The Ukraine Price Spike Crisis: Policy Response, Food System Myths and African Households’ Ability to Dodge the Worst Outcomes
This post was written by Dr. David Tschirley, Dr. Saweda Liverpool-Tasie and Dr. Thomas Reardon, respectively, professor, associate professor and university distinguished professor in the Department of Agricultural, Food and Resource Economics at Michigan State University. Tschirley is also director of the Feed the Future Innovation Lab for Food Security Policy Research, Capacity and Influence (PRCI).
The war in Ukraine, coming on top of market disruptions from the COVID-19 pandemic and major climate-related disruptions in China and India, has led to huge surges in the prices of some key food commodities on global markets. After sustained increases over 2021 and sharp rises so far during 2022, nominal U.S. dollar (USD) prices are now comparable to (maize) or well above (vegetable oils and wheat) their top levels during the food crises of 2007-2008 and 2010-2013 (Figure 1). Fertilizer and crude oil prices have also surged. As these two inputs are key drivers of the final cost of food to consumers, their price rises have contributed to the surge in food prices.
Past price surges have tended to last multiple years. Measured from its start in July of 2010, when the prices of vegetable oil, maize and wheat all started their sustained rise, the time to return to near-pre-spike levels was 49 months for vegetable oil ($1.54 in June of 2010, $1.59 in July of 2014), 62 months for maize ($1.49 in June 2010, $1.58 in August 2015) and 62 months for wheat ($1.09 in June 2010, $1.18 in August 2015). What’s more, this extended period of high prices followed an interlude of less than two years of lower prices after the 2007-2008 crisis. The current price surge started around mid-2020 and is thus already two years old. While no one can reliably predict prices over the next several years, the multiple factors driving the current crisis suggest that the world may not soon see prices at levels it had become accustomed to prior to 2020.
Governments and development agencies are naturally concerned about the impacts of these high prices on food security and poverty and want to design interventions to lessen any negative impacts. As they do this, policymakers need to be aware of the common but incorrect assumptions — the myths about food systems and value chains — that too often drive policymaking in a crisis and lead to serious negative consequences.
Myths and reality in African food systems
Over the medium-term (the next 3-5 years), the poverty and food security impact of these price surges will depend on many factors, including their impact on food production and rural labor markets. Over the next year, however, consumers need simply to dodge this price spike bullet. Their ability to do so depends fundamentally on the importance of these foods in their diet and their ability to dodge away from the foods experiencing sharp price rises and dodge toward other foods whose prices are remaining lower.
Policy, including policy mistakes, will influence households’ ability to do this. We see three broad types of policy mistakes that are commonly made and that either are being considered by governments now or that we expect, based on past experience, may be considered (see the Mittal 2009 discussion paper and the Food and Agriculture Organization’s (FAO) 2008 Economic and Social Perspectives Policy Brief for reviews of past policy responses). First, governments may try to impose behavior on markets that they are unable to achieve. In the short-run, the key example of this kind of policy mistake is price controls on staples; the complexity of markets and the millions of individual decisions that drive them make it literally impossible for governments to impose a price on these products. Longer-term, governments may make the error of attempting to drive production of crops, such as wheat, where the country has no comparative advantage; calls for increased “self-sufficiency” in such crops are a standard reaction to price crises.
Second, governments may — with some success — impose policies that have more negative than positive effects. These can include communities preventing grain from leaving their area and national governments banning exports. The latter is a standard reaction of many governments to food price crises and gets plenty of attention, but comparable restrictions by local communities are also not unusual.
A third kind of policy mistake is spending inordinate sums on broad food or fertilizer subsidies that are unsustainable.
In thinking about how governments and donor agencies should respond, we therefore focus on three common myths about the behavior and performance of food systems and their value chains in Africa, and derive lessons about actions governments should take and actions they should avoid. This builds off recent work on food system myths and government response to the COVID-19 pandemic.
The first common myth is that imports are central to national food security. Yet, the fact is that, for sub-Saharan Africa (SSA) as a whole, the import share in food consumption (in quantity terms) ranges from 10% to 13%, depending on the measure used. So, around 90% of all food consumption in SSA comes from domestic production moving through entirely domestic value chains. Import shares in wheat, rice and vegetable oil consumption are much higher (around 76%, 40% and 67%, respectively, for SSA as a whole in 2019, per the FAO Statistical Database (FAOSTAT)), but key products such as maize, sorghum and millet; regional grains like teff, cassava and other roots and tubers; fruits and vegetables; and meat have far lower shares of imports in their total consumption. Import shares are higher for some countries, but this means they are well below 10% in many others. Clearly, while food imports matter to food security, they do not drive it.
