Agricultural commodity prices have been very volatile since the early 2000s, peaking in 2008, then declining sharply until 2010 before starting to rise again (i). In 2012, prices reached a new peak caused by a historic drought in the United States, but then remained low over 2015–2019, a period that also saw a restocking of inventories of soybean, wheat, and corn.
In stark contrast to the previous five years, there was a considerable increase in commodity prices in 2020 caused by a decline in the inventories of main commodities and interruptions in the global supply chain due to COVID-19. During the 2021–2022 harvest, drought in Argentina, Brazil, Uruguay, and Paraguay created upward pressure on agricultural prices, and the current war between Russia and Ukraine has put additional upward pressure on certain food prices that have reached levels not seen since the 2008 crisis. Certain commodity prices, such as those for soybeans and wheat, have reached all-time highs (Figure 1).
Figure 1. Trends in Selected Commodity Prices (U.S. dollars per metric ton)
The war in Ukraine has also had a direct effect on Latin America and the Caribbean. Several countries in the region largely rely on wheat imports from Russia and Ukraine, which together account for 25 percent of world wheat exports (Figure 2). For example, Nicaragua imports 80 percent of its wheat from those two countries.
Figure 2. Russian and Ukrainian Wheat Exports to Selected Latin American and Caribbean Countries, 2013–2019 (Thousands of U.S. dollars)
Besides the impact on commodity prices, the war has affected the supply of fertilizers, unleashing potential medium- and long-term worldwide consequences. Both Russia and Ukraine are important exporters of fertilizers such as urea, anhydrous ammonia, potassium, phosphates, and nitrogenated fertilizers. They also supply the inputs for fertilizer production (e.g., natural gas). Russia alone provides 15 percent of global fertilizer exports and 10 percent of global oil exports.
Figure 3 shows that fertilizer and food prices were on an upward trend even before the war broke out. During January and February 2022, fertilizer prices increased by 82 percent compared to the same months in 2021, while food products increased by 24 percent over the same period. At the same time, the price of natural gas – the primary input for certain fertilizers – skyrocketed. This creates adverse conditions for fertilizer production in other countries and poses a difficult choice for farmers entering the next planting season: use less fertilizer and bear the risk of lower yields, or pay historically high input prices, which might generate further upward pressure on food prices. Maybe the most critical question for farmers is: Even if they are willing to pay the price, will they even be able to access fertilizer supplies?
Figure 3. Fertilizer and Food Indices (2016 = 100)
Figure 4 shows the share of imports of Russian fertilizers in total fertilizers imports in the Latin American and Caribbean countries. On average, the region imports 15 percent of its fertilizer from Russia, although for some countries such as Peru, Ecuador, and Suriname the share is more than 30 percent. The case of Brazil (23 percent) warrants particular attention, given that it is the world’s largest importer of fertilizers and largest producer of soybeans. Russia’s partial suspension from the international banking system (SWIFT) could affect access to fertilizers by certain countries that might face difficulties making payments to purchase these inputs. This could, in turn, hinder agricultural production and food security. In this complex context, the challenge is for other leading fertilizer exporters to compensate for this deficit (for example, China accounts for 11.6 percent of world fertilizer exports, Canada, 9.1 percent, and the United States, 6.5 percent). Those most affected by this situation will probably be small and medium-sized farmers, who face severe liquidity constraints, and the most vulnerable groups, who already have high levels of food insecurity.
Figure 4. Share of Fertilizer Imported from Russia by Latin American and Caribbean Countries in 2019 (Percent of total fertilizer imports)
Food Prices in Latin America and the Caribbean
Higher agricultural prices and the recent spike in energy costs that is adding upward pressure on food price inflation have raised food security concerns in several Latin American and Caribbean countries. Figure 5 shows an upward trend in consumer prices for food and beverages. It is worth noting that while the upward trend began in early 2020 and accelerated in January and February 2022, the data do not include the latest price spike in March 2022, which was expected to be significant.
