The food prices explosion: false and actual culprits

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Jacques Berthelot

Solidarité

 

 

Food prices surged in 2007 by 26% in Vietnam, 25% in Liberia, 16% in Chile and West Africa, compared to only 4% in the US and 3.1% in France. In the first semester of 2008 the surge of food prices accelerated in all countries further increasing the number of chronically hungry people. The U.S. Department for Agriculture (USDA, 2008a) projects that the number of hungry people would reach 1.2 billion by 2017[1].

 

If we except Argentina, Brazil and Thailand – the three main developing countries (DCs) for their net agricultural exports –, the agricultural trade balance of DCs has collapsed from a surplus of $4.8 billion in 1970 to a deficit of $49 billion in 2004. Without the same countries, the DCs’ food trade – which includes fish but not non-food agricultural products – has fallen from a surplus of $2.4 billion in 1970 to a deficit of $28.7 billion in 2004 (Berthelot, 2008a). This increased deficit is not only due to the EU and US dumping but also to DCs cuts in their applied tariffs – under pressures from the international financial institutions controlled by the North and from the WTO – so that the EU applied tariffs on basic staples are still much higher than in DCs.[2] This gap in tariffs explains that the EU has been able to maintain its food sovereignty as reflected by its much lower share of imports in total domestic uses than in West Africa (WA): over 2001-04 it was of 5.9% for cereals in the EU against 18.9% in WA, 2.7% for dairy against 39% and 4.9% for meats against 7.4%. And these most protected and subsidized products, together with sugar, fruits and vegetables, accounted in 2003 for 68% of calories in the EU diet, 83% of proteins and 49% of lipids. Conversely the same products, largely imported, accounted in WA (and likely in all Sub-Saharan Africa) for 59% of calories, 57% of proteins, 30% of lipids (Berthelot, 2008b). With such a high dependency from imports at dumped prices for basic staples during so many years, local staples have been largely supplanted and it is easy to understand why the recent explosion of world prices has triggered so many food riots. 

 

This paper aims to appraise the upstream explosion in the prices of staple agriculture commodities and their root causes. To analyse the upstream explosion of agricultural commodity prices, we need a meaningful comparison of agricultural commodity and food trade between countries. Many authors, countries and international institutions are confounding agricultural trade with food trade. For a meaningful comparison of trade flows among countries, I have revalued and developed comparable data from the UN COMTRADE data base: agricultural trade includes the products listed in the Agreement on Agriculture except manufactured tobacco, and food trade excludes non edible agricultural raw materials but includes fish products (Berthelot, 2008c).

 

The recent explosion in the prices of agriculture commodities

Almost all agricultural commodities have been affected by the explosion of prices since January 2006, with the exception of sugar[3] and pork. The increase in prices of cotton and coffee has been much lower than that of the staple products (cereals, oilseeds, dairy) produced mainly in countries with temperate climates. To understand the root causes, one must understand that the U.S. is the 'price maker' for the world prices of 'grains' (cereals, rice, oilseeds, pulses, cotton). Other exporters base their prices for agricultural commodities on the US FOB[4] prices that are quoted in Chicago, Kansas City or Minneapolis (Ray, de la Torre Ugarte, Tiller, 2003). Because grains feed animals, grain prices affect the prices of animal products, which underlines the major role of the U.S. in determining most world agricultural prices.

 

By March 2008, US wheat prices had grown 2.8-fold[5] (FAO, 2008) for both the Hard Red Winter (HRW) and Soft Red Winter (SRW) varieties but then they fell by 29% and 37% in August, remaining  at $341 and $250 per ton ($/t) respectively (Berthelot, 2008). The U.S. renewable fuels standard is driving much of the recent market demand for agrofuels. This standard explains the 2.9-fold increase of the corn price by June 2008 to 294 $/t, which was driven up further by the floods in the Midwest to 307 $/t in early July before falling at 250 $/t in August. The price of rice had hardly risen until October 2007 (+ 11%), but then skyrocketed to reach 963 $/t by May 2008 before falling at 787 $/t in August. Oilseeds prices have jumped almost as much as cereal prices: soybean prices increased 2.5-fold until July 2008 to 586 $/t, rapeseed 2.9-fold until July 2008 to 754 $/t. Soybean oil increased by a factor of 2.9 until June 2008 as palm oil did until March 2008, and rapeseed oil by 2.2 until June 2008.The price of meat also increased dramatically: beef by 46% (2,898 $/t in April 2008), poultry by 50% (1,974 $/t in June 2008), mutton by 32%  (4,893 $/t in May 2008). Only the pork price almost stagnated, with a mere 7% increase until June 2008 at 2,204 $/t.

