Driven by the expansion of global demand, commodity prices continued to increase in 2010, and in first months of 2011 some prices reached a new historical peak (see Figures 1.10 - 1.13). The oil price (crude Brent) has sharply increased from its trough of USD 30 per barrel in December 2008 and was at the time of writing fluctuating around USD 110, around three‑fourths of its all-time high of USD 145 in July 2008. The latest oil price spike of between USD 110 and USD 120 was caused by the events in Libya. Changes in the price of oil depend, however, on further political developments in oil producing countries, notably Libya, and also on the supply response to the recent hike in oil prices. Some OPEC member countries, such as Saudi Arabia, have increased production in response to the price hike, but others have not followed. The technical assumption used in this report is that during the projection period 2011/12, the oil price will decline again to around USD 90 per barrel. Oil price uncertainty will continue to be a major risk factor for economic growth in the near term. African oil exporters, notably Nigeria, Algeria Angola and Sudan, are benefiting from the oil price boom. Not so Libya, which has the continent’s largest oil reserves, as the political upheaval has caused a sharp decline in oil production and aggregate output. While oil exporters benefit from windfall gains on output, net exports and government revenue, oil importing countries are suffering from losses in output and a worsening of current accounts. This is a particular problem for Highly Indebted Poor Countries (HIPCs). The impact of higher oil prices on the economies also depends on how countries respond to the oil price shock. If governments contain the impact of the shock by controlling petroleum prices and/or providing subsidies output declines less in the short-term,  but budget deficits increase, which could cause output losses in the longer term.

The price of gold has continued its steep rise during 2010 and into 2011, driven by global demand that aimed at hedging against financial market and exchange rate risks. The escalation of violence in Libya has further boosted the price of gold. The soaring gold price benefits countries such as South Africa, Ghana, Zimbabwe, Tanzania, Guinea and Mali, Africa´s main producers of gold. Africa accounts for around 30% of global gold production.

Other metal prices have recovered from their trough in early 2009, driven by global demand. The price of copper has reached a new historical peak, providing windfall gains to copper producing countries. Zambia is Africa’s biggest copper producer, followed by the Democratic Republic of Congo and South Africa. The price of aluminum has recovered at a more moderate pace. South Africa and Mozambique are Africa´s largest aluminium producers, followed by Egypt, Ghana, Nigeria and Cameroon.

Export prices for agricultural products have further increased in the course of 2010 and into 2011. Cotton has recorded the sharpest price increase, caused by higher global demand (notably from China) and supply shortages due to poor crops in Pakistan and export restrictions in India. In Africa, Burkina Faso, Chad, Mali and Benin are main producers of cotton. The cocoa price has experienced sharp swings at high levels, affected by the events in Côte d´Ivoire, the world´s largest producer. The price tumbled after the news about good harvests in Côte d´Ivoire, but it jumped again after the export ban on cocoa by EU. This ban was intended to cut the funding of the incumbent president, Mr. Gbagbo and to support Mr. Ouattara, the internationally recognised winner of the presidential elections, but it also hurt farmers. After Mr. Gbagbo has been caught, the export ban has been lifted. Prices of coffee are also rising fast due to poor harvests in major producing countries, such as Colombia and Brazil. The high prices are benefiting African producers, such Ethiopia and Kenya, and help to absorb the impact of lower production due to bad weather conditions in some coffee-growing regions.

Import prices of basic foodstuffs have increased sharply in the course of 2010, with prices of wheat and maize rising much faster than the price of rice. African farmers benefit from higher agricultural prices, but consumers, notably in urban areas, are suffering. In several countries the hardship falling on populations has contributed to large-scale political unrest, although other problems, notably high youth unemployment and insufficient political freedom, have also played roles.

The causes for the recent hike of food prices are diverse. Increasing global demand as well as supply constraints played roles. Financial market speculation has also been criticised as a booster, although the size of this effect is controversial (see Box 1.3). 

Figure 1.10: Oil price and gold price (base January 2000 = 100 )

Source: African Development Bank, World Bank.

