MARKETS AND DETERMINANTS OF FOOD PRICES - Food Security, Food Prices and Climate Variability - page 102

that local production is not a significant source of local food, that local production is not
highly variable, that local food is more expensive than food imported from elsewhere or that
local foods are not marketed to a significant extent (they are consumed within the households
or communities that grow them). Knowing which countries and regions are integrated into
the global food system will help food security analysts to identify the countries where high
and variable global food prices will cause food insecurity through increasing lack of access,
since incomes usually lag behind production.
Another important aspect for calculating the transmission of the international commodity
price dynamics to local food prices is determining the importance of local climate variability.
If the international price controls local prices, then local food availability dynamics occurs on
top of that strong signal. If a drought occurs, what is the impact on food prices and ultimately
food demand? This can only be answered through an understanding of locally consumed
goods in the market, because if local foods are not marketed and a sudden drop in availability
of these foods occurs, a rapid increase in demand in the market may be the result which is
likely to increase food prices. Since there are few other ways of tracking local, household food
production across large regions remotely at reasonable expense, this attention to food prices
of low value, locally grown foods is important.
Food and cereal price indices
To monitor changes in food prices, the United Nation's Food and Agriculture Organization
(FAO) has developed a food price index to monitor food commodity price trends at a global
level. This index largely reflects supply and demand conditions in export markets in the
developed world and the most advanced countries of the developing world. A component of
the FAO Food Price Index, the FAO Cereals Price Index, is an indicator of price trends in
globally traded cereals but only poorly reflects variations in the least expensive food often
consumed by the poor in food insecure countries (Funk and Brown, 2009). Figure 5.5 shows
the food price indices from the FAO, including the cereals and the food index. The prices of
other important food items are often not highly related to each other, with meat, dairy and
sugar showing distinct trends and variability.
The FAO food price index is a normalized, weighted average of prices of a group of goods
over a specific period of time. Food price indices are based upon weighted averages of a
basket of food items that have documented commodity prices in international export markets
and food prices in the capital cities of every country. To deal with multiple currencies, infla-
tion rates, value of currency and many other variables, all price indices are expressed in terms
of their value in a base period, and calculated on a monthly basis. Thus one limitation of the
FAO food price index is that it relies on generically relevant foods such as meat, fish, dairy,
oils, vegetables and grains. For the most food insecure households, nearly all of these goods
are not attainable on their very small and stretched food budgets. Thus the food prices included
in the food price index are not very relevant to the most food insecure. Thus to understand
how the international price of grain affects local food prices, we will use the cereals price
index information provided by the FAO.
The FAO cereals index comprises the price of wheat, maize and rice at the international
and capital city markets. To take into account the importance of the wheat, maize and rice
prices used in the index, the commodities are weighted with world export shares in 2002 to
2004, as provided by the FAO statistical database. Cereal prices are inter-related, thus for the