Bridges Weekly Trade News DigestVolume 15Number 2 • 26th January 2011

Food Price Volatility Dominates Farm Ministers’ Summit


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High and volatile food prices dominated discussions at a farm ministers’ summit on trade and food security in Berlin this weekend. However, while participants reached broad agreement on the problem, they disagreed over its causes and preferred solutions, with the role played by financial market speculation proving particularly controversial.

The impact of farm commodity prices on food security has again returned to prominence with the UN’s recent announcement that prices for some products have reached historic highs, and the decision by French president Nicholas Sarkozy to place the issue at the top of this year’s agenda for talks amongst the Group of 20 leading economies. Unrest in North Africa, partly triggered by anger over rising food prices, has also propelled the issue back into policymakers’ priorities and media headlines.

The 22 January gathering of some four dozen farm ministers sought to examine more broadly how trade could contribute to food security. In a final communiqué, ministers called on the G-20 to “endeavour to strengthen the ability of agricultural markets to function properly, to improve market transparency and market information and to fight the abuse and manipulation of prices.”

Nine G-20 members participated at the event - Brazil, Canada, France, Germany, Indonesia, Japan, Russia, Saudi Arabia and the UK. However, trading powers such as China, India and the US were absent, as were agricultural powerhouses Argentina and Australia.

Speculation source of differences

At the meeting, French Agriculture Minister Bruno Le Maire called for stronger regulation of commodity markets. “The reality is that today in these financial-agricultural markets, more than fifteen times the global cereal production is trading,” he said. “That is asking for speculation.”

Le Maire’s comments were echoed by EU Agriculture Commissioner Dacian Cioloş, who argued that disclosing more information on farm commodity trading would help to “eliminate those who conduct these transactions only to speculate and make short-term profits”.

However, WTO Director-General Pascal Lamy cautioned that there was not yet a consensus on the role of speculation in prompting price spikes. “Some say that part of the solution to price volatility may lie in market instruments; financial instruments, such as futures,” he observed. Instead he called on participants to consider the role of export restrictions in exacerbating food shortages, noting that some analysts consider these to be “the principle cause of the food price rise in 2008, for some of the most vital staples”.

Lamy warned that decision-makers must “have an accurate diagnosis of the problem before designing a response.” Bad weather, exacerbated by policy measures such as export bans, was at the root of the recent price spikes, he said.

Controls on rice exports in 2008, and restrictions last year on wheat exports from Russia and the Ukraine, had “hurt net-food-importing countries; and could actually starve them”, Lamy added. He also called for countries to “at least explore” exempting humanitarian food aid from export bans.

Lamy: Doha deal would help

The ministers’ statement also included an “appeal” to countries’ chief negotiators to bring the WTO Doha Round to “a timely, ambitious and balanced conclusion”, and asked them to bear in mind its contribution to global food security. While the communiqué failed to include any specific deadline, governments are currently attempting to conclude a long-overdue accord in the WTO talks by the end of this year.

Ministers also said they stood by the aim of “creating fair and balanced rules for the agricultural sector within the Doha Development Round.”

Lamy told the Berlin meeting that a Doha accord  “would greatly reduce rich world subsidies that have stymied the developing world’s production capacity and which have, in certain commodities, cornered it completely out of the market”. As well as completely eliminating export subsidies, the talks would bring down tariffs, albeit with certain ‘flexibilities’, “thereby increasing consumer access to food.”

“Globally, what we would be likely to see as a result of Doha is more food being produced where this can be done more efficiently,” he added.

Risk management

In their statement, the ministers said they were considering “reinforcing the importance of risk-protection measures” in order to tackle price volatility — in a possible reference to instruments such as insurance schemes for farmers, or social safety-nets. The European Commission recently announced it is considering a new ‘risk management toolkit’ for the EU’s post-2013 farm policy, with options “ranging from a new WTO green box compatible income stabilisation tool, to strengthened support to insurance instruments and mutual funds.”

However, the Berlin communiqué also emphasises that free, transparent price formation is a “key prerequisite” for functioning markets. Arguably, while many developed countries have historically employed price control measures as a means to subsidise their producers, these can also prevent farmers from responding to signals from consumers, and distort trade and production.

Ministers avoid comment on biofuels

“If current policies continue, by 2019 about 13% of the global production of coarse grains will be used for ethanol, 16% of vegetable oil, and 35% of sugarcane”, noted Lamy. He warned that “in pumping biofuels into our tanks, we are in fact pumping corn, sugarcane, and other foods into our transportation systems”.

The ministerial statement made no mention of whether trade policies on biofuels affect food security or price volatility. The issue has been a major source of controversy, with some countries arguing that trade distortions resulting from tariffs, subsidies and non-tariff barriers serve to create or exacerbate production inefficiencies, and others claiming that the fuels represent a viable and sustainable alternative to fossil fuels.

Solutions

In separate proposals, French president Nicolas Sarkozy has called for a database to gather information on world agricultural production, consumption and stocks; recommended that an international organisation like the UN Food and Agriculture Organisation collect and provide transparent data on agricultural stocks; and suggested collaborating internationally to avoid unilateral imposition of measures such as agricultural export bans. He has also proposed finding ways for poor countries to protect themselves from price volatility or other adverse shocks, called for food aid to be exempt from export taxes, and is likely to use the G-20 presidency to try and ensure that market operators give a guarantee for trades of agricultural commodities, as part of a push for global commodity market regulation.

At the Berlin meeting, Lamy noted that “we need greater investment in agriculture, a sector in which we have under-invested for a while”.  He added that countries also needed to reflect further on their biofuel policies, consider social safety nets for consumers and farmers, more robust food aid systems and provide strong support for the World Food Program.

Ukraine’s farm minister, Mykola Prysyazhnyuk, suggested that “the World Bank should launch an initiative to create a world grain bank,” Bloomberg reported.

Food prices are expected to remain on the agenda at G-20 meetings later this year. In addition to two summits involving heads of state or government — one in May at the French seaside resort of Deauville, and one in November at Cannes — G-20 finance ministers are also likely to gather on the margins of the April and September meetings of the World Bank and IMF. A meeting of agriculture ministers is planned for the end of June.

“Agriculture Ministers Call for G-20 Action to End Food Price Manipulation” by Rudy Ruitenberg, Bloomberg, Jan 22, 2011; “Speculation, Price Swings Threaten Security of Food Supply, Ministers Says” by Rudy Ruitenberg, Bloomberg, Jan 24, 2011; “France’s Sarkozy Calls for G-20 to Regulate Commodities and Price Swings”, by Rudy Ruitenberg, Bloomberg, Jan 24, 2011; “Food price rises ‘may cause unrest’: ministers”, AFP, January 23 2011; “World Should Create Grain Reserve, Ukraine Farm Minister Says”, 22 January 2011, Bloomberg. Reuters, “FACTBOX-French proposals on commodity markets regulation”, 24 January 2011.

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