Latin America and the Caribbean: Dealing with Another Food Price Shock

IMF Blog, October 25, 2012

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Canonical URL: Latin America and the Caribbean: Dealing with Another Food Price Shock

Authors: Luis Cubeddu, Sebastián Sosa
Date: October 25, 2012
World food prices are rising mainly due to global weather-related shocks.
The recent increase in food prices has been less acute than the two previous episodes (in mid-2008 and early 2011).
Price movements differ across commodities: soybeans, corn, and wheat are up sharply; coffee and sugar prices are down.
Market projections suggest corn, soy, and wheat prices will stay high through end-2012, then decline gradually as supply conditions normalize.

The impact on domestic inflation in Latin America and the Caribbean is beginning to be felt.
Pass-through to core (underlying) inflation has been relatively limited thus far.
Monetary authorities need to remain vigilant because global food price shocks can affect inflation and inflation expectations with a lag.
Countries with weaker monetary policy frameworks should be particularly alert and ready to act decisively given historically high pass-through from global to domestic food prices and from domestic food prices to core inflation.
Wage restraint will be required in countries with pegged exchange rate regimes or dollarized economies.

Impact on the balance of payments will differ across the region:
- Southern Cone countries (exporters of soybeans, corn, and wheat) stand to benefit from higher prices.
- The Caribbean, a large food importer, stands to lose the most.
- Central America will be adversely affected despite being a net food exporter because it imports corn and wheat (whose prices have risen) and exports coffee and sugar (whose prices have declined).
These food price trends add to external imbalances in the Caribbean and Central America, which have been affected by high energy prices for several years.

Poor households spend a larger share of income on food; policies to protect them must be accommodated within tight budgets.
Fiscal constraints differ by country:
- The Caribbean needs to reduce public debt.
- Central America needs to regain policy space.
- South America’s commodity exporters operating near potential would need to reallocate spending from other areas to income support for the poor to keep fiscal positions in check.
Policy options and cautions:
- Scale up well-targeted social safety net programs (avoid generalized price subsidies).
- Reduce taxes/tariffs on food items temporarily (avoid export taxes/restrictions as they generally distort production incentives and are difficult to unwind).
- Consider supply-side policies to encourage food production (for example, subsidies on fertilizers and seeds), but limit these to clear cases of market failure in the agricultural sector.

IMF blog post: Latin America and the Caribbean: Dealing with Another Food Price Shock (October 25, 2012).

IMF Regional Economic Outlook: Western Hemisphere - Rebuilding Strength and Flexibility, April 2012
- IMF Regional Economic Outlook: Western Hemisphere - Rebuilding Strength and Flexibility, April 2012 (Markdown version)
- IMF Regional Economic Outlook: Western Hemisphere - Rebuilding Strength and Flexibility, April 2012 (PDF)