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THE GORDIAN KNOT OF THE FOOD CRISIS

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GENEVA, Jan 27 2011 (IPS) - Barely out of the 2008 food price crisis, the world appears to have entered yet another phase of higher prices. Rising food prices are now stoking global inflation, not to mention political unrest of proportions that we could have seldom imagined.

The United Nations’ food agency FAO has informed that food prices have hit a record high last December, above 2008 levels. Contrary to 2008, one overriding factor appears to be at play in today’s crisis: bad weather. What we are looking at is mainly a supply constraint. Last year, US wheat futures rose by 47%, buoyed by a series of weather events, including the drought in Russia and its Black Sea neighbours. While supply constraints are the main culprit of today’s crisis, there are other contributing factors too.

In examining food price crises in general, our point of departure must necessarily be an exploration of the consumption and production pictures distinguishing within them between transitory and structural factors.

World food consumption is driven by three principal long-term, structural, factors: income growth rates, population growth rates and dietary preferences. The most extraordinary development of our times is that food consumption is also driven by energy production. In pumping biofuels into our tanks, we are in fact pumping corn, sugarcane, and other foods into our transportation systems.

The OECD and FAO tell that, if current policies continue, by 2019 about 13% of the global production of coarse grains will be used for ethanol, 16% of vegetable oil, and 35% of sugarcane.

Globally, income is rising and will continue to rise, although unevenly. With rising incomes comes rising demand. Population growth rates, on the other hand, have been falling for almost 30 years now, and the world has certainly passed its peak growth rate of the late 1960s. But the absolute rise remains.

At the global level, dietary preferences are converging for many reasons, like the spread of food chains, and greater exposure to North American and European dietary habits: meat, milk, and dairy consumption in the developing world, in particular, are rising.

Will world production be able to keep up with this increased demand? There are three main sources of growth of crop production: expanding the current agricultural land area; boosting the frequency with which that area is cropped; and trying to boost actual yields (through mechanization, better irrigation, or biotechnology for example).

But contrary to popular perception, it is not the amount of new land that is brought into cultivation that will be the determinative factor but, rather, increasing yields. In fact, over the past four decades, rising yields alone have accounted for 70% of the increase in crop production in the developing world.

Like most other industrial sectors, agricultural production will also remain dependent on fluctuations in the price of oil. A rise in fuel prices makes it more expensive to produce fertilizer, and to deliver products.

The factors that influence production and consumption are linked at the global level by international trade, which balances supply and demand and brings products from the land of plenty to the land of less. But when this mechanism is disrupted by trade barriers, turbulence besets the markets.

Export restrictions play a major role in food crises. There are other trade barriers too, which harm agricultural production, such as tariffs and subsidies, and which prevent food from being produced where this can be most efficiently done. But export restrictions play a very direct role in aggravating food crises.

Export restrictions lead to panic in markets when different actors see prices rising at stellar speed. They were the single most important reason for the 2007-08 price explosion on the rice market; there was no fundamental market imbalance at the time. Equally, the 2010-11 price rise for cereals has much to do with the export restrictions of Russia and Ukraine; imposed after both countries were hit by severe drought.

Clearly, these restrictions have a logic, they do not wish to see their own populations starve. So the question is what alternative policies could allow them to meet this goal? The answer must reside in more food production globally, more social safety nets, and more food aid and possibly food reserves. But we must also reflect on the Doha Round. Export restrictions are but one element of the trade barriers that prevent efficient agricultural markets from emerging. The Doha Round of world trade negotiations can contribute to the medium-to-long term response to food price crises by removing many of the restrictions and distortions that have harmed the supply-side picture. The Round would greatly reduce rich world subsidies that have stymied the developing world’s production capacity and which have, in certain commodities, cornered it completely out of the market. The worst kinds of subsidies, which are export subsidies, would be completely eliminated. It would also bring down tariffs, although with certain flexibilities; thereby increasing consumer access to food.

As to the response measures: clearly we need greater investment in agriculture, a sector in which we have under-invested for a while. In particular, to prepare our agricultural system for the impending climate change that we are likely to witness. This will be vital to prettying the supply-side picture. (END/COPYRIGHT IPS)

(*) Pascal Lamy, Director-General of the World Trade Organisation (WTO).

 
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