Fighting Global Food Price Rises in the Developing World: The Response of China and Its Effect on Do

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Fighting Global Food Price Rises in the
Developing WorldThe Response of China and Its
Effect on Domestic and World Markets

• Jikun Huang, Jun Yang, Huanguang Qiu
• Center for Chinese Agricultural Policy (CCAP),
  CAS
• Scott Rozelle
• Stanford University

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Food price (2005100) in the selected countries
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What is behind these price rises? Reports in the
media and briefs by policy analysts .. are
confusing
Biofuel boom
Rise of China
Weak US dollar
Oil price and increasing freight rates
Crop failures
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Global pressure on food prices and food supplies
is causing rising concern in the world about the
welfare and food security of many in developing
countries and is even being blamed for social
and political unrest
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• To ease the mounting pressures and to avoid
  the damage that food crisis could bring to
  Chinas economy, officials called for the use of
  a broad spectrum of policy measures to counteract
  the price rise. Many actions were immediately
  taken.

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Questions and Overall Goals of This Presentation

• What are the causes of the current rises in food
  prices?
• Are the pressures for higher food prices being
  transmitted into developing countries (e.g.,
  China)?
• How are governments responding?
• Are the policy efforts to keep prices down
  effective?
• What about the effect of these policies longer
  run on prices inside and outside of developing
  countries?
• Overall goal
• To try to help answer the questions raised above.

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Rest of Presentation

• The ThreatRising Prices in World Food Markets
  and Their Causes
• Chinas Leaders Respond
• Impacts of Chinas Countermoves
• Discussion and Policy Implications

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The Genetic Revolution and real global cereal
price index in 1905-2005 (All prices 100 in
1960)
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International Prices for Some Selected
Commodities (price of January 2005100, measured
by US)
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Sources of international food price changes
Source Yang, Qiu, Huang, Rozelle (2008)
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High food shares and integrated markets threat
of inflation and rising concerns

• On average, food still accounts for a large share
  of Chinas total expenditures
• 36 in urban and 43 in rural in 2006
• Chinas agricultural market is highly integrated
  into world markets.

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Nominal protection rates () in China, 1980-2005
In absence a response by government, rising price
internationally could be expected to lead to
higher prices domestically
Source Huang, Yu, Rozelle and Martin (2008)
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Chinas Leaders Respond

• Recognizing the threat, China took a series of
  steps between in 2007 and 2008 to try to counter
  the rising prices.

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• Major policies
• Sell grain stocks to free market traders
• Eliminate VAT rebate (13) on the key
  agricultural commodities
• Restrict the outflow of Chinas own cereal
• Sign long terms futures and forward contracts
  with grain (and meat) exporting countries
• Impose fertilizer export tax levies 30-35 in
  Feb 2008 and then 100 after mid-May
• Subsidies and insurance to farmers raising sows
• Tightened monetary policy
• Adjust biofuels policy Big initial plans second
  thoughts.

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Impacts of Chinas Countermoves

• Rice, wheat and maize Prices
• (Have means to operate in the short run)
• Soybean prices
• (No much policy measures available in short
  run)
• Pork prices
• (Little traded due to SPS and other NTBs)

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No any means to force down prices in the short
run No stock about 60 domestic consumption is
imported
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Explaining the sources of price rises and
effectiveness of Chinas policies in 2005-2008

• Methodology
• Scenarios

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Modified GTAP-E model

• Creating ethanol and diesel industry in the model
  
• More detail agricultural commodities
• Separating maize from coarse grain
• Separating soybean from oilseeds
• Adding the module to reflect the substitution
  between biofuel and gasoline
• New extension Taking into the by products of
  Biofuel (DDGs) into account

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Scenario for 2005-2008

• Reference scenario (RF)
• No changes in world oil price in 2005-2008
• No expansion in world biofuel in 2005-2008
• Two alternative scenarios
• Actual world oil price in 2005-2008
• Actual world oil price
• actual world biofuel production

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Real crude oil prices (US/barrel in real 2005
price)
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Current and Projected Total Biofuels (bioethanol
and biodiesel) Production in the Next 30 Years.
Source Msangi, et al., 2007
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Simulated Chinas food prices under difference
scenarios in 2005-2008 (2005100)
Wheat
Rice
Maize
Soybean
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The combined impact of all of Chinas policy
responses (and other factors except for oil price
and biofuels) are captured by the residual.
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Discussion and Policy Implications (1)

• Chinas counter measures have helped keeping
  domestic grain prices from rising as they have on
  international markets and achieved its national
  grain security in the recent years.
• However, this does not mean that such a set of
  policies is optimal for the world. When more
  than 30 countries, in addition to China, levied
  export assessments or prohibited traders from
  exporting from domestic markets into
  international markets, there seem no good global
  solution in the short run unless there would be a
  strong global/collection action.

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Discussion and Policy Implications (2)

• Two further questions
• Can grain prices be suppressed indefinitely?
• Answer No. Indeed farmers are shifting
  production from grain to edible oil crops. In the
  longer run it is inevitable that China will
  confront great pressures of rising grain price in
  near future.
• Has Chinas growth caused the recent rising food
  prices on international markets?

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China has been a net food exporter duringits
rapid growing period in the past 3
decadesAgricultural export and import (billion
US), 1980-2006
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Chinas net export of rice, wheat and maize in
2005-2007 (1000 tons)
This means that at exactly the time that world
food prices were taking off, China was actually
increasing shipments into international markets.
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Chinas net import soybean in 2005-2007 (1000
tons)
Only in soybeans, its imports did rise. Surely, a
15 percent rise between 2005 and 2007 could not
cause the world food crisis.
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Real cereal price index (All prices 100 in 1960)
Biofuels will cause rise in food prices
(unprecedented in last 100 years), it could have
huge effect on many parts of the population
Biofuel era ?
Business as usual
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Discussion and Policy Implications (3)

• Needs to prepare to accept food price risesas
  long as they are in an acceptable range. As
  agricultural prices rise, however, farmers will
  be stimulated to increase production. Chinas
  current policies to limit the rise of food prices
  will not work in the long run.
• The fundamental method to control rising food
  prices and maintain national food security will
  be realized by all efforts that will enhance
  investments in the agricultural sector.

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Discussion and Policy Implications (4)

• Rising and sustained high food price should be
  looked on as an opportunity to stimulate the
  rural economy. They will help foster a strong
  agricultural sector.
• It should be recognized that it is inevitable
  that there will be some consumers that get hurt.
  It is essential to construct (enhance) a social
  security system to provide the necessary support
  for vulnerable citizens.