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Interview

Long term risks to food security

by Claire Schaffnit-Chatterjee

Opinion

Egypt, the world's largest wheat importer, is buying more than half of its wheat supply from Russia

Egypt, the world's largest wheat importer, is buying more than half of its wheat supply from Russia

Only two years after the food crisis of 2008 caused severe hunger and riots in developing countries, crop prices are rising sharply once more. Are food markets getting out of balance? Claire Schaffnit-Chatterjee of Deutsche Bank Research explains why shortages could occur more frequently in the future – unless more sustainable ways of consumption and production are enforced. [ Interview with Claire Schaffnit-Chatterjee ]

After crop failures in Russia due to climate disasters, the government ­announced export bans. As a result, commodity prices are rising and we seem to be running risk of a new food crisis. Are food markets becoming ­unstable?
Food markets have always been unstable as they depend on weather. To analyse markets, we need to distinguish between short-term and long-term trends. Short-term crop shortages do not necessarily ­affect long-term food security. The current shortages in Russia are caused by fires and droughts. This is a temporary phenomenon which the world market can probably compensate due to a reasonable level of stocks in the short term – in spite of a poor harvest expected in Canada and the problematic situation in Bangladesh. Thanks to bumper harvests in the USA and potentially Australia, no extreme shortage is foreseen at the global scale. Nonetheless, rising food prices of course badly affect the world’s poorest.

What about the long-term outlook?
It is quite tense. Extreme weather phenomena, like what happened recently in Russia, are to be expected more frequently due to climate change. This will affect food supply, on top of water scarcity, land degradation and the use of crops for biofuels. At the same time, global demand continues to rise because the world’s population is growing and economic growth in the developing world leads to higher consumption. The demand-supply ratio is becoming more fragile, so markets are becoming more volatile. This is certainly reason for concern, policymakers should take note.

If the Russian problem is only short term and can be compensated, why are experts internationally so upset about the country’s ban on exports?
On the one hand, these bans are understandable, as a government’s attempt to prevent its people from wheat shortages. Nonetheless, export bans are counterproductive, especially in the long run. They generate stress in the global system when purchasing contracts are broken and impact prices by creating situations of scarcity. Those to suffer will be poor countries that cannot cushion off world-­market price volatility. Additionally, open markets in the long-term give incentives to increase supply globally when worldwide demand increases.

But won’t it take too long before the dynamics of demand and supply bring the world market back into balance?
Obviously, it is a challenge to produce more, especially in a context of increasing scarcity. Raising production requires innovations, investments and time.

You say we are not facing a severe problem in the short term, but rather in the future. But even nowadays ­people are suffering hunger – isn’t the situation tense already?
At the moment, the reason for hunger is not scarcity of food, rather a lack of access. This is the result of markets not ideally functioning. Trade liberalisation creates opportunities to compensate regional shortages, so it leads to the possibility of safer access to supplies for everyone. This topic should be a priority in trade negotiations, particularly in the WTO context. There is, however, another problem: most of the world’s small-scale farmers are excluded from the big retail chains and accordingly lack access to the global market. We would need open markets combined with marketing channels that involve all producers. Partnerships between global agribusiness players and small farmers are increasingly developing for the benefit of both. Small farmers need better access to markets and can benefit from technical and financial innovations. The retail ­giants, on the other hand, gain local knowledge and secure their supply.

So trade liberalisation is the key to fighting hunger?
Trade liberalisation is a very complex ­issue. An open trade system has clear benefits in comparison to a close or ­managed system. On the downside of managed trade, we have seen negative implications of export subsidies from ­Europe to developing countries if EU-sponsored “cheap” commodities manage to compete with local production in these countries. But fully open trade is not without risks: In the case of food shortages and rising prices, poorer countries are affected most whereas industrialised nations can easily afford higher prices. An open economy needs regulation to handle crises. Trade policies must include measures that can be taken when serious problems occur.

Does speculation contribute to food-price inflation?
In recent years, speculation on food has increased, mostly because investors wanted to diversify their portfolio. Debate on the consequences is lively. Simply said, speculating means taking a position with regard to future prices and has been done since the beginning of agricultural activity. When farmers plant their seeds, they do not know what prices their crop will fetch. An exchange-traded contract, like a future contract, for instance, can provide them with some security. Financially, commodity markets also have an important role in discovering the market price, and add to liquidity in the system. That said, excessive speculation has the potential to distort the normal functioning of a market. Such speculation can have dire consequences on farmers and consumers alike and is unacceptable.

How can excessive speculation be prevented?
Regulations may be established to gua­rantee more transparency and prevent excessive trading in food commodities. This would allow the proper functioning of ­financial tools whose useful role to farmers and other parties has been recognised. In the USA, markets already seem more transparent than in the European Union.

What can and should be done to prevent food shortages in the future?
Internationally, managed food reserves may help to stabilise the market, potentially a combination of physical reserves and virtual ones as suggested by some people. The World Bank is also planning to set up a food fund. Such funds could prevent prices from skyrocketing. But either kind of reserve is quite tricky to implement and would have to be lead by a trustworthy international organisation.

What measures would guarantee sufficient food supply in the long run?
To set up a sustainable global nutrition system, we need to find new ways of consumption and production. We sometimes tend to forget that we need both. On the production side, we mainly need enough investments for innovation – especially in developing countries – in order for yields to increase and more sustainable agricultural practices to be implemented at the same time. The latter is very important, ­because if you increase yield only by over-exploiting soils, you’ll be doing long-term harm. As for consumption, we should bear in mind that humanity is wasting a lot of food: on the way from the production to the household as well as in the household itself. It would make sense to stop such waste. Another option is to eat less meat. Furthermore, the use of bio fuels should be reconsidered – they have benefits, but they are occupying soils that could be used for food production.

Questions by Eva-Maria Verfürth.