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What Causes Food Price Spikes? The Neglected National Interest

June 5, 2012

Can the world’s farmers produce enough food for 8 billion people in 2025? The answer, according to LSE professor Tim Dyson, is yes. Assuming that average per-capita world consumption remains constant worldwide, Dyson projected the demand in 2025 on the basis of the population growth.  According to Dyson, world farmers will be able to produce 3 billion tons cereal for 8 billion people in 2025 given that world cereal yields are likely to increase at the same pace they did between 1951 and 1997 . So if there is the potential of producing enough food for everybody to go around, why the world keep experiencing periodic food spikes? The answer has to do with two words: national interests.

Running down stocks: in the 1990s EU emerged on the world stage as a cereal exporting block thus rivaling traditional exporting regions such as North America and Oceania. Thanks to its heavily protectionist Common Agricultural Policy, EU was able to offload on the world market a massive quantity of cereal surpluses at heavily subsidized prices. This provoked the world grain prices to drop  by the beginning of the 1990s, at roughly 60% of their value in the 1980s. The responses of these regions was to introduce policies which reduce cereal support costs and at the same time reduce the level of stocks which are expensive to maintain.  Stocks are however very important because if demand outstrips production (as a result of droughts or other extreme weather events) countries can tap into their inventories to stabilize prices. When today the world faces these events, exporting countries dispose of little back up stocks to make up for the fall in production: as result prices spike. The key element to keep in mind is that cutting back production and running down stocks was and is a deliberate policy decision to avoid cereal prices to drop: this was in their national interest. Low inventories and as a result food spikes do not just happen.

Barriers to Trade and Subsidies:  OECD countries (major net exporters on the grain market) impose barriers to trade and support domestic production. From this perspective the national interest is defined as the interests of the farmers and producers as subsidies impose a cost on other citizens. When national interest is so defined the removal of barriers to trade is out of question. These policies  have held back the growth of agriculture exports from developing countries (see here the  graphs from FAO)  : they limit the access to export markets and introduce highly subsidized products in their domestic markets. As a result there is and will be a geographical mismatch between increase in production and increase in demand: the regions with the most rapid increase in population and therefore in cereal demand (Sub-Saharan Africa, countries in South East Asia and Middle East) will not be able to produce a sufficient volume to match this demand. To do so they will have to increasingly rely on cereal imports from other regions in particular the grain exporting regions of North America, Oceania, EU and Russia.  Regional mismatch and trade deficits did not just happen. They happen because this status quo respond to the food security and national interest of grain exporting countries.

Isolate your market:  one of the key triggers of food prices spikes in 2008 and 2011 has been government action, in particular import restrictions imposed by big producers around the world. In the aftermath of droughts Russia decided to banned sales of grains. Ukraine, India, Egypt followed suit. Why these exporters banned or restricted grains exports? They aimed to keep local markets well supplied and cap local prices and they were successful in doing so.  Never mind that this tightened international supply thus driving up prices: feeding the world is not their responsibility. The other fact is that during the food price spikes in 2008 and 2011 the transmission of international food price to domestic price was highest in those regions which are more open to international food markets such as Latin America and Sub-Saharan Africa. In other words, grain exporting countries  cut off their link with the international market and this sent shock waves across the global food market with  net importers paying the price of these actions. However, the lesson learnt was not that governments should not tamper with the market. It was just the opposite: governments which step in are able to isolate themselves from the prices spikes.  Integrating domestic markets with international is therefore, and not surprisingly, not an appealing option for policy makers.

The decisions of running down stocks, maintaining barriers to trade and isolating the domestic market from the international ones respond to a fundamental principle: food policies and food security are matters of national security and national interest. Policy makers care about their citizens to get enough food (be that cereals or rice) or to get enough money (in regions such as West Europe or North America) and not about other countries citizens (see also here how the rice fiasco in 2007-2008 showed just that).

Yet this fact continues to be ignored and more trade liberalization is prescribed as the best solution to rising food prices. It is necessary to recognize that an ideal world where food can move free from surplus production areas to deficit ones and where policy makers do not tamper with food market is not likely to materialize anytime soon. Policy makers are accountable (when they are) to their citizens in the short term. For this reason, they prefer measures which offer any immediate results (imposing export restrictions) even if this implies undermining agricultural productivity in the long term (most likely through market integration). To recognize this fact, it is necessary to tilt the advocacy debate away from more trade liberalization towards investments on crop productivity improvements and crop yields increase.

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