A second myth is that households have a narrow consumption basket and limited ability to respond to price shocks in imported foods. Instead, the fact is that wheat and rice account for only 2.5% of all food consumption in SSA by tonnage and that other staple foods conferring calories, such as maize, other grains, cassava and many other roots and tubers, provide many poor households with the opportunity to dodge away from staple commodities experiencing price spikes. Vegetable oils typically account for 2%-3% of total food supply, per FAOSTAT in 2019. Substitution may be more difficult here: while many African households have an ancient tradition of using peanuts and animal fat as key sources of fat, it is not clear how many can meaningfully substitute those for modern vegetable oils.
A third myth is that rural households purchase little food; the fact is that around 50% of all rural food consumption in many countries of East and Southern Africa is now purchased; one journal article reports 60% for Tanzania and another journal article reports 78% in Nigeria. Value chains (particularly domestic value chains) for the provision of food are crucial for the food security of rural households, not just urban households.
The key takeaway is that domestic value chains (meaning not imported food) are crucial to food consumption in both rural and urban Africa. If these can continue to work effectively during this crisis, they will allow households to reduce the impact of the war-induced price spikes on their food consumption. If policy mistakes are made, and if key targeted policy actions are not taken, then the negative food security effects will be far greater.
Key threats to value chain functioning
Beyond the direct impact on global food prices, spikes in oil prices from Russia’s war on Ukraine can have major effects on the functioning of food value chains in Africa. Through April, the world market price of crude oil had risen over 22% since January 2022 and over 95% since January 2021. For non-oil-producing countries, these price rises will especially affect food consumption through markets (which we show above is high even in rural areas), even of commodities such as roots and tubers insulated from direct price effects. Note that many supply chains are hundreds of kilometers long, e.g., maize travels 1,000 km from surplus northern to deficit southern Nigeria; maize travels over 700 km from central Mozambique to Maputo in the south; maize and rice in Tanzania travel 500 km from the Southern Highlands to Dar es Salaam. Surges in fuel prices will also likely squeeze margins for actors all along the food value chain as they absorb the rising costs in their operations but face a consumer base with limited purchasing power.
The overarching priority in this crisis, as in all food crises, is to keep value chains functioning. We suggest five priorities to achieve this.
First, use the crisis in two ways: to re-emphasize the need to invest in domestic food value chains: transport infrastructure, wholesale and retail market infrastructure under more effective (public-private or community) ownership and management, and vastly improved logistical and hygienic conditions in the markets; and to promote food system innovations in e-trade, technology and finance that are flourishing in the wake of COVID-19 and can make a difference for some consumers.
Second, avoid policy mistakes that hinder value chain functioning. These include local communities prohibiting out-shipment of food staples, national governments closing overland borders (though intra-Africa food trade is low, it is crucial in some cases, such as flows of maize from Uganda or Tanzania to Kenya when those countries face shortages) and price controls (these are unenforceable, will at best have no impact and at worst create uncertainty, higher transactions costs and higher prices to consumers in markets). Advertise your commitment to keeping trade flowing within the country and across land and sea borders.
Third, avoid policy mistakes such as a “commitment” to food self-sufficiency in crops, such as wheat, with no comparative advantage. These can involve massive expenditure for little or no return and divert attention and resources from sectors for which the country has a comparative advantage.
Fourth, where budgets allow, consider targeted and time-limited subsidies to fuel costs for the food trade, and make sure that small and medium-sized enterprises (SME) are covered by the policy. Such steps are based on the critical role of fuel costs throughout value chains and, thus, their important role in the final price paid by consumers. Alternatively, or perhaps complementarity, consider temporary tax holidays and suspension of other fees that may significantly raise midstream actors’ cost of doing business. As always, the challenge will be how to phase such subsidies and tax holidays out as the crisis subsides, since they can have major impacts on countries’ budgets.
Finally, where food distribution is considered, realize that it will cover only a tiny share of all consumption, target it to those most in need and advertise where you will be doing it so that traders are not caught unaware. Realize that many rural households depend greatly on markets for food supply and take no actions that would hamper rural-to-rural and urban-to-rural trade flows.