There are several reasons for the food price crisis. Certainly, poor harvests as a result of extreme weather conditions in such places as Australia (where there was an unprecedented drought) provided the initial trigger.
And there is no doubt that a rise in consumption, as a result of growing populations and incomes in many emerging economies, has been a driver of higher food prices. It is equally clear that a persistent drop in agricultural investment has depleted already low food stockpiles.
But the extremes in food prices are increasingly the result of speculation as investors switch from bonds and equities in the credit crunch into relatively small commodity markets.
Calm should eventually return to food markets for several reasons. First, I expect the world economy to head into recession over the next year. That will curb the pace of demand growth for food.
Second, the operation of market forces should begin to boost supplies. Russia and Ukraine – with vast wheat-growing potential – are clearly likely to produce more; so will Thailand, Argentina and a few other key food exporters. Furthermore, the drought affecting Australia will not last forever.
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Hungry markets |
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CRB foodstuff spot price index |
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Source: Datastream |
Finally, biofuel production, which has allegedly contributed to the rise in food prices, is also likely to be a temporary problem. Germany, one of the biggest customers for biofuels, is working on a synthetic product that, unlike biofuels distilled from corn or sugar cane, will be made from plant waste or straw and will therefore not put pressure on other crops.
The problem is not so much that there is not enough food to go around but rather that food surpluses are produced in the wrong places, stored inadequately, protected by nationalist considerations and then offered at prices that the world’s poorest cannot afford.
The long-term solution, therefore, lies in liberalizing food markets. There needs to be fresh investment in a new farming revolution, encouraging farmers to produce more and, by offering them micro-credits, to produce food more efficiently. Export tariffs must be eliminated.
New investment
Governments need to bring in better legislation to limit the land seized – often illegally – for construction and to provide farmers with the necessary knowledge, fertilizers and machinery. New investment in hybrid crops and genetic engineering would raise yields and provide more nutritious food. But above all, there must be a free market in food, which should be treated like any other commodity.
But so far, governments are doing precisely the opposite. The EU has no intention of abolishing its Common Agricultural Policy. Indeed, the French – who invented this mad policy in the first place and are still one of its chief beneficiaries – are now claiming that CAP has proven its worth.
The EU has now agreed to suspend its "set aside" policy, under which farmers in Europe were paid to stop using some of their arable land. The result will be a glut in food products two years from now and the return of Europe’s food mountains, which will then be dumped on world markets, depressing the prices for everyone and harming producers in the Third World.
Meanwhile, the EU has also reaffirmed its total opposition to genetically modified food, despite the fact that there is absolutely no scientific evidence indicating that this might hurt health, but plenty of evidence that it increases yields.
Hoarding and cartels
Asia is no better. Thailand has tacitly encouraged its rice farmers to hoard their products, in anticipation of higher prices. The Thai government has also touted the idea of establishing a rice cartel, an Opec-style arrangement for the commodity. Mercifully, neither Vietnam nor any other member-states of the Asean organization in southeast Asia agreed to this proposal.
Unfortunately, there is absolutely no chance of getting a deal on the World Trade Organization Doha Round for food. Food is yet again considered a strategic commodity, outside the scope of market liberalization.
"If ever there is a time to cut distorting agricultural subsidies and open markets, it must be now," says Robert Zoellick, president of the World Bank. He is right but few governments are prepared to listen. The biggest tragedy is, therefore, not the political fallout from higher food prices but the missed opportunity to bring some market sanity to this issue.
David Roche is president of Independent Strategy Ltd, a London-based research firm. www.instrategy.com