February 8, 2010
The long running dialogue on the ‘best’ model of trade in food and agricultural products to ensure food security inside and outside the European Union has been further enlivened by recent publication of a UK Government analysis of the issue. This clearly and unsurprisingly , emphases that only free trade will ensure both domestic and universal food security. Its conclusions are in marked contrast to a recent report from the French think-tank Momagri which takes the completely opposite view.
The UK paper argues that the recent escalation and then collapse in world food commodity prices was caused by a lack of market freedom and transparency which prevented farmers from responding to rising world prices by increasing output.. Interference by governments through export bans, production and export subsidies subsequently led to over-supply which depressed farmers’ prices. In short, it concludes that: ” international trade is a key underpinning of food security at all levels”
Momagri argues the converse: more not less government regulation of agricultural commodity markets is needed. It was the absence of internationally regulated stocks and lack of protection of producers in developing countries which led to prices which the poor could not afford and to a 25% rise in the world’s hungry people. Momagri argues that too liberal trade, involving ‘too much speculation’ and lack of protection of small farmers in impoverished countries is the cause of food price volatility.
Thus, while the UK Government argues that price spikes and increased hunger are caused by lack of market fluidity, Momagri argues the opposite: that they are caused by too much free play of the market.
However, the fundamental three part problem which all would-be food policy makers have to grapple with is that the demand for food is inelastic – consumption does not increase (enough) when prices fall, production increases lag behind shortfalls in supply (because of the length of the natural production cycle) and those shortfalls are principally caused by the weather.
The reality is probably that the answer lies somewhere between these two poles. There is little doubt that small farmers in poor countries are discouraged from producing more by the inflow of cheap imports from developed countries when harvests are good. They undoubtedly need protection to develop. Conversely, too much regulation of developed country markets produces the surpluses that wash around world markets damaging the incomes of unprotected farmers.
The one thing that cannot be regulated is the weather. And it is violent climatic variation that usually causes short term supply crises. In a rational world the answer to this underlying problem would be the creation and maintenance of internationally regulated stocks. This is an issue that economists and politicians have wrestled with for decades without any consensus ever being achieved. The main reason for this that the major agricultural exporting nations have always feared that an ‘International Food Reserve’ would always be a permanent price-depressing factor. Many would argue that this is the lesser evil when compared with the damage done by violent price variations.