The two inter-related issues featuring on the agenda of this 77th Development Committee Meeting highlight the challenges and opportunities facing the world community in reaching the Millennium Development Goals (MDGs) against the background of recent market developments, including higher commodity prices.
The first MDG (MDG1) entails the ambitious target of reducing the proportion of people who suffer from poverty and hunger by half by 2015. The vital goal of reducing the number of chronically undernourished people by half by 2015 was adopted by world leaders gathering for the 1996 First World Food Summit (WFS). The Summit defined food security as existing “when all people at all times have access to sufficient, safe, nutritious food to maintain a healthy and active life”. Virtually no progress has been made towards this objective during the past decade. Between 1996 and 2006, the number of chronically hungry people in poor countries increased by 20 million. Some 854 million people or 13% of the world population cannot afford their most basic food needs, the majority or 820 million of whom reside in the developing countries.
More recently, problems of food security have been aggravated by commodity price increases. Agricultural commodity prices rose by 14% in 2006 and 37% in 2007, and in some cases, are soaring at an even faster pace this year. The price increases can be ascribed to a combination of factors, including increased world demand for food due to rapid growth in emerging countries; low grain stocks; unprecedented and rapid migration from rural to urban areas; changing weather patterns and recent poor harvests in some countries possibly as a result of climate change, rising fertilizers prices, and the conversion of food crops to bio-fuel crops to satisfy the needs of a rapidly growing bio-fuels industry.
Also contributing to higher prices for all agricultural commodities have been the recent increases in the price of fuel commodities - including oil. The oil price rises were due in major part due to speculation by institutional investors active in energy futures markets, which detached prices from fundamentals. The latter was exacerbated by the continuing weakness of the U.S. dollar, which encouraged a heavy influx of financial flows into the crude futures market. Other factors contributing to the volatility included geo-political developments in some oil-producing regions, perceived market tightness, bottlenecks in refining, seasonal maintenance work, weather-related supply disruptions, and a moderate increase in world oil demand.
The recent food price increases present both challenges and opportunities for low- and middle income countries. In the short term, the price rises may pose serious threats to an already fragile food security situation among the poor in low-income countries (LICs), most of whom are net buyers and importers of food. More than half of countries in Sub Saharan Africa (SSA)- home to the majority of LICs – are off track to reach the 2015 target of cutting malnutrition rates by half, and one in four people in the African sub-region are chronically undernourished. In some countries, including Burkina Faso, Mauritania, and Senegal, trends are worsening.
Rising prices could also raise the incomes of smallholder farmers in both low- and middle-income countries, if more remunerative prices would be realized at the farm gate. Smallholder farmers should be reaping the benefits of the increased demands on agriculture. All too often, however, they do not. They are at the bottom of the supply chain, unable to exert any control over the conditions in which their commodities are sold, and constrained in moving up into the value-added parts of the chain.
Historically, smallholder producers have shown resilience to commodity price increases, and their potential to increase production is significant. Ensuring that price increases are transmitted to the level of smallholder producers thus remains the foremost challenge in translating the recent price rises into welfare for the rural poor, which constitute three quarters of the world’s one billion extremely poor – those surviving on less than US$1 a day. Several measures could be taken to enhance the capacity of smallholder producers to share in the benefits of the upturn in agricultural demand. These include boosting rural investments and institutional support; reducing transaction costs; enhancing productivity through research, extensions services, and credit schemes, and strengthening organizations of poor rural farmers in order to increase their volumes going to the markets, and enhance their bargaining power in the value chain.
World food prices are projected to rise further, between 20% and 50% by 2016, owing to structural changes in supply and demand. These include rapid urban population growth, improvements in living standards and changes in consumption patterns, the growing risks of climate-related disasters and water scarcity, and sustained growth in demand for bio-fuels due in part to increased support for the bio-fuel industry.
The expansion of bio-fuel production could pose challenges for the rural poor, particularly in Africa. The mass development of bio-fuels involves turning over giant swathes of arable land from food to energy production. While such an experience has proved successful in Brazil with the production of ethanol from rain-fed sugar cane, it is not one that could necessarily be replicated in Africa, where the production of bio-fuels could be at the expense of even scarcer commodity: food. Under such circumstances, the prospects of achieving MDG1 of reducing the proportion of people suffering from hunger by 2015 may be further compromised.
Food companies have started passing on the price increases to consumers. High international prices for food crops such as grains ripple through the food value/supply chain, contributing to a rise in retail prices of such basic foods as bread or pasta, meat and milk. The effect of the food price rises in advanced economies will be limited. Food accounts for some 10-20% of what people consume in most advanced economies. It is worse for people in LICs, where food accounts for some 60-80% of what people consume. The world’s poorest or bottom billion are worst affected by the food price rises, and cannot afford to pay the inflated prices for food. The specter of global food shortages again stalks the world today, with hunger affecting countries and regions worldwide. Food riots erupted in Mexico in 2006, in Mauritania and Senegal in 2007, and in Burkina Faso early 2008.
With the world’s population projected to swell to 9 billion by 2050, world hunger is likely to worsen at current trends, particularly in developing countries and regions. Unless action is urgently taken to re-focus international attention to support for agriculture and rural development and enhanced food security, social disturbances, protests and civil unrest and hardship are bound to increase. This will particularly affect the poorest countries and people, and may delay progress towards meeting the first and most vital MDG of reducing the proportion of people suffering from extreme poverty and hunger by half by 2015.
Meanwhile, international action to build a strategy to eradicate world hunger has been limited. Heads of State and Government reaffirmed their commitment to MGD1 of reducing the proportion of people who suffer from hunger by half in the 2000 UN Millennium Summit Declaration, and again, at the 2002 Second World Food Summit (WFS). The importance of food security notwithstanding, however, international investment in the agriculture – the mainstay of the economies of the countries in which OFID operates - has significantly declined. The proportion of official development assistance devoted to agriculture dropped from some 20% in the late 1980s to about 3% today. Similarly, limited progress has been made towards liberalizing world trade in agriculture under the stalled Doha Round of multilateral trade negotiations.
Conscious of the importance of agricultural and rural development for particularly the poorest countries and the poorest segments of their societies, OFID has allocated fifteen percent of its cumulative public sector operations to support the agriculture sector, and address the needs of the rural poor. In addition to direct support to agriculture, we have invested heavily in rural infrastructure, and in projects that promote private enterprise development both on- and off-farm through our separate Private Sector Facility. OFID financing has been also been given as outright grants to support the education and health sectors in rural areas, and to provide emergency food aid to help address food crises in particularly Africa through its Food Aid Special Grant Account.
OFID Member Countries have been instrumental in the establishment and financing of the International Fund for Agricultural Development (IFAD) in the late 1970s, which remains one of OFID’s key partners in the uphill battle against rural poverty and hunger until today. Similarly, OFID has played a vital role in the inception of the Common Fund for Commodities (CFC). OFID has made a significant contribution to both the First and Second CFC Accounts, and remains a staunch supporter and ally of its core constituency – the developing countries, particularly the structurally weak and commodity dependent LIC’s.
It should be noted in this vein that OFID was conceived as an instrument for South-South solidarity and support, rather than as a compensatory mechanism for higher commodity prices, including oil. This may be evidenced by the oil price crisis of the 1990s, when OFID and its member countries stood firm in their commitment to help fight world poverty and hunger in particularly the world’s poorest countries, although oil prices dipped to about US$10 per barrel. OFID directed the bulk its cumulative assistance towards the LICs, where oil imports are insignificant. The higher income developing countries account for the larger part of total oil imports of developing countries, but receive lower priority from OFID.