 

These price increases must be viewed against an analysis of global supply and demand for cereals. According to the USDA’s own estimates (2008b), global cereals production between 2005-06 and 2006-07 has only fallen by 0.6% (i.e. from 2,017 Mt (million tons) to 2,005 Mt).  USDA also indicates that output is expected to reach 2,113 Mt in 2007-08. At the same time global demand for cereals has risen by 3.9% (from 2,032 Mt in 2005-06 to a projected 2,111 Mt in 2007-08). The volume of global trade in cereals has hardly changed: from 253 Mt in 2005-06 to an expected 264 Mt in 2007-08.

 

Increases and decreases of world agriculture commodity prices are inversely correlated with the level of global ending stocks (i.e. stocks available at the end of the marketing year[6]). The recent food price explosion is not an exception: global ending stocks have fallen by 12.8% from 2005-06 (390 Mt) to 2006-07 (340 Mt) but have slightly recovered in 2007-08 (346 Mt). For 2008-09, USDA expects a rise in production at 2,195 Mt, and a demand of 2,174 Mt, raising global ending stocks to 367 Mt. Abbott et al (2008) explain why global ending stocks in the past years have fallen: liberalization policies and increased levels of world trade have induced governments, particularly the U.S. and EU, to minimize storage costs whilst private traders have opted for just-in-time-delivery, holding minimum stocks.

 

However the reduction of global cereals stocks from 70.1 days of consumption in 2005-06 to 60.1 days in 2006-07 and 59.8 days in 2007-08 can hardly explain the more than 200% price surge in 2.5 years. The more so as this low level of stocks is not exceptional: in 1995-96 ending stocks fell to 52 days of consumption but the HRW wheat price rose by only 38% from 1994 to 1996 and the SRW wheat price by 32.4%. Therefore low ending stocks alone cannot explain the price explosion. To understand it we have to identify the reasons for the decrease in supply and the dynamics of demand. On the supply side among relevant short term factors we find climate variations in several exporting countries, increased production and transport costs due to the oil price spike, and export restrictions. Long term factors affecting the supply of agricultural commodities are smaller yield increases and reduced agricultural production in developing countries due to the dumping practices of developed countries. Short term factors that impact the demand side include the creation of a new market due to the mandatory agrofuels standards and financial and commercial speculation. On the other hand, increased food consumption and changing consumption patterns in emerging countries like China and India, and a generally increasing world population are long term factors.

 

China, India, and export restrictions: the false culprits of the agricultural prices explosion

In the public debate in most industrialized countries, changing food consumption patterns in China and India (increased meat and dairy production which requires grains for feedstock) and export restrictions of agricultural exporters in DCs, who have decided to prioritize domestic food needs over exports, are often cited as key factors in the current explosion of food prices. An analysis of the food trade balance of China and India does not lend strong support to this argument. China's food trade balance maintained an average surplus of $4 billion from 2000 to 2006. China has always been a net exporter of cereals (mainly corn) except in 2004 and its cereals stocks have risen from 107.5 Mt in 2005-06 to 118.4 in 2007-08. Its net imports in oilseeds and vegetable oils have been rising fast, reaching 28 Mt of oilseeds and 8.5 Mt of vegetable oils in 2006-07 against respectively 20.5 Mt and 5.4 Mt in 2003.  Due to the price increase of pork by 42% in 2006, China drastically reduced its domestic corn-based ethanol production from 3.8. billion liters in 2006 to 1.8 billion liters in 2007. China continues to export corn and increased investment in agriculture by 31% in 2007 to increase agricultural production. Consequently, it is hard to hold China responsible for the current food price explosion.

