Factors underlying the global food crisis - a

trade and development

perspective

Factors underlying the global food crisis - a

trade and development

perspective

Rajan DhanjeeOffice of the DirectorDivision on International Trade in Goods and Services, and CommoditiesUNCTAD

Rajan DhanjeeOffice of the DirectorDivision on International Trade in Goods and Services, and CommoditiesUNCTAD

Nature of crisisNature of crisis• Massive food price increases, especially staples –

shortages - food stocks depletion• Reduced access to food (particularly for poor),

linkage with poverty - urgent hunger needs in over 37 DCs (including 20 LDCs), estimated 100 mill. more people driven into poverty and hunger - food riots/social instability – adverse effects on inflation/import bills

• Crisis of food security and of development policy, threatens achievement of MDGs, economic growth, poverty reduction

• Opportunities: Price rises could enhance incentives for food production, benefit DC farmers/net food-exporting DCs provided they obtain fair share of benefits

• Massive food price increases, especially staples – shortages - food stocks depletion

• Reduced access to food (particularly for poor), linkage with poverty - urgent hunger needs in over 37 DCs (including 20 LDCs), estimated 100 mill. more people driven into poverty and hunger - food riots/social instability – adverse effects on inflation/import bills

• Crisis of food security and of development policy, threatens achievement of MDGs, economic growth, poverty reduction

• Opportunities: Price rises could enhance incentives for food production, benefit DC farmers/net food-exporting DCs provided they obtain fair share of benefits

Overview of evolution of crisis

Overview of evolution of crisis

• Cumulative effects of long-term trends (demographic/ consumption patterns, systemic failures of development strategy and investment), more recent supply and demand dynamics (e.g. climatic conditions, oil price rises, biofuels production) and responses amplifying price volatility (e.g. speculation, export restrictions)

• Price decline since summer due to bigger harvests, lower energy prices, etc. but wholesale prices still lot higher than pre-crisis levels and retail prices have declined much less

• Financial crisis has worsened credit availability/cost for agriculture and trade and hit DC purchasing power (devaluations, recession, reduced exports, etc.)

• Will be price surge in 2009 (according to FAO), partly because recent price decline has reduced planting

• Food crisis will remain challenge for development policy

• Cumulative effects of long-term trends (demographic/ consumption patterns, systemic failures of development strategy and investment), more recent supply and demand dynamics (e.g. climatic conditions, oil price rises, biofuels production) and responses amplifying price volatility (e.g. speculation, export restrictions)

• Price decline since summer due to bigger harvests, lower energy prices, etc. but wholesale prices still lot higher than pre-crisis levels and retail prices have declined much less

• Financial crisis has worsened credit availability/cost for agriculture and trade and hit DC purchasing power (devaluations, recession, reduced exports, etc.)

• Will be price surge in 2009 (according to FAO), partly because recent price decline has reduced planting

• Food crisis will remain challenge for development policy

Demand/supply imbalance

Demand/supply imbalance

• Growing demand: – population/income growth (rise of some

DCs)– urbanization,changing dietsDecreasing supply: – decline in quantity/quality of

agricultural land– effects of climate change, droughts,

etc.– depletion of food stocks– low agricultural productivity (esp. in LDCs)

• Growing demand: – population/income growth (rise of some

DCs)– urbanization,changing dietsDecreasing supply: – decline in quantity/quality of

agricultural land– effects of climate change, droughts,

etc.– depletion of food stocks– low agricultural productivity (esp. in LDCs)

Causes of low DC productivity

Causes of low DC productivity

1. Insufficient public investment in agriculture/rural development (communications, irrigation, transport)

2. Structural adjustment programmes weakening support measures (marketing boards, extension services, subsidies for inputs like seeds or fertilizer, price stabilization funds)

3. Reduced ODA for agriculture4. Low investment by domestic investors and TNCs5. Disincentive effects of agricultural protectionism

(production/export subsidies, etc.) and food aid in kind6. Increased costs from strengthening of intellectual

property rights (plant varieties, new seeds)

1. Insufficient public investment in agriculture/rural development (communications, irrigation, transport)

2. Structural adjustment programmes weakening support measures (marketing boards, extension services, subsidies for inputs like seeds or fertilizer, price stabilization funds)

3. Reduced ODA for agriculture4. Low investment by domestic investors and TNCs5. Disincentive effects of agricultural protectionism

(production/export subsidies, etc.) and food aid in kind6. Increased costs from strengthening of intellectual

property rights (plant varieties, new seeds)

Speculation and export restrictionsSpeculation and

export restrictions

• Speculation through commodity indices, futures, options:– Funds invested in commodity indices estimated at $170

billion as of end of March 2008 - Jan-Mar 2008: volume of globally traded grain futures and options 32 % higher than in Jan-Mar 2007