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Figure 1.11: Copper and aluminium prices (base January 2000 = 100)

Source: African Development Bank, World Bank.

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As the African continent is a net food importer, the sharp increase in food prices will increase the import bill. This is putting pressure on the balance of payments and raising inflation. Where governments increase food subsidies to protect their population, the burden is shifted to government budgets, causing deficits to rise and/or other spending to be cut. The countries within the group of Low-Income-Food-Deficit Countries (LIFDC) are particularly vulnerable to higher food prices (AfDB, 2011; Salami et al., 2011). According to the 2010 classification of the Food and Agriculture Organization (FAO), of the 77 countries of this worldwide group, 43 are in Africa, around 80% of all African countries. To prevent (or respond to) social unrest, countries are taking measures to tackle the effects of higher food prices. For example, in Egypt, which is a large importer of food – it imports 40% of its total foodstuffs and 60% of its wheat – the number of ration-card beneficiaries has increased.

Figure 1.12: Export prices of agricultural products (base January 2000 = 100)

Source: African Development Bank, World Bank.

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Figure 1.13: Import prices of basic foodstuffs (base January 2000 = 100)

Source: African Development Bank, World Bank.

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Box 1.3: What is causing food price inflation?

After the sharp decline from their peak in the second half of 2008, international food prices soared again in 2009 and 2010. Prices for cereals, cooking oils and sugar increased most, while the increase of meat prices was more moderate. Global supply and demand imbalances in agricultural commodity markets appear to have been a main driving factor for this recent increase.

On the supply side, unfavourable weather conditions in important producing countries affected sugar and wheat prices. Among the sugar-producing countries, Brazil (the most important producer) suffered from dry weather, and India’s output in the biggest sugar growing region (Uttar Pradesh) was reduced by heavy rainfalls, infestations and crop diseases. Among producers of wheat, Australia’s crops were damaged by heavy rainfall, and several other wheat-producing countries also suffered from unfavourable weather conditions. Following the lower production due to drought, the Russian Federation banned its wheat exports, which reduced supply to international markets. Additionally, unfavourable weather conditions negatively affected agricultural production in several countries in Africa, such as Benin, Madagascar, Morocco, Mozambique, Tunisia and Zimbabwe. But in most other African countries, favourable weather conditions boosted harvests, thus mitigating the effect of high global food prices. Nonetheless, food security remains critical for vulnerable groups.

On the demand side, the growing world population is often mentioned as a main driver of food prices. While this is true for the medium and longer term, it cannot explain the recent price hike. Thus, together with the supply disruptions, other demand-side factors appear to have been more important, notably that countries increased their stocks to protect their populations from higher prices. Other factors driving food prices (both on the supply and demand sides) are higher energy prices and the expansion of biofuel production. The sharp increase of petroleum prices is increasing not only costs for production (including prices of fertilizers) and transport of agricultural products, but it also makes it more profitable to transform agricultural products into biofuels. Regulations (as in the European Union) and subsidies for ethanol (as in the United States) favour the use of biofuels. The additional demand for agricultural products, which can be used for biofuel production, increases their prices. As consumers shift their demand to cheaper products, those prices also rise. At the same time, farmers find it more profitable to use their land for the production of biofuel inputs, which reduces the supply of food production and further increases food prices.

Factors outside agricultural markets, such as the relatively weak exchange rate of the US dollar, are also blamed for driving commodity prices. As commodity prices are denominated in US dollars, a weaker dollar encourages replenishing stocks, thus increasing demand while producers of commodities are demanding a higher price (in US dollars), thereby driving up prices. However, it is difficult to isolate exchange rate effects from other factors that changed at the same time, notably the recovery of the global economy. Financial market speculation is also blamed as a culprit for the volatility and recent increase of commodity prices. It is true that in recent years more money is flowing into commodity markets, also fuelled by excess liquidity in financial markets due to expansionary monetary policies. However, there are different views regarding to what extent this affects prices as the causal relationship between spot prices and futures prices is not very clear.