 

Also India is a net exporter of food products (since 1995), and of meat and dairy. It is also a net exporter of cereals (despite the import of 6 Mt of wheat in 2006), and its stocks have risen from 13.1 Mt in 2005-06 to 16.6 Mt in 2006-07 and 20.9 Mt in 2007-08. As for oilseeds, India is a large importer of vegetable oils (5.4 Mt/year), but exports almost as much oilcake (5.2 Mt in 2007-08). Its trade deficit in oilseed products almost disappeared in 2006 ($291million). Despite the fact that in 2006 India was the 5th largest ethanol producer (at 1.9 billion liters - mostly from sugar cane), its production has dropped to 200 million liters in 2007. Biodiesel is produced from the non edible oil of jatropha, cultivated on arid lands. Based on these facts, it is hard to sustain the argument that India could be responsible for the explosion in grain prices. Because Indian agricultural production is much less dynamic than China’s (its agricultural value added has increased by only 2.7% per year from 2003 to 2007 compared to 4.5% average annual growth in China during the same period), it will be more difficult for India to satisfy its domestic food needs through domestic production in the long run. The expected 54% rise of the Indian population by 2050 plays a big role in that.  China’s population is forecast to grow by only 9% over the same period.

 

Export restrictions to safeguard food security should not be blamed

Several developing countries introduced export taxes, quantitative restrictions or bans on exports of basic staples when food prices soared. Vietnam, India, Egypt, China, Cambodia, Indonesia, Uzbekistan have imposed such measures for rice. Even Thailand, the largest rice exporter, has decided to sell rice 40% cheaper on its domestic market than for export, which effectively taxes exports. Argentina, Ukraine, Russia, Kazakhstan, Pakistan, China and India have restricted wheat exports. Other countries have imposed such restrictions on still other agricultural products. In fact export taxation was never disallowed by the WTO, and this tax could be prohibitively high because it is not bound anywhere, unlike import tariffs. Developed countries have only to notify them at the WTO Committee on agriculture as have DCs if they are net exporters of the commodity. Clearly, export restrictions have exacerbated the surge in world prices, but they have also reduced food inflation in the countries taking such measures. Their governments gave priority to the food security of their own citizens. Thus, the argument of international institutions and developed countries that export restrictions – and more generally the lack of free trade in agricultural products – are the root causes of soaring prices, cannot be sustained. In most cases export restrictions were only adopted after prices had already exploded to levels that put domestic food security at risk.

 

The main culprits of the current food price explosion: the US and EU

The U.S. and EU have promoted unsustainable agriculture and agrofuels policies, and devised unfair agriculture trade rules at the World Trade Organisation (WTO) and via bilateral free trade agreements. This has led to huge food trade deficits of both countries. Their policies are at the heart of the current explosion of agricultural commodity prices, the subsequent rise of food prices and occurrence of hunger riots.

 

The unnoticed U.S. and EU large food trade deficits

The general confusion of agricultural products with food products and differences in the list of products included in trade statistics have obscured the huge food trade deficits of the U.S. and the EU. The US food trade deficit exceeded $11 billion in 2005 and 2006, most of which is due to the fish trade deficit of around $9 billion. In 2007, the US food trade deficit shrunk due to the spike in its agricultural export prices. The EU food trade deficit is even larger, exceeding $20 billion in 2005 and 2006 (€16.7 billion). It is also due to a huge deficit in fish trade ($16.7 billion or €13.3 billion in 2006).

 

In 2007-08, the EU-27 has become the fifth largest net importer of cereals, at 10 Mt. In the two previous marketing years, the EU was still a net exporter of cereals (9.5 Mt in 2005-06 and 4.4 Mt in 2006-07). Compared to the 11.9 Mt outfall of Australian cereals exports over the past two marketing years due to droughts, the outfall of net EU cereals exports of 19.5 Mt, is almost twice as much.  Furthermore, the EU is still the first net importer of oilseed products, with 17 Mt of oilseeds, 27 Mt of oil cake and 8.2 Mt of vegetable oils in 2006-07, far ahead China.

