Javier Guzmán Calafell: Level and volatility of food prices: challenges
and prospects
Remarks by Mr Javier Guzmán Calafell, Deputy Governor of the Bank of Mexico, at the
panel on "Level and volatility of food prices: challenges and prospects" at the "Food security
in a context of high food price volatility and low productivity in Latin America and the
Caribbean: challenges and opportunities" international seminar, Guadalajara, 27 March
2014.
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First of all I would like to thank our three speakers, for having accepted the invitation to share
with us their perspectives on the key aspects related to the high level and volatility shown by
food prices in the last years. Given the importance of the topic, not only to Mexico but at the
global level, and the quality and experience of our speakers, I have no doubt that this
session will be of great interest to all of us.
After having shown a pronounced decline for several decades, international food prices
started to increase at the beginning of this century, abruptly spiking in 2007-2008. Prices for
these products fell at the end of 2008 within the context of the global economic crisis, but
rose again to hit levels in 2011 that were even higher than those posted before the crisis.
Although in the wake of this spike food prices have diminished, they still remain at very high
levels. In addition, forecasts for the next few years suggest a complex scenario. For
example, the OECD and the FAO estimate that food prices for the period 2013-2022 will be
above, in real terms, those seen on average in 2003-2012.1
The increase in food prices in the last few years has been accompanied by great volatility.
According to calculations of International Monetary Fund staff, long-term volatility of food
prices reached in 2009 its highest level in almost 30 years.2 Naturally, price fluctuations for
these products heighten challenges for economic policy and complicate significantly
consumption and investment decisions by families and businesses. Some analysts have
even emphasized that, viewed from a very long-term perspective, challenges stemming from
the volatility of food prices could be more acute than those related to their level.3
The level as much as the volatility of food prices have significant repercussions for all
economies, advanced or not, by affecting economic growth, inflation, public finances, the
balance of payments, income distribution, poverty, and in some cases even political stability.
However, the magnitude of the corresponding challenges has an inverse relationship with the
level of development. Allow me to provide some additional information in this regard:
• The International Monetary Fund estimates that the median food share in total
spending in advanced economies is 17 percent, compared to 31 percent in
emerging and developing countries.4 In addition, it is important to keep in mind that
in a number of these countries, or in specific sectors of the population, the
corresponding figure is much higher.5
• In this context, it is not surprising that, according to World Bank calculations, the rise
in food prices in 2010-2011 resulted in a net increase of 44 million in the number of
people living in extreme poverty in developing nations.6
• Additionally, some recent studies conclude that increases in international food prices
may give rise to a significant deterioration of democratic institutions, and to a higher
number of internal conflicts, in poorer countries.7
This underlines the importance of clearly understanding the factors that affect both the level
and the volatility of food prices, as well as the challenges that public policy must confront in
this respect.
Clearly, fluctuations in food prices are largely determined by supply and demand factors
inherent to these markets, such as the pace of world economic activity, demographic
changes, the implications of higher income levels in some countries for eating habits, climate
related factors, and the availability of water and arable land, among others.
However, the analysis becomes more complicated given that there are events outside the
strict sphere of food markets which are affecting food price developments. It is worth to
highlight in this regard that developments in energy markets affect food prices through a
more intense use of energy in the production, processing, storage, and transportation of
these commodities, as well as through the more widespread production of biofuels and the
resulting rise in the use of food and agricultural inputs for this purpose. Second, a growing
interconnection is being observed between financial and food markets, as reflected by the
larger number of financial investors in primary product markets and the proliferation of
financial derivatives tied to these products. It is likely that this also has had an impact on food
price trends.8
In this context, it is clear that the design of policies oriented toward moderating increases in
the level and volatility of agricultural and food prices, and dealing with their consequences
when they are inevitable, faces significant challenges. I would like to highlight four of them,
which from my point of view are particularly relevant. First, the design and implementation of
the policies required to deal with the macroeconomic impact and the social costs of food
price fluctuations. Second, the setting in motion of actions oriented toward overcoming
structural difficulties that are affecting food production, such as low investment levels,
infrastructure deficiencies, modest storage facilities, and the high concentration in brokerage
markets. Third, the need to take into consideration that some of the policies that have been
adopted to attenuate the effects of food price increases, such as export restrictions or tariff
reductions in several countries simultaneously, price controls and subsidies, frequently end
up having the opposite effect. Fourth, the importance of taking actions focused on improving
transparency, the availability of information, and in general the functioning of markets for
these products, in such a way as to provide adequate incentives for the adoption of schemes
that stimulate productivity and competitiveness in this sector, contributing in this manner to a
lower disparity in food prices, both across countries and regions, as well as through time.