HIGH FOOD PRICES LEAVE DEVELOPING COUNTRIES STRUGGLING TO COPE

For over six years, negotiators from governments around the world have been haggling over cuts to farm subsidies and barriers to agricultural trade in talks at the WTO. Competitive exporters seeking greater liberalisation have met stiff opposition from countries determined to protect their farm sectors from the full force of international competition. The wrangling continues, as WTO Members push for a deal in the troubled Doha Round of global trade talks.

Away from the halls of the WTO headquarters in Geneva, however, many developing country governments have in recent months found themselves following very different policies. Import-sensitive countries have slashed duties to zero, and even competitive exporters have moved to limit rather than promote exports, as they struggle to help consumers cope with skyrocketing food prices.

Prices for rice, the staple food for about half of the world's 6 billion people, have soared to record highs, with key benchmarks touching $1000-per-tonne earlier this month, more than double the rate at the start of the year. Prices for a wide range of foods have risen sharply since the end of 2006, affecting commodities from corn, cereals, and soybeans to dairy products, meat, and edible oils.

The high prices have spurred food riots in countries such as Cote d'Ivoire, Haiti, Mauritania, Mexico, Senegal, and Yemen. In Egypt, where anger over food prices has caused political unrest in the past, the army has been ordered to bake cheap bread for the hungry.

Anxious importing countries such as the Philippines and Bangladesh have been unable to buy the amount of rice they wanted to boost their dwindling inventories, as trading companies wait to see if prices will rise even higher.

Meanwhile, rice exporters such as Vietnam, India, Cambodia, and Egypt have moved to curtail the amount of the grain that can be exported. These export restrictions are a double-edged sword: though they may bolster domestic supplies to help keep costs within control, they also undermine farmers' incentives to step up future production. Moreover, for commodities like rice, for which only a small proportion of global production is traded internationally, supply concerns about key exporters can cause especially dramatic fluctuations in the international market price.

Most fundamentally, export bans can threaten basic food security in import-dependent countries. Joachim von Braun, the head of the International Food Policy Research Institute, has called the bans "starving thy neighbour" policies.

Many reasons for high prices
The rise in basic commodity prices has been driven by a wide range of factors. Farm commodity prices are famously cyclical. Part of this is because it takes an entire growing season for supply to catch up with increased demand. The building up and drawing down of global stockpiles also affects prices. High oil prices have pushed up the cost of fertilizer and transportation, further boosting costs.

Failed crops due to drought in Australia and Turkey, and bad weather in Ukraine and parts of North America, have dramatically disrupted the supply - and therefore upped the price - of commodities such as rice and wheat. These supply shortages may swing back, with corresponding price downswings. This is why the G-33 bloc of developing countries - some of whose members are busily lowering their own applied farm duties - remains eager, in talks at the WTO, to retain the ability to raise tariffs to their current bound maximum levels on some 'special products' for food and livelihood security reasons.

The bulk of attention has focused on two sources of increased food demand: growing appetites for cereals and meat as incomes rise rapidly in fast-growing developing economies such as China and India, and biofuels. The diversion of crops and land for the production of grain and oilseed-based biofuels, along with blending mandates, high tariffs and subsidies in western countries, have contributed to the rapid rise in food prices.

The UN special rapporteur on the right to food, Jean Ziegler, has been scathing about the effects of turning massive quantities of agricultural commodities into biofuel, calling it a "crime against humanity" that is causing people to go hungry by raising the price of staples.

Unlike biofuel-related demand for food crops, which is directly policy-driven, demand growth resulting from population and income growth cannot be avoided. But even the supply of agricultural commodities faces uncertainty over the medium- and long-term, as urbanisation and industrialisation affect land and water use. Also significant are the likely effects of climate change on rainfall and other weather patterns. Some see the decade-long drought in Australia as a sign of things to come.

Varied effects
Josette Sheeran, who heads the UN's World Food Programme, described how the food crisis was affecting people at different socioeconomic levels across the developing world. "For the middle classes, it means cutting out medical care," she said, according to a report in The Economist. "For those on $2 a day, it means cutting out meat and taking the children out of school. For those on $1 a day, it means cutting out meat and vegetables and eating only cereals. And for those on 50 cents a day, it means total disaster."
The WFP has called the rising food prices a "silent tsunami" that has pushed millions of people into the "urgent hunger category" in the past six months. The World Bank estimates that the growth in food prices could push 100 million people further into poverty.

Poor people in developing countries are especially exposed to commodity price fluctuations: not only do they spend over half of their incomes on food, they eat basic commodities or semi-processed foods, such as milled rice, or corn meal.

In contrast, basic commodities account for a relatively small proportion of the cost of more processed foods. For instance, at a bakery in Geneva, wheat flour might account for only a fifth of the cost of a loaf of bread, with labour costs making up a substantially higher share of the price customers pay.

Can the trading system help?
World Bank President Robert Zoellick and others have suggested that a Doha Round deal on cutting farm subsidies and tariffs could play a role in addressing the food crisis. "The poor need lower food prices now," Zoellick recently told a Washington audience. "But the world's agricultural trading system is stuck in the past. If ever there is a time to cut distorting agricultural subsidies and open markets for food imports, it must be now. If not now, when?"