 

In addition to these huge trade deficits, both U.S. and EU ending stocks of cereals declined by 41.2Mt from 2005-06 to 2007-08, which represents 93.6% of the reduction of global cereals ending stocks in this period[7]. The inverse correlation between world prices and stocks for agricultural commodities underscores the U.S. and EU overwhelming responsibility in the surge of global cereals prices. This situation raises the question of what the root causes for lower global ending stocks of cereals are.  The answer lies in the current agrofuels policies of the U.S. and the EU.

 

The US and EU agrofuels policies

As a result of the U.S. renewable fuels standard, the use of U.S. corn for ethanol has jumped from 12% in 2004 to 23% in 2007. It is expected to be at 32% in 2008 (Collins, 2008). The 79 Mt of corn allocated to ethanol production in 2007-08 are 24% more than total US corn exports for that period. The 79 Mt figure represents 82.5% of world corn exports. At the same time, the U.S. stocks-to-use[8] ratio of U.S. corn has dropped from a 24% average (1980 to 2004) to 11.1% in 2007-08. It is expected to fall to 5.4% in 2008-09. This means that available U.S. stocks only guarantee 20 days of supply. This low level of stocks puts the world at a high risk of a further corn price explosion and other grain and food price rises, if supplies are lower than expected due to climate variations. According to Collins (2008), the enormous existing and future diversions from domestic and exported food and feed stocks will only drive "corn prices and the prices of related major crops to unexpectedly ever-higher levels" given their substitution effects. The surge in corn prices in 2006-07 has fostered a large increase in corn-growing areas and a record harvest in 2007.  On the other hand, areas planted with wheat and soybeans declined. Wheat production dropped by 8 Mt and soybeans by 16 Mt; their prices increased even more than that of corn. As a consequence the corn-growing area for the 2008 harvest declined by 8%, while wheat and soybean areas increased by 6% and 18% respectively.

 

All international institutions have attributed the main responsibility for the explosion of world food prices to the U.S. use of corn for ethanol. U.S. corn ethanol explains one third of the rise in the world corn price according to the FAO, and 70% according to the IMF. The World Bank estimates that the U.S. policy is responsible for 65% of the surge in agricultural prices, and for Keith Collins, the former USDA Chief economist, it explains 60% of the price rise. The World Bank (2008) states that: "Prices for those crops used as bio-fuels have risen more rapidly than other food prices in the past two years, with grain prices going up by 144%, oilseeds by 157% and other food prices only up by 11%." The U.S., as a result of its corn ethanol production, is clearly responsible for the explosion of world agricultural prices and USDA itself recognizes its large responsibility (Trostle, 2008). The second largest world corn exporter, Brazil, produces ethanol from sugarcane and hence has not influenced world market prices for corn.  In addition to the U.S. corn ethanol program, the U.S. biodiesel program also contributes to soaring prices. Collins (2008) estimates that "It is reasonable to assume that 60 percent of the increase in soybean and soybean product prices between 2006 and the expected levels for 2008 are also due to biofuels. Biodiesel production has accounted for 52 percent of the increase in soybean oil use between 2005/06 and 2007/08." 

 

The EU-27 agrofuels mandate (5.75% of biofuels in the fuels for transportation by 2010 and 10% in 2020) (European Commission, 2007) also contributed significantly to the explosion of grains prices. In 2006, 80% of the EU’s agrofuels were biodiesel (4.9 Mt versus 1.2 Mt ethanol), which represents 77% of world biodiesel production. 64% of the rapeseed oil used in the EU-25[9] were processed into biodiesel even as the EU trade deficit in vegetable oils grew. To date the EU on average imports 45% of its needs in vegetable oils, it is the largest importer of oilseeds products. The growing demand for oilseeds resulting from the EU agrofuel policy has contributed to the growth of world prices of that commodity.

