By Dr. Clive Thomas
World food markets
When discussing recently rising food prices most persons do not refer solely to their day-to-day experiences purchasing food items, but to the frequent media reports of prices in the major global markets for food as well. There are real time and futures markets for food. That is, the principal food items are traded by buyers and sellers both presently and for dates into the future. These markets are mostly located in the main financial and commercial capitals of the world’s wealthiest and most powerful economies.
However, after careful examination we would find that in these global markets, operators often behave more as if they were participating in gambling casinos, betting on food availability, demand, and supply around the world, rather than in a true exchange or meeting place for earnest buyers and sellers. Speculation in food markets is a major motive for their being there. Consequently, every real or rumoured mismatch in demand and supply for food items fuels a frenzy of buying and selling (gambling).
Evidence of this can be seen in the fact that the recent global mismatch between demand and supply for grains has been less than one per cent. Indeed, in 2004-05 there were record outputs of grains, with supply overall rising by more than 10 per cent for that period. Yet there has been a rapid rise in food prices since 2000.
Several factors account for the heavy presence of speculation in global food markets. One of these is that the traded portion of several food items is often only a small fraction of total global demand and supply for those items. Why is this the case?
For one, lots of agricultural products produced in exporting countries are also consumed by them at home. For some of these products this ‘own-consumption’ siphons off a huge proportion of world output, particularly in the case of large producing countries.
It is also the case that much of the ‘traded’ product does so on the basis of government-to-government trading arrangements with their own mechanisms for arriving at the price received by the exporting country and paid for by the importing country. These arrangements, when added up globally, could account for an overwhelming amount of the global trade in a particular commodity.
Because of this circumstance, output, demand, and supply for such products are far more regulated by these inter-governmental arrangements than the particular global commodity market and its price for the item.
Sugar is perhaps the best example I know of where these features so dominate global production, exports, and imports, as to make the world’s two most famous sugar markets (London and New York) provide through their quoted ‘prices’ misleading indicators of the true price at which the bulk of the world’s sugar is actually traded.
Global trade reform
The point of these observations so far, is to indicate that global trade reform through the WTO and in particular its Agreement on Agriculture, which is now being negotiated under the Doha Round of global trade negotiations, is expected to result in real competition between exporters and importers prevailing over inter-governmental, and hence politically-directed trading arrangements.
The Doha Round of WTO negotiations began seven years ago in 2001 and was originally expected to have been concluded by 2005. These negotiations are primarily concerned with bringing a developmental perspective to bear in global trade rules and regulations. If successful, the expectation is there will be a major fillip to agricultural production, thereby going a long way towards bringing a lasting and definitive halt to the threat of rising food prices.
The questions we need to answer at this stage, therefore, are what are the realistic prospects for this global trade reform? Will it lay the basis for a re-constituted global agriculture?
Pace and level of ambition
There are at this stage of the already protracted negotiations many impediments to its successful completion. As this article is being written a Mini-Ministerial Conference (of thirty (30) WTO members) has been convened in Geneva (commenced on July 21 and was to last one week), with the objective of finding a way to conclude the Doha Round of negotiations by December 2008. It would be fair to say that no set of impediments to the successful conclusion of the Doha Round is more important than those focusing on agriculture. Indeed, the consensus is that progress in agriculture would go a far way in determining the “pace and level of ambition” of the Doha round of negotiations.
In the agricultural negotiations at least three areas of disagreements stand out, namely, 1) trade distorting subsidies and domestic support; 2) the availability of safeguard mechanisms for those developing countries that liberalize their agricultural trade and then encounter problems; and 3) the use of non-tariff barriers by WTO members to protect local markets. Let us briefly examine each of these in turn.
First, the reality is that global agricultural production has been badly distorted by the massive subsidies which the rich countries give to their farmers. The European Union, the USA and Japan are the worst offenders. Thus for example, in the case of the European Union, subsidies to their farmers and agricultural producers in 2006 amounted to a whopping US$80 billion. Among these arrangements it is even the case that farmers are being subsidized not to produce. This is quite remarkable, given the many hungry people worldwide!
In the current round of negotiations, and in the face of much criticism the European Union has offered to cut its import tariffs on food by 60 per cent. Its previous offer was 54 per cent. However, some observers claim that Europe is in fact actually making the same offer, but using different methods of calculation to arrive at the higher percentage. Such is the level of suspicion among WTO members!
The concern here is that the rich industrial countries are the major producers, exporters and importers of food items and they use massive food subsidies to create an artificial competitiveness for their products, thereby distorting global agricultural trade. Despite this, there has been in recent decades a noticeable shift in global production of food away from these countries towards the developing and emerging economies of the South.
Next week I shall continue this discussion.