"Wait a second," responded Harvard University professor Dani Rodrik on his blog (http://rodrik.typepad.com/). "Wouldn't the removal of these distorting policies raise world prices in agriculture even further? And in fact aren't these price effects the main channel through which agricultural trade liberalisation in the North is supposed to benefit the South?" Rodrik pointed to World Bank data suggesting that the removal of trade restrictions would raise the price of wheat, rice, and other grains.

Indeed, part of the reason for launching the Doha Round negotiations was to address rich country farm policies that had been depressing the prices received by poor farmers in the developing world. But if low prices were so bad, how come high prices are bad too?

There is a reason for the apparent contradiction, explained Per Pinstrup-Andersen, a professor of food, nutrition, and public policy at Cornell University and the University of Copenhagen. Years of low farm prices caused by reasons external to poor farmers in developing countries - notably, rich country farm subsidies - meant there was no incentive for developing country governments or the private sector to invest in agricultural production, and to build roads and the other rural infrastructure necessary to support it. Low productivity and low farm prices meant that farmers often looked for other sources of income, and became net buyers of food. Now, with prices rising, "they get caught in the middle."

"We need to get rid of the trade-distorting subsidies in OECD [industrialised] countries," the World Food Prize laureate said, adding that the time was ripe for doing so since farmers did not need them now, and production levels were currently being determined by the high market prices. Reducing import restrictions in the EU and other developed nations would also help create clear incentives for developing country agriculture.

Since the 1980s, government spending on agricultural research in developing countries has declined. Instead of research, the bulk of public farm spending has often been used to purchase social peace or electoral support by ensuring low prices for food or agricultural inputs like seeds and fertiliser. The Economist last week cited World Bank data suggesting that over the two decades since 1980, developing country crop yields grew by steadily declining rates.

Continued high prices could help many developing country farmers who are net buyers of food to become net sellers, Pinstrup-Andersen said. They could ultimately even drive up wages for landless labour, and boost demand for rural goods and services that would generate employment. To help this happen, however, there would need to be greater investment in farmers' associations and rural infrastructure, and better price transmission mechanisms to ensure farmers actually feel the higher prices in their own pockets.

"One of my concerns is that governments are going to introduce the wrong policies" in response to high prices, he said. Price controls and export taxes, he warned, could discourage the necessary additional investment in agricultural production.

Producing more with less
For global farm policy to result in reasonable food prices and reasonable farm incomes, "the only solution is to produce more with less." This includes less use of natural resources, he emphasised. Therefore, not only do governments need to create an appropriate facilitating environment for farmers, consumers need to pay for the land, air, and water costs of agricultural production in the price that they pay for food. Unless these costs are "endogenised" in food prices, "we're just going to borrow from our grandchildren to get our food prices down. Not a good thing."

As for the low-income food importing countries that are most vulnerable to further increases, Pinstrup-Andersen said that they should be given grants of the foreign exchange that they require to import the food they need at the going international rate. Unlike in-kind food aid, "this would send a signal to governments and farmers to make the investments they need."

He described the argument that low food prices are good for poor food importing countries as a "short-term, static argument." Most African countries are net importers of food. A "longer-term, dynamic view" would suggest that a lot of these countries could produce more food "if the conditions were right." After the last wave of high oil and food prices in 1973-74 - when food prices were almost double what they are today, adjusted for inflation - public investment in rural infrastructure and private investment in farming went up, as did agricultural productivity, he noted.

Even with high prices, the Institute for Agriculture and Trade Policy cautions that few of the benefits may accrue to farmers in poor countries, because of the "the incredible market power" held by the handful of transnational corporations that dominate international agricultural production value chains. It has called for multilateral monitoring of how these "highly untransparent" value chains operate, to better assess where profits are distributed along them.

The Minneapolis-based think tank, which is sceptical about the potential positive effects of a Doha accord on food markets, supports intergovernmental efforts to stabilise commodity prices. Although government attempts to control commodity prices have had a spotty record of success in the past, Carin Smaller, with the institute's Geneva office, said that the predictability arising from more stable prices was necessary "both for poor consumers, who spend 50 percent and more of their resources on food, and for small producers, who have to take risks to get the credit to plant and who, in many cases, are poor consumers themselves."

Food prices are now firmly on the international policymaking agenda, featuring prominently at the ongoing UN Conference on Trade and Development meeting in Ghana. The World Bank has called for a 'new deal' on food, and has appealed for $500 million in emergency support for the World Food Programme. The Group of Eight leading industrialised nations are also set to address the issue at their annual summit in July.

Despite growing alarm about the cost and availability of food, high prices were hardly the only cause of hunger in the world, or even the most important, noted Pinstrup-Andersen. "860 million people could not get access to food when prices were low" five years ago, he said. However, unlike the urban protestors making news headlines today, most of them live in rural areas.
"We should have been demonstrating five years ago."

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