 

The main EU agrofuels subsidies have reached about €4.4 billion in 2006, of which €1.4 billion to farmers, mainly in direct payments, and €3 billion to processors in excise tax exemption. However the EU mandate for 2020 would raise the subsidies to around €13.7 billion, of which €4.2 billion in direct payments to farmers and €9.5 billion in excise tax exemption to agrofuels processors.  The EU Commission estimates that the mandate for 2020 would need 34.6 Mt of crude oil energy equivalent (Mtoe) of biofuels (EurObserv’ER, 2008), of which 8.7 Mtoe expected from second generation biofuels and 6.4 Mtoe from imports, the EU production mobilizing 17.5 million hectares or 15% of its arable land for the rest, implying 59 Mt of cereals – 19% of EU total use –, 28.1 Mt of oilseeds and 2.3 Mt of sugar.

 

Whatever the financial weight of these subsidies for EU taxpayers, the most worrisome are the highly detrimental impacts of the biofuel mandate on world agricultural prices and on the surge in feedstocks and biofuels imports from DCs, with impacts on their environment and poor consumers. Indeed the Joint Research Center (JRC) of the EU Commission itself and the International Energy Agency estimate that second generation will not take-off before 2030. Furthermore as, on the 28.1 Mt of EU oilseeds, 18.1 Mt correspond to the rapeseed oil used for food "The overall % of biofuel imported… would rise to 56-64% overall, and 80% of biodiesel" (de Santi et al., 2008). The consequence is that "10% 1st generation ethanol in EU gasoline would use 2.5% of world 2020 cereals… That would cause a world cereals price change of at least +4%, whilst 10% 1st generation biodiesel in EU diesel would use 19% of world 2020 vegetable oils, which would cause a world price change of at least +24%". Besides, on the greenhouse gas (GHG) issue the JRC concludes that "The uncertainties of the emissions due to indirect effects, much of which would occur outside the EU, mean that it is impossible to say with certainty that the net GHG effects of the biofuels programme would be positive". And its overall conclusion is that "Even for the most favourable possible combination of assumptions, the benefits fail to exceed the costs".

 

The U.S. and EU are jointly responsible for devising unfair agricultural trade rules

The Agreement on Agriculture (AoA) of the WTO, bilateral and bi-regional Free Trade Agreements (such as the North American Free Trade Agreement, NAFTA) and the EU’s Economic Partnership Agreements (EPAs) with African, Caribbean and Pacific countries (ACP) have progressively deregulated national and international agricultural markets, based on the argument that the 'free play of market forces' will optimize prices for all actors, and in particular for consumers. The reduction of the DCs' import protections (tariffs, import quotas) together with the massive dumping of U.S. and EU agricultural exports have had ruinous impacts on their agri-food industries and have displaced million of farmers. The singularity of agricultural markets – characterized by a stable demand facing supplies fluctuating with climatic vagaries, and thus by a high volatility in agricultural and consumers prices – explains why all countries since the Pharaohs have run agricultural policies to regulate supplies at the import level and through stocks. It was what the initial CAP had understood, except that it did not manage exports, given its massive dumping, which has been the highest, to cap it all, on the two products with production quotas: dairy and sugar! 

 

The unfair definition of dumping and allowed subsidies by the WTO – whereby there is no dumping as long as agricultural products are exported at domestic prices, even if they are below average production costs[10] - explains the CAP reforms of 1992, 1999 and 2003: to maintain the EU competitiveness of its agribusiness firms by lowering by steps the domestic prices of agricultural products – raw materials of their final foods – down to their world level[11]. Bringing domestic prices closer to world prices has allowed the EU to export without or with low export subsidies but with massive allowed domestic subsidies. At the same time, the lower domestic prices compensated by domestic subsidies have limited imports as agri-food firms could buy agricultural products at about the world prices on the domestic market.

 

If the EU has reduced by 90% its export subsidies on cereals from 1992 to 2002, taking into account domestic subsidies shows that the subsidy per exported ton has increased by 20%. From 1995 to 2000 the share of domestic subsidies in total subsidies to the EU exports has reached ¾ for poultry, 62% for pig meat, 38% for dairy and 52% for bovine meat (Berthelot, 2006a, b and c). Average agricultural exports have risen from €51.1 billion in 1995-00 to €62.8 billion in 2001-06. While average export subsidies have shrunk from respectively €5.9 billion to €3.2 billion (€336 million expected in 2009), total subsidies to agricultural exports have risen from €13.5 billion to $13.9 billion (Berthelot, 2008d). We are far from the EU claim it has almost eliminated its dumping!

