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[ Food security ]

“Signal to intervene”

The international community must adjust to extraordinarily high and unstable food prices. Joachim von Braun, director general of the International Food Policy Research Institute, outlined long-term trends and discussed what policymakers should do in an interview with Hans Dembowski.

Food prices are no longer making headlines. Harvests have evidently turned out better than expected. Was the excitement in the first half of the year overblown?
No, it was not. Demonstrations and protests in more than 50 countries were a reaction to the price crisis in the first half of 2008. Hunger has generally increased, with irreversible consequences for the health of millions of people. It would be a mistake to simply to do things as they were done before, just because prices have lately fallen a bit. Foodstuffs are subject to short-notice price fluctuations. That does not always indicate a new trend. The slightly lower prices at present are due to weaker economic growth, which results in lower demand. The world has not grown out of the crisis, rather it has managed to shrink out of it to some extent. However, the price trend is showing upward in the long term because of
– ever-increasing population figures in many developing countries,
– changing consumer habits of large population sections in some developing countries, China and India in particular,
– the use of food crops to generate bio-fuels,
– water scarcity,
– high energy costs to obtain, produce and market agricultural products, and
– the loss of land cultivated for agricultural purposes as a result of industrialisation and urbanisation.

On top of that, agricultural productivity has been stagnating for years.
That is correct. Too little has been invested in agricultural research. Even if major counter-measures were now taken to halt this trend, it would take several years for the results of research to be reflected in increased productivity. For all these reasons, the trend is towards higher prices than in the past.

Might it become impossible to produce enough food for all of humanity?
No, I don’t think so. Sufficient food can be produced for the growing world population, even in the future, if industrialised and developing countries make a considerable investment in agriculture. Agricultural research is necessary to increase yields and productivity. Poor farmers must be given better access to high-yielding seeds, high-quality fertilisers and other resources. They must also be provided with information about good agricultural practices. Access to markets and infrastructure must be improved in developing countries, so that farmers can generate profits, and foodstuffs are made available where they are needed.

Did the leading industrialised countries respond appropriately to the crisis?
They should have responded earlier. At least, the leaders at the G8 summit in Japan did recognise that considerable resources are needed to overcome the price crisis. Their programme includes the use of emergency aid to satisfy urgent nutritional requirements of the weakest and most vulnerable groups, as well as measures to rapidly increase production. Moreover, it includes arrangements to increase support to smallholder farmers in low-income countries. Combined, all this should rapidly increase production and productivity, through the use of improved seeds and fertilisers, amongst other things. However, it remains to be seen where and when the committed $ 10 billion will actually be used. The industrialised nations have also failed to cut their subsidies for bio-fuels. The use of raw materials for bio-fuels accounted for 30 % of the increase in grain prices between 2000 and 2007. The industrialised nations should have seen the crisis as a signal to freeze bio-fuel production, until prices sink to a reasonable level again.

How do you assess the action of major agricultural producers among developing and newly-industrialising countries?
China and India, the major producers, have increased their investments in agriculture by 20 to 30 % this year. This is very positive. However, the fact that many developing countries imposed export restrictions and high tariffs for agricultural products was negative. Export restrictions may indeed reduce the risk of shortages at the domestic level in the short-term but, at an international level, they lead to a failure in trade policy. The international market becomes restricted at whim, and thus becomes considerably more volatile. That is particularly painful for the countries that depend on imports. Furthermore, trade partners lose trust in one another, which is detrimental to smoothly running international trade. Only a few developing reacted by sufficiently boosting social security payments to weak groups, who are in particular need. Such programmes must be extended so as to protect children, women and the poorest of the poor.

