Will cheap oil lead to cheap food?

The halving of world oil prices over the last six months raises
questions about the implications for food prices and the welfare
of poor people.
Do lower oil prices mean lower food prices?
To a certain extent. But for low-energy cropping systems
common in most developing countries, and in areas where food
is not transported far, the impact will be dampened. For large oil
exporters, however, food prices may increase. In general, lower
oil prices should lower the cost of moving food from producers
to consumers and reduce on-farm fuel and fertilizer costs. But a
countervailing factor is that cheap oil may also induce people to
drive more, and as fuel ethanol mandates link biofuel use to
overall fuel use, ethanol use and the volume of maize used to
produce it would also go up. In countries where oil is a large
share of exports, real exchange rates may depreciate, which will
disproportionately increase the price of traded goods like grains
relative to other prices.
Is the downturn in agriculture commodity prices necessarily bad
for farmers who produce food?
A major downturn in commodity prices would not be great for
farm incomes, and high crop yields would be needed to help
dampen the effect on farm profits. Lower fertilizer and transport
costs may help mitigate any negative impacts.
How long will oil prices remain low?
While there is no certainty in forecasts, current estimates
suggest fuel prices will remain low for 2015, increasingly slightly
in 2016. There are three main drivers of the oil price decline
which are structural: Significant increases in US shale oil
production, receding concerns of oil supply disruptions in the
Middle East, and a change in OPEC policy to maintain rather than
cut production.
What can countries do?
Raising agricultural productivity growth can offset the effects of
lower food prices on farm profits. Oil exporting countries that
import a higher share of their food consumption – think
Venezuela, Yemen, Nigeria, and Azerbaijan — face a potentially
more challenging environment, particularly if they have not built
up financial reserves during this period of higher oil prices.
Investing to increase food supply in 2015 could help lower next
season’s imports; targeted safety nets for the most vulnerable
can help preserve purchasing power, and broader investments in
agriculture could also help diversify future exports away from
the dominance of oil. Keeping markets open can help reduce
rapid price escalations. Recent concerns of possible curbs to
wheat exports from Russia, the fourth largest exporter, led to a
surge in world wheat prices even as oil prices tumbled.
Where do you think food prices are heading?
We’ve had a couple of good grain harvests and grain stocks
have grown bigger, but consumption continues to rise and this
may increase with lower prices. We’re just a bad crop away from
difficult times and we should keep an eye on things like the
continuing dryness in Brazil, whether agricultural finance will
flow to Ukraine as much as is needed in the spring, and gauge
potential impacts of the imminent export duty on wheat in
Russia.
In summary, it’s a complicated and volatile world and only
continued and increased investment in agriculture and science is
going to enable us to meet global, regional and national food
security goals over the long term. A couple of good years of
bountiful harvests do not lessen the challenge. This has been the
warmest year on record, and the specter of climate change is
forever with us.
This article originally appeared on The World Bank’s Voices Blog.
Publication does not imply endorsement of views by the World
Economic Forum.
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Author: Juergen Voegele is the Senior Director for the Agriculture
Global Practice at The World Bank.