 

Similar reforms have been undertaken with the U.S. Farm Bills since 1996: domestic prices of 'grains' were lowered to eliminate foreign competitors on the world market. U.S. farmers have been compensated for low domestic prices by payments such as marketing loans, countercyclical payments and fixed direct payments to cover the gap between the market price and their average production cost.

 

In spite of these facts, all international institutions are pressing to finalize the WTO Doha Round and to further liberalize agricultural trade, pretending that this will solve the current crisis of exploding food prices. Pressure on developing countries for further cuts in their import protections for agricultural and non agricultural products by the U.S. and EU continues.

Their transnational agri-food corporations have been the only winners in agriculture trade liberalisation; their profits have surged, particularly during the recent explosion of agricultural prices.

 

Brazil's global crusade to promote agrofuels and finalize the Doha Round
Beyond the negative social and ecological impacts of biofuels in Brazil itself, President Lula's global crusade to promote them can be explained by their considerable knock-on effect on Brazil's economy: huge increase of agribusiness profits and of food and ethanol exports, with an amazing agricultural trade surplus of $49.7 billion in 2007 ($58.4 billion of exports and $8.7 billion of imports) (Agencia Brazil, 2008) against $38.4 billion in 2005 and $37 billion in 2006 (Instituto de Economia Agricola, 2008). Despite Lula's efforts to demonstrate that biofuels expansion has nothing to do with the explosion of world agricultural prices, Brazil is the first beneficiary of that expansion, much ahead the US which claims to have registered an agricultural trade surplus of $11.9 billion in 2007,  surplus expected to climb at $24 billion in 2008. 
 
However, in so doing, Brazil is betraying DCs, selling its leadership among them for a lentils meal since, in this context of soaring agricultural prices so profitable to its exports, Brazil wants to finalize the Doha Round at any cost, since it would open new markets, particularly in other DCs to which almost half its agricultural exports are already directed since 2004. In full contradiction with the bulk of DCs' objective prioritizing the protection of domestic markets.   

 

Financial and commercial speculation

International institutions, Western governments and experts play down the role of financial speculation in the explosion of agricultural prices as well as of oil prices, underlining that speculators could not bid up prices much beyond the fundamentals of physical supply and demand. For Collins (2008), "Investors and traders are not creating the environment that is increasing farm prices; they are reacting to the opportunity presented by tight markets to invest funds to earn a return as prices move higher". However, the U.S. and EU agrofuel policies constitute a powerful incentive for hedge funds and index funds to amplify the price hikes. How can the surge in a single day (27 March 2008) of the rice price by 31%, or of the HRW wheat price by 29% (25 February 2008) be explained otherwise? If financial speculation did not alter the normal working of commodities futures why is it that, according to The New-York Times (2008), for Fred Grieder, an Illinois farmer on 600 hectares,

"Futures… are less reliable. They work as a hedge only if they fall due at a price that roughly matches prices in the cash market, where the grain is actually sold. Increasingly… grain futures are expiring at prices well above the cash-market price… Farmers or elevator owners wind up owing more on their futures hedge than the crops are worth in the cash market. Such anomalies create uncertainty about which price accurately reflects supply and demand — a critical issue, since the C.B.O.T. (Chicago Board Of Trade) futures price is the benchmark for grain prices around the world".  Furthermore "Today’s crop prices are not just much higher, they also are much more volatile… Traders in March expected wheat prices to swing up or down by more than 72 percent in the coming year, three times the average volatility for that monthThose wild swings in expected prices are damaging the mechanisms — like futures contracts and options — that in the past have cushioned the jolts of farming".

 

In addition to speculation on futures markets, there is also hoarding by various market players, including farmers and exporters, which is amplified by the appreciation of national currencies against the dollar, in which most agricultural products are traded (including rice between Asian countries). For example, the dollar dropped from 40.77 Thai baths in January 2006 to 31 baths in mid-March 2008; exporters who had sold for future delivery complained that rice growers and mills were hoarding stocks in the expectation of new price surges, which meant that the exporters often had to buy the rice at a higher price than their selling price (Hill, 2008). Another perverse effect of the explosion of agricultural prices is the correlative surge in farm land prices. In the United Kingdom "the value of farmland rose by 28 per cent during the second half of 2007… [and] by more than 10 per cent in the first quarter of 2008". In the US the average price of arable land rose by 13% in 2007 and is likely to rise again by 15% in 2008.

