Energy transition and new tech can fix high food prices, economists say

Global commodity prices are not expected to ease this year, and any hopes that they might decrease significantly will depend in large part on the trajectory of the Ukraine war, according to a report published Tuesday by the World Bank. Prices for non-energy products, including foods, are expected to rise about 20% this year, while Brent crude oil is set to average $100 a barrel, only dropping to $92 in 2023, the report said. The spike in energy prices over the past couple of years is the worst since the 1970s, with the past five years averaging just $60 a barrel. Devex interviewed two World Bank economists who worked on the report and asked: What can be done, especially for the lower-income countries and people whose expenditures largely consist of food costs? “In the short term, there aren’t easy solutions,” said Senior Economist Peter Nagle, noting that prices may remain elevated for years. The bank is recommending that countries take targeted social support measures, though it’s difficult to ensure that they are used effectively. “When prices go up they go up for everybody, including agencies engaged in donations, like the World Food Programme.” --— John Baffes, senior agriculture economist, World Bank “In response to price hikes, policymakers have often sought to provide relief to consumers via subsidies or lower taxes; however, these are generally ineffective remedies and may exacerbate supply shortages,” the report cautioned. Specifically, the bank urged governments to instead focus on cash transfers, school meal programs, and public work schemes that reach the people most in need. “Low-income countries may have urgent needs for international assistance for a prolonged period,” the report also said. The real solutions, though, lie in the medium and longer terms, the report said. These include shifting away from fossil fuels — which are skyrocketing in price and a major contributor to spiking costs of fertilizer — and instead moving toward low-carbon and renewable energy technology. In addition, the economists encouraged investments in new agricultural technologies. “We have some huge food security problems,” said John Baffes, a leading commodity economist at the bank. For now, much of the concern is centered on African countries and some nations in Asia, but the reach of the issue is likely to grow. One of the key concerns is fertilizer, with rising prices due to not only elevated input costs on the energy side but also sanctions on Belarus and Russia, as well as Moscow’s protectionist policies on agricultural sector exports. If farmers use less fertilizer, yields are expected to be lower. “It’s a good opportunity now for governments to look at those technologies and work with those companies who produce those technologies so they can be diffused in a much more rapid fashion, rather than using subsidies,” Baffes said, adding that the past few years have seen tech solutions for using fertilizers more efficiently, among other areas. “There is a question of whether we are going to see a shortfall in supplies,” he said in reference to fertilizers, noting great uncertainty in the outlook. However, Baffes appeared fairly certain that grain and maize prices would stay higher than before the crisis. Wheat in particular is forecast to rise more than 40% from last year — hitting an all-time high in nominal terms, pushed up by increased prices for inputs. Rice has not jumped as much thus far, but it is a space to watch. “When prices go up they go up for everybody, including agencies engaged in donations, like the World Food Programme,” Baffes said, saying the donor community needs to take note. At a recent Devex event on food systems, WFP said it is facing a massive budget shortfall, just as needs are rising. This means the agency “moves food from hungry people to starving people,” said Chase Sova, senior director of public policy and research at World Food Program USA, during a panel discussion at the event. While Russia’s invasion of Ukraine is likely to ensure prices remain higher for longer, inflation was taking off even before the war, in part due to disruptions from COVID-19 and distortions from stimulus programs in advanced economies. However, another factor is weather. Last year saw more “one-off” weather events such as droughts and floods, sometimes in the same country — not to mention fires, such as in the U.S., Nagle said. “Extreme weather is an issue that is increasingly going to become a big issue for the supply side of commodities,” Nagle said, noting that “exceptional weather” events might become less exceptional due to climate change. “In the near-term, higher prices threaten to disrupt or delay the transition to cleaner forms of energy,” the World Bank said in a press release for the new report. “The war is also leading to more costly patterns of trade that could result in longer-lasting inflation,” it added. How does this work? The circular nature of the economy means that as prices rise for energy inputs such as gas, there is a shift to coal and other energy sources. Not only is coal costly to transport — thereby adding its own elements to inflation — but it is a major polluter, causing harm on the climate front. And because commodity inflation is so broad-based, metal prices are also increasing, leading to higher costs for renewable energy — which requires metal for battery-grade nickel, for example — and making the transition more expensive. One short-term fix for all this is investing in energy efficiency, such as weatherizing buildings to reduce energy consumption, the World Bank said. Also, more efficient use of energy and fertilizer by advanced economies would increase availability and reduce upward pressure on prices. “In advanced economies, we don't use fertilizers efficiently,” Nagle said. “So, one easy solution would be to use it more effectively.” This might be easy on paper, he said, but changing the way people work may be much harder.