Figure 5. Food and Beverages Prices for Selected Latin American and Caribbean Countries
(December 2019 = 100)
The impact of higher food prices on poverty and food security indicators in different countries will depend on their typical consumption basket, the structure of their economy, the composition of their agri-food trade, the magnitude of the price increases, and the diversification of input supplies, among other factors (ii). Most studies find a short-term relationship between higher food prices and poverty (iii), with direct adverse implications for accessing food in terms of quantity and quality (iv). This is especially relevant today in Latin America and the Caribbean, where poverty affects more than 200 million people (32 percent of the population). Low-income families might be the most affected because they allocate a larger proportion of their income to food consumption.
Public Policy Responses
The current situation in Latin America and the Caribbean in terms of food prices and food insecurity is worrisome. The war between Russia and Ukraine has the potential to further deepen poverty and increase food insecurity in the region, particularly in a context where vulnerable groups are still affected by the COVID-19 pandemic. To ease the detrimental consequences that the conflict could inflict on poverty and food security both in the region and worldwide, a sixfold strategy should be considered that aims to (i) maintain trade, (ii) increase diversification of fertilizer suppliers, (iii) alleviate poverty, (iv) adapt policy interventions with up-to-date information, (v) improve the efficiency of fertilizer use, and (vi) ease farmers’ liquidity constraints.
- First, trade restrictions such as temporary export bans, which can distort international markets and further increase global food insecurity, should be avoided (v). While these trade-restrictive policies may produce some short-term benefits by lowering domestic prices, they tend to have adverse medium- and long-term effects on farmers’ incentives to invest and increase productivity. In addition, these measures endanger global food security and, specifically, hurt consumers in food-importing countries.
- Second, the supply of food and agricultural inputs should be diversified in order to improve resilience to shocks and reduce dependency. This is pivotal to ameliorate the impact of price increases and input shortages.
- Third, it is necessary to closely monitor the situation of low-income households and vulnerable groups close to the poverty line in order to expand and deepen social protection programs that target those who are food-insecure.
- Fourth, an information system should be established to monitor the prices of food and agricultural inputs. This would allow for expedited identification, design, and modification of public policy interventions that could alleviate the effects of price changes on affected groups (consumers and/or farmers).
- Fifth, it is essential to use fertilizers more efficiently, reduce their excessive use, and decrease dependence on chemical fertilizers. This can be achieved by providing technical assistance and promoting the adoption of digital tools such as precision agriculture and other sustainable agricultural technologies that maximize yields.
- Sixth, liquidity constraints of farmers need to be eased so that they can maintain adequate access to production inputs. This requires coordinating with the private sector and establishing mechanisms that do not destabilize market dynamics, and specifically targeting small and medium-size farmers (e.g., through the use of input vouchers). This is critical to maintain an adequate domestic food supply and reduce the vulnerability of rural populations.
Finally, investments in agriculture must be viewed as long-term public stabilization policies instead of as emergency policies to address a crisis. Investing in agricultural innovation, research, and adaptation to climate change are key strategies to improve the resilience of the food system and maintain long-term food security. The Inter-American Development Bank (IDB) is committed to achieving this goal in Latin America and the Caribbean.
References
- United Nations. 2011. Price Formation in Financialized Commodity Markets: The Role of Information. New York and Geneva: United Nations.
- Hertel, T., and L.A. Winters (eds.). 2006. Poverty and the WTO: Impacts of the Doha Development Agenda. Basingstoke, UK, and Washington, DC: Palgrave-Macmillan and the World Bank.
- Barrett, C., and P. Dorosh. 1996. Farmers’ Welfare and Changing Food Prices: Nonparametric Evidence from Rice in Madagascar. American Journal of Agricultural Economics78(3): 656–69.
- Minot, N., and F. Goletti. 2000. Rice Market Liberalization and Poverty in Vietnam. Research Report No. 114. International Food Policy Research Institute, Washington, DC.
- Martin, W., and K. Anderson. 2012. Export Restrictions and Price Insulation during Commodity Price Booms. American Journal of Agricultural Economics 94(2): 422–27
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