 

Conclusion: rebuilding agricultural and trade policies on food sovereignty to regulate agricultural and food prices

The root causes of the current food price explosion and of the food crisis come from the liberalization of agricultural policies of the U.S. and the EU, which have also promoted the deregulation of agricultural trade as well as the structural adjustment programs implemented in developing countries through their armed arm of the World Bank and IMF. As a consequence most DCs have been deprived of policy space to stimulate agricultural production, protect their agriculture markets from dumping or stabilize prices for producers and consumers alike. Indeed the agricultural prices bubble has already begun to burst: grains prices in August-September 2008 have already lost one third of the levels reached in March-May of this year. The looming economic crisis linked to the financial markets disruption will most likely lead to a continuation of the decline of agricultural commodity prices.  Unfortunately, now that many DCs have lowered or even eliminated their tariffs on food imports to face the food riots, it would be politically difficult for them to raise them again, which will not induce farmers to increase their production.    

 

In order to overcome the current crisis, agriculture production in net food importing countries must be supported. This requires to rebuild agricultural and trade policies on the food sovereignty principle. Because food is a basic need for survival, each country or region should have the right to define its trade policy according to its domestic food security interests, as long as it does not harm other countries through its agriculture exports. Import protection is the only means for DCs to rebuild their domestic agricultural markets through market oriented agricultural policies and it is the least protectionist type of agricultural support and the most affordable one for poor countries, because they do not have the financial means to support their farmers with direct payments. In a globally deregulated agricultural market, only rich countries can use subsidies to protect their domestic agriculture from imports without measures such as tariffs or quotas at the import level.

 

Such policies should allow producers to earn most of their incomes based on prices that allow a fair and adequate return to producers instead of subjecting them to the highly volatile, dumping-influenced, world market prices that also fluctuate with exchange rates.  To avoid large fluctuations in the prices of basic staples and to promote prices that are fair and equitable for producers and consumers, exporting countries should establish mechanisms of supply management to avoid surpluses of non-competitive products, i.e. of products requiring an import protection, or export subsidies, or domestic subsidies on exported products. Exporting countries must commit to coordinate their agricultural export policies to minimize fluctuations in international prices. Countries should also rebuild minimum food security stocks in order to prevent new explosions of food prices. Speculation on agricultural commodities futures as it occurred recently must be banned. India has implemented such bans successfully for rice and wheat since 2007. As a consequence Indian wheat price has risen only by 5.9% between April 2007 and February 2008 (Sen, 2008), whilst the world price of Hard Red Winter wheat surged by 112.7% and that of Soft Red Winter wheat by 131.1%.   

 

Given the high volatility of world agricultural prices, and the resulting ineffectiveness of ad valorem tariffs (fixed percentage of the CIF price), countries should be able to use variable import levies to stabilize domestic prices of agricultural commodities, or price band systems that would mitigate the transmission of fluctuations in world prices to domestic prices. Entrance prices or price bands should be calculated to ensure fair and equitable prices for the large majority of the small family farms of each country. Developed countries and the more advanced DCs should enhance market access opportunities for less developed countries. This could be done through special agreements that do not demand reciprocal preferences, or through duty-free quota access to products originating in, or of export interest to DCs, when it is clear that increased exports would actually benefit small farmers and not be detrimental to poor consumers.

 

References

Abbott Philip C., Hurt Christopher, Tyner Wallace E. (2008): What's driving food prices? Farm Foundation Issue Report, July.

 

Agencia Brazil (2008): http://www.agenciabrasil.gov.br/noticias/2007/12/13/materia.2007-12-13.3390134025/view

 

Berthelot, Jacques (2008a): Rebuilding the Agreement on Agriculture on food sovereignty to implement the right to food, 17 June: http://solidarite.asso.fr/home/textes2008eng.htm

 

Berthelot, Jacques (2008b): Analysis of the Chair Falconer's 8 papers on agricultural market access, Solidarité, 1st February, http://solidarite.asso.fr/home/textes2008eng.htm.

