Global food prices remain very high

The Commission has published its latest international food price monitoring newsletter for September. This tracks price changes for five major food groups included in the FAO food price index. After hitting a record level of 237.7 in February 2011, the FAO Food Price index continues lingering above levels observed during the 2007/08 food crisis, settling at 231.0 in July 2011 and 231.1 in August 2011. Compared to June 2011 levels, meat and sugar indices strengthened, while other eased slightly. These high food prices continue to fuel concern about food price inflation in developing and emerging economies.

FAO food price index Sept 2011

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4 Responses to “Global food prices remain very high”

  1. Bernhard Brümmer →
    September 20, 2011 at 15:42 #

    Alan, thanks for sharing this. One thing which keeps me puzzled about the FAO index is its composition – IIRC, it is based on trade weights, which for example gives sugar a much higher weight than it actually has in, say, poor households’ food budgets. Similar for oils. Since these two are the major drivers of the currently observed high overall food price index, the actual food price inflation pressure in poorer countries might not be described most adequately by the index in its present form.

  2. Alan Matthews →
    September 20, 2011 at 16:36 #

    Bernhard, this is indeed a valid comment, and to be fair to the Commission, one that they themselves are fully aware of. They comment as follows when reporting the FAO Food Price Index

    “Although the FAO Global Food Consumption Price Index which tracks changes in the cost of the global food basket is a better indicator of the impact of changing prices on food security, the FAO Food Price Index is the most quoted in the press even if as a trade weighted average price index it does not properly reflect the average food basket of consumers. It consists of the average of 6 commodity group nominal price indices (meat, dairy, cereals, oils and fats, and sugar) weighted by the average export shares of each of these groups for 2002 – 2004. As a trade weighted index the FAO index does not reflect the average food basket of consumers since heavily traded products (e.g. sugar which experienced the biggest hikes) are overrepresented and domestically consumed products (like cereals) are underrepresented.”
    [In fact, it is an average of 5 commodity groups as oils/fats are one]

    I guess the question you implicitly raise is whether it is appropriate to cite this index so heavily. If one wanted an index to highlight the impact of food prices on incentives for food production, one might want to use a global production-weighted index. For impacts on food security, movements in domestic food prices are tracked by FAO (with a nice interface at http://www.fao.org/giews/pricetool2/) but not aggregated to a single international index.

    Certainly, it is very useful to be reminded that the FAO Food Price Index is trade-weighted. Having said that, it is really quite striking that the index is now above its 2008 peak and yet we don’t see anything like the extent of international action and focus on the problem as we did in 2008.

  3. Bernhard Brümmer →
    September 23, 2011 at 07:13 #

    Thanks for the reply, Alan. The misled public focus on the FAO Food Price Index could be caused by FAO itself: Google lists about 1700 hits when searching for “FAO Food Price Index” on fao.org while the corresponding number of hits for the FAO “Global Food Consumption Price Index” is just nine. And the latter has only been introduced in 2009, and seems not be available online except in the bi-annual food outlook. The latest available figure I could find refers to May 2011 and is at 244, compared to a peak value in 2007/08 of about 275. Given price developments in the recent months, this alternative index is likely close to its previous record levels, too.
    As to why the international reaction is much more limited this time, the repetition effect could play a role, and maybe other pressing things on the agenda distract some attention, too.

  4. Alan Matthews →
    September 23, 2011 at 08:06 #

    @Bernhard

    I am grateful to you for pointing out that the FAO Global Food Consumption Price Index is reproduced in the biannual Food Outlooks, and it is worth exploring in mor detail. It tracks changes in the cost of the global food basket as portrayed by the latest FAO world food balance sheet. Representative international prices for each of the commodities or commodity groups appearing in the balance sheet are weighted by their contribution to total calorific intake. Thus, although the price series used are not domestic retail prices but still international prices, the index will give a better appreciation of pressures on food security as it is more closely aligned to the composition of consumers’ food baskets.

    It is worth quoting in full the FAO commentary comparing this index with the Food Price Index in the June 2009 Food Outlook bulletin:

    The index tracks changes in the cost of the global food basket as portrayed by the latest FAO world food balance sheet (see http://faostat.fao.org/). Representative international prices for each of the commodities or commodity groups are weighted by their contribution to total calorie intake in the food basket. This departs from the methodology used to draw the benchmark FAO Food Price Index, where the different food components are weighted by their shares in the value of global food trade. On comparing the two, we may ask: why did the calorie-based price index peak more sharply? and why does it today stand significantly higher than the traditional, trade based, index? The answer lies in the different weights applied, as the trade-based index tends to overstate the influence of high-value products, such as meat or dairy, and to underplay that of lower priced staples, such as cereals. While the total value of livestock product trade is typically almost twice that of cereals, there are few consumers in the world whose average intake of meat and dairy is double that of rice, bread, pasta, noodles, etc. put together. Therefore, last year’s surge in international cereal prices relative to the modest rise in livestock product quotations yields a much higher index value when it is weighted by consumption, than a trade based index.

    Interestingly, Bernhard, when I look at the latest published figures for this index to May 2011 which you quote above, contrary to the hypothesis in your initial comment it appears that the consumption-based price index has increased by more than the trade-weighted index in recent months.

    http://capreform.eu/wp-content/uploads/2011/09/FAO-Global-Food-Consumption-Price-Index.gif