Your institute, the IFPRI, has recommended that the main grain producers establish reserves, which countries that depend on imports can resort to in case of emergency. Does the virtual model of the food bank, agreed on by the G7 at the summit in Japan, go far enough?
IFPRI has proposed a global institutional arrangement, which consists of two main pillars:
– a minimum grain reserve, which is physically stored and available for immediate humanitarian assistance in the event of a catastrophe, and
– a virtual reserve in the form of a financial fund with an intervention mechanism, to calm down markets driven by speculative behaviour.
The actual reserve would be made up of about 300,000 tonnes of grain, supplied by the main grain-producing countries. It would be managed by the World Food Programme (WFP), and used exclusively for responding to emergencies and humanitarian relief. The virtual reserve would be used to stabilise prices. When food inflation arises, the financial fund would take counter-measures with cheap futures contracts and thus calm price trends. This would prevent speculative attacks on prices. The G8 has agreed to test the idea of virtual reserves, and international agencies are in the process of doing so.

What you propose contradicts the basic economic principle of supply and demand.
Well, there can sometimes be an ethical obligation to temporarily guide the market’s invisible hand when dealing with food. Unlike with the consumption of other products, people cannot delay the consumption of food. Intervention is therefore legitimate when supply and demand dramatically go off course.

How would you ensure that intervention does not lead to even greater distortions?
Intervention in the futures market would be monitored by a high-level technical commission. The commission could be appointed by the participating countries on a permanent basis, and it would enjoy the support of a global intelligence unit. This unit would trigger an alarm as soon as prices significantly deviate from a dynamic price spectrum which is estimated according to market fundamentals. This would be the signal that intervention is needed, using appropriate short sells to gently move prices in a sensible economic direction, which is not much distorted by price speculation.

That sounds very demanding.
The virtual reserve and intervention mechanism would be based on a coordinated commitment by the participating countries. All involved would commit to supplying funds on a short-term basis if needed for intervention in grain markets. Further analysis would be required to determine the size of this fund. Futures markets for commodities have a high level of leverage, so a fund of about $ 20 billion could already send out very strong signals in the grain market. It is also important to note that these funds are virtual in the sense of merely being pledged, but unlikely to be disbursed. Therefore, they are not expenditures governments must include in their budgets.

Perhaps high prices are blessing, in the sense of creating income opportunities in a sector with high employment opportunities. After all, cheap surplus products from rich nations have flooded the international market for a long time, making life impossible for smallholder farmers in poor countries.
At first sight, one might indeed assume that the world’s 400 million or so smallholder farmers are among the winners from increasing food prices. In actual fact, however, most smallholders in developing countries buy more food in net terms than they sell, so they are affected by the rising food prices. Certainly, many farmers do sell a lot shortly after the harvest, but for the rest of the year they depend on additional purchases. In theory, high food prices should increase the smallholder farmers’ profits, but this is not the case for most of them. They cannot achieve economies of scale in production, and often they do not have access to lucrative markets. Even for smallholder farmers who are able to boost production, higher profits are far from certain, as increases in revenue may be counterbalanced by rising costs. Higher energy prices mean that farmers have to pay more for fertilisers, livestock feed, transport and so on.

How do you assess the role of world trade?
Trade must become more open if the crisis is to be overcome. But in recent times, the opposite has been the case. The failure of the WTO talks in Geneva in the summer was most discouraging. Regional agreements only offer second-best resolutions, after all. Furthermore, regional trade deals tend to shut out the poorest countries. The industrialised nations should continue to reduce their remaining trade-distorting subsidies. Industrialised and developing countries should cut back their tariffs and safeguards, so that farmers are able to sell their products internationally. Freer trade in foodstuffs would reduce price fluctuations and provide production incentives to farmers.

Can you already predict what the current financial crisis in the US will imply for food on the global market?
If global economic performance falls by about one percent as a result of the financial crisis, this would have consequences for incomes and the demand for animal feed and energy resources. This could mean relief in terms of food prices. However, the financial crisis makes it increasingly difficult to mobilise capital for investments needed, in agricultural research or rural infrastructure. Public funding must increase if private investments fall. Unfortunately, however, public funding is also becoming scarce because of the expensive bail-outs. This is fatal. Those who make economic policy must not ignore the poor when managing this crisis.

»» http://www.ifpri.org

D+C, 2008/11, Focus, Page 413-415