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IMFSurvey Magazine: In the News

Some Climate Policies Worsen Food Problems, Panelists Say

Brazil's soybean harvest: Lower agricultural productivity has boosted prices, panelists tell IMF seminars (photo: Paulo Whitaker/Reuters)

PROGRAM OF SEMINARS

Some Climate Policies Worsen Food Problems, Panelists Say

IMF Survey online

October 22, 2008

  • Drop in agricultural productivity has led to price increases
  • Water scarcity to be biggest constraint on extra food production
  • Investment in drilling, refining infrastructure would loosen oil supply

Incentives introduced in some advanced industrial countries to mitigate effects of climate change have backfired, panelists said during seminars held during the IMF-World Bank Annual Meetings.

With many developing nations experiencing deep shocks and citizen unrest due to rising food and fuel prices, plenaries and breakout sessions during the Program of Seminars addressed causes, effects and solutions.

Commitments by members of the Organization for Economic Cooperation and Development (OECD) to reduce carbon emissions through alternative fuels development, while well meaning, have exacerbated the global food crisis and contributed to world-wide water shortages, said Nestle chief executive Peter Brabeck-Letmathe.

The resulting drop in agricultural productivity has led to price increases, he said. "Water scarcity will be the most constraining element," to additional production, he predicted. Replacing fuel with biofuel is "a very, very bad idea."

Role of natural disasters

Replacing even 6 percent of total fuel usage with biofuel would require doubling agricultural production to maintain current output. "Where are you going to get the land and the water for this? This is irresponsible policy," Brabeck-Letmathe said. If the US alone would reverse its policy to replace fuel with biofuels, food prices would stabilize, he stated.

Mohammad Syedyzzaman, chairman of BOC Bangladesh and a former secretary of finance in Bangladesh, noted that the rash of natural disasters in 2006-2007 also impacted food production. To add to the crisis, "other countries stopped exporting grains, and food prices almost doubled during this time."

Syedyzzaman called for a range of responses. In the short term, governments and multi-lateral institutions should strengthen social safety nets to protect the most vulnerable. In the medium term, incentives to encourage additional private sector involvement will catalyze the development of new technologies to improve agricultural output, and address water shortages. "In the long term, there should be a reexamination of biofuels policy," he said.

Biofuels cut oil demand

While biofuels may be contributing to spiraling food prices, seminar panelists agreed that they also play a role in reducing global demand for oil, a factor contributing to recent crude oil price declines.

Oil prices are down from their midyear highs of close to $150 a barrel. Still, the volatility remains, and will continue, experts said. At a plenary and breakout sessions examining the oil market and the long-term outlook, speakers ruled out market speculation as the leading cause of the price spikes. They also challenged the notion that global oil supplies are drying up.

Demand for oil has increased because of robust growth in non-OECD countries, explained Mark Henstridge, director of group economics for British Petroleum. Rapid industrialization may have come at the expense of energy-efficient technology. "These economies are very energy hungry, and account for 90 percent of growth in primary energy consumption," Henstridge said.

He cited other contributing factors:
• Difficulty in accessing additional sources of crude
• External problems such as violence in the Niger Delta that have reduced production
• Disincentives to drilling—such as heavy taxes on export revenues—in some resource-rich nations, and
• Lack of investment in refining capacity.
Combined, these factors led to tightness in supply, resulting in price increases.

Oil supply glut

Recent oil price drops are due to a glut in OPEC supply, and to overall declines in global demand as prices skyrocketed and as OECD nations increased use of alternative fuels, Henstridge added.

Andrei Kirilenko, an economist at the Commodities Futures Trading Commission, refuted the suggestion that speculation contributed to the volatility. "Do commodity index speculators affect prices? There is no systematic evidence to suggest that they are influencing. Markets are reacting to supply and demand," he said.

Panelists suggested that long-term investment in drilling and refining infrastructure would loosen supply, while improvements in the energy efficiency of industry in non-OECD countries, overall global economic downturns, and increased reliance on alternative fuels could continue cool demand.

Nevertheless, they said, prices will never return to the low levels seen in the last century. "The days of $10-a-barrel oil are gone forever," predicted Lawrence Summers, professor and former president of Harvard University, and former chief economist of the World Bank.

Central bank independence

Other panelists suggested that monetary policy can help countries respond to commodity price shocks. "Central bank independence, a flexible exchange rate, explicit inflation targets, and reliable core inflation measures can help avoid the mistakes of the 1970s," said John Murray, deputy governor of the Bank of Canada. He also stressed the importance of structural reforms to encourage transparency, letting markets work, strong rainy day funds, and treating state-controlled resource companies as commercial enterprises.

European Parliament member Anders Wijkman said the number of hungry people will increase, not because of underregulated credit swaps or distressed assets, but because of climate change.

"Climate change is more rapid and more serious than we thought. Even more serious than the financial crisis is the ecosystem crisis," he said. One single aspect—a slight rise in sea level—threatens more than 67 million people in Bangladesh alone. Changing weather patterns, increases in the number and intensity of natural disasters, and severity of recent droughts have all contributed to a reduction in agricultural output, which tightens the supply of staples and increases prices.

Heat-related crop problems

Martin Parry, director of the Jackson Environmental Institute at the University of East Anglia, said up to 20 percent of shortfalls in agricultural production are the result of climate change. Studies have shown that the most stable producers of the world's food, including western Australia, northern and southern Africa, and southern Europe, will experience sustained drought and heat-related crop problems.

"The world's breadbasket will become the most arid," Parry said. The result would be reduced yields, production shortfalls, and hunger—and 1.2 billion more people vulnerable to lack of water.

Exposure to climate change could be reduced through development," Parry said. Prioritizing rural electrification, cultivation of drought-resistant crops, and investment in projects that reduce emissions and support energy efficiency will reduce vulnerabilities, he said.

Comments on this article should be sent to imfsurvey@imf.org


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