

Panama

Ecuador

Cuba

Trinidad y Tobago

Guatemala

Costa Rica

Nicaragua

Bolivia

Paraguay

Uruguay

Brazil

Argentina

Food Net Balance Agricultural Net BalanceFAOSTAT | © FAO Statistics Division 2008 | 18 July 2005

Positive food trade balance

Negative food trade balance

LATIN AMERICA AND THE CARIBBEAN (24 COUNTRIES): DIETARY ENERGY SUPPLY (DES) AND UNDERNOURISHED PEOPLE, 2000-2002

(Kilocalories and percentages)

Source: ECLAC, The Millennium Development Goals: A Latin American and Caribbean Perspective (LC/G.2331), Santiago, Chile, 2005, page 61.

In the Latin American and Caribbean region, undernourishment is due mostly to access issues, not

shortages of food supply

CUBARG

MEX

BRA

CHICRI

URU

TYT

GUY

JAMSUR

PAR

ELS

VEN

HON

RDO

NIC

PANGUA

HAI

PER

ECU

COL

BOL

LAC

y = 6374.7e-0.0025x

R2 = 0.7944

0

5

10

15

20

25

30

35

40

45

50

1800 1900 2000 2100 2200 2300 2400 2500 2600 2700 2800 2900 3000 3100 3200 3300

Dietary Energy Supply (DES), in kilocalories per person per day

Un

de

rno

uris

he

d p

eo

ple

(p

erc

en

tag

es)

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08

Economic impact: risk of inflation

LATIN AMERICA: INFLATION RATE(Quarterly moving average, annualized percentages)

Social impact: risk of reversing progress in poverty reduction

Poverty decreased from 44% in 2002 to 35% in 2007. But the poor still number 194 million, including 71 million in extreme poverty.

This is higher than the 1980 figures.

LATIN AMERICA: POVERTY AND INDIGENCE, 1980-2007(Percentages)

12.713.415.419.418.519.0

22.518.6

35.136.539.8

44.043.843.548.3

40.5

0

10

20

30

40

50

60

1980 1990 1997 1999 2002 2005 2006 2007b

Per

cent

age

Indigent Non-indigent poor

• More areas under production and therefore more pressure on native forests (and on biodiversity).

• Increased pollution of agrochemicals (health, biodiversity and climate change from nitrous oxides).

• Pressure on already stressed watersheds from added demand.

• Increased climate change drivers (deforestation, soil erosion, agrochemicals, methane from cattle and fossil

Sustainable development impact

Short term

• Measures to buffer food price increases in domestic markets and/or improve income, especially that of the poor:

•Direct subsidies for lower income groups

•Reduce taxes on or subsidize the production of certain foods

•Tariff reductions for food and inputs

• Support international efforts to deliver emergency aid to populations at risk

Public policy challenges

Long term

• Policies to increase supply and productivity in a sustainable manner:

• Investment in R&D for efficient and sustainable food and for biofuel production

• Adequate investment for climate-change mitigation

• Re-establishment or strengthening of extension services