 

Berthelot, Jacques (2008c): Sorting the truth out from the lies in the explosion of world agricultural prices, Solidarité, May 19 (http://solidarite.asso.fr/home/Agriculture06.php).

 

Berthelot, Jacques (2008d): Repeat a lie thousand times and it becomes the truth, 16 August http://solidarite.asso.fr/home/textes2008eng.htm.

 

Berthelot, Jacques (2006a): Feed subsidies to EU and US exported poultry and pig meats, 31 January.

 

Berthelot, Jacques (2006b): The comprehensive dumping of the European Union's dairy produce from 1996 to 2002, 31 January.

 

Berthelot, Jacques (2006c): Le dumping total de la viande bovine de l'UE de 1996 à 2002, 19 April 2006, http://solidarite.asso.fr/home/textes2006.htm

 

 

Chidambaram, P. (2008): Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries, April 13.

 

Collins, Keith (2008): The Role of Biofuels and Other Factors in Increasing Farm and Food Prices, June 19.

 

EurObserv’ER (2008): Biofuels Barometer, n° 185, June

http://www.biofuelstp.eu/downloads/baro185.pdf

 

European Commission (2007): Impact assessment of the Renewable Energy Roadmap, 30 April 2007, AGRI G-2/WM D(2007).

 

FAO (2008), International commodity prices, http://www.fao.org/es/esc/prices/PricesServlet.jsp?lang=en

 

Helbling Thomas, Mercer-Blackman Valerie, Cheng Kevin (2008): Commodity Boom, Riding a Wave, Finance and Development, IMF, Washington D.C. 

 

Hill, Bob (2008): Troubling trade, Rice To-Day, April-June 2008.

 

Instituto de Economia Agricola, Superávit comercial agrícola deve ter variação negativa em 2006, http://www.iea.sp.gov.br/out/verTexto.php?codTexto=7019

 

Langellier, Jean-Pierre (2008): La croisade du Brésil pour l'éthanol, Le Monde, 11-12 mai.

 

Ray Daryll, de la Torre Ugarte Daniel, Tiller Kelly (2003), Rethinking US Agricultural Policy: Changing Course to Secure Farmer Livelihoods Worldwide, Agricultural Policy Analysis Center, The University of Tennessee.

 

De Santi, Givanni et al. (2008): Biofuels in the European Context: Facts and Uncertainties, Joint Research Center, European Commission, March  http://www.biofuelstp.eu/downloads/jrc_biofuels_report_march_2008.pdf

 

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[1] This paper is an extension of a recent paper which will be published in an Austrian booklet Kurswechsel edited by BEIGEWUM.

[2] Particularly than in French West Africa (WAEMU): the EU mean applied tariff is of 66% on frozen meat (20% in WAEMU), 87% on dairy (5%), 50% on cereals (5% but 10% on rice), 59% on sugar (20%).

[3] Sugar reached a very high price in February 2006 never exceeded since 1981.

[4] Free on board (freight on board) price means a price which includes goods plus the services of loading those goods onto some vehicle or vessel at an export location.

[5] All price surges in the article have been computed from the base year 2006, unless specified otherwise.

[6] Marketing years differ from one country to another and also from one product to the other. In the EU its goes go from July to June for cereals. 

[7] 2005-06 to 2006-07: US ending stocks fall by 21.8 Mt, EU ending stocks by 7.5 Mt. 2006-07 to 2007-08: EU ending stocks minus 15.1 Mt, US ending stocks plus 3.2 Mt.

[8] Stocks-to-use ratio: the level of ending stock for a given commodity as a percentage of the marketing year total demand or use.

[9] Some of the data refer to years in which the EU had 25 members (before 2007).

[10] GATT article VI.1.a and Agreement on Agriculture article 9.1.b.

[11] See the EU trade Commissioner Pascal Lamy's speech of 19 June 2003 to the EU Confederation of the Food and Drink Industries: http://trade.ec.europa.eu/doclib/docs/2004/july/tradoc_113875.pdf

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