– Likely reduction since financial crisis – but difficult to know, lack of transparency

• Export restrictions (export bans or taxes):– were established by several DCs for different crops to help

address local needs during acute period of food crisis, most restrictions now been removed

– may reduce global food supply, undermine incentives for increasing agricultural investment/food production

– there is right to temporarily prohibit or restrict food exports under arts. XI. 2 (a) & XX (j) of GATT

– on-going WTO discussions on disciplining their use

• Speculation through commodity indices, futures, options:– Funds invested in commodity indices estimated at $170

billion as of end of March 2008 - Jan-Mar 2008: volume of globally traded grain futures and options 32 % higher than in Jan-Mar 2007

– Likely reduction since financial crisis – but difficult to know, lack of transparency

• Export restrictions (export bans or taxes):– were established by several DCs for different crops to help

address local needs during acute period of food crisis, most restrictions now been removed

– may reduce global food supply, undermine incentives for increasing agricultural investment/food production

– there is right to temporarily prohibit or restrict food exports under arts. XI. 2 (a) & XX (j) of GATT

– on-going WTO discussions on disciplining their use

Energy and biofuelsEnergy and biofuels• Higher energy prices have: 1. raised costs of

agricultural inputs (fertilizer, seeds, etc.), farming, food processing, distribution and 2. by raising demand/prices for biofuels, contributed to price rises for food: (a) used as biofuels (corn, etc.); (b) competing with biofuels for land/resources; © substituting for (a) and (b)

• Biofuels/food linkage varies with crop, country, land use, trade, etc., offers export opportunities but raises food security issues for DCs

• Markets distorted by obstacles to DC production & exports of food and biofuels (tariffs, technical regulations, subsidies/incentives, blending targets)

• Higher energy prices have: 1. raised costs of agricultural inputs (fertilizer, seeds, etc.), farming, food processing, distribution and 2. by raising demand/prices for biofuels, contributed to price rises for food: (a) used as biofuels (corn, etc.); (b) competing with biofuels for land/resources; © substituting for (a) and (b)

• Biofuels/food linkage varies with crop, country, land use, trade, etc., offers export opportunities but raises food security issues for DCs

• Markets distorted by obstacles to DC production & exports of food and biofuels (tariffs, technical regulations, subsidies/incentives, blending targets)

Competition issuesCompetition issues

– Concentrated agro-food market structures on both seller and buyer sides, enhanced by mergers/strategic alliances, facilitate:

• anti-competitive practices (e.g. abuse of dominance, abuse of economic dependence, cartels, collusive tendering) and/or exercise of buyer power against consumers, farmers and/or food processors

• higher prices for agricultural inputs • maintaining DC farmers’ profits far lower than

retail food prices• dampening of market incentives for DC food

production, reducing food supply

– Concentrated agro-food market structures on both seller and buyer sides, enhanced by mergers/strategic alliances, facilitate:

• anti-competitive practices (e.g. abuse of dominance, abuse of economic dependence, cartels, collusive tendering) and/or exercise of buyer power against consumers, farmers and/or food processors

• higher prices for agricultural inputs • maintaining DC farmers’ profits far lower than

retail food prices• dampening of market incentives for DC food

production, reducing food supply

Trade rulesTrade rules• Multilateral trading system allows food &

agricultural markets to be distorted by agricultural subsidies, export credits, State trading enterprises, food aid (often driven by over-production, not need)

• Some DCs (mostly those in structural adjustment programmes) have low bound agricultural tariffs so defenceless against “dumped” imports (higher bound rates would allow modulation of applied rates in line with food security and local agricultural production concerns)

• But interim agreements within Doha Round indicate interest in tariff flexibility for products important for food security/livelihood security/rural development

• Multilateral trading system allows food & agricultural markets to be distorted by agricultural subsidies, export credits, State trading enterprises, food aid (often driven by over-production, not need)

• Some DCs (mostly those in structural adjustment programmes) have low bound agricultural tariffs so defenceless against “dumped” imports (higher bound rates would allow modulation of applied rates in line with food security and local agricultural production concerns)

• But interim agreements within Doha Round indicate interest in tariff flexibility for products important for food security/livelihood security/rural development

Issues for discussionIssues for discussion

1. What are your views about the relevance or importance of the causes identified for the global food crisis – are there other causes?

2. Which causes have been relatively more or less important in your country?

3. How has your country been affected by the food crisis in terms of food security, trade, development, and/or poverty alleviation?

1. What are your views about the relevance or importance of the causes identified for the global food crisis – are there other causes?

2. Which causes have been relatively more or less important in your country?

3. How has your country been affected by the food crisis in terms of food security, trade, development, and/or poverty alleviation?