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Rome Summit: Despite Good Analysis of the Situation, Inadequate Proposals and Recommendations
Jacques Carles, Executive Vice President of momagri &
Bastien Gibert, Expert of momagri
The Rome Summit held on June 3-5 provided an opportunity for several Heads of State, international organizations and NGOs to reaffirm their commitment to international cooperation, particularly in terms of agriculture. Numerous works were presented and proposals advanced, all pointing to the idea that global governance of agriculture and food must be reorganized, as reflected in the proposals made by Ban Ki Moon, Nicolas Sarkozy and the FAO. In fact, the FAO presented a forward-looking working paper entitled "Soaring Food Prices: Facts, Perspectives, Impacts and Actions Required," in which it proposes a strategy for overcoming this crisis. However, we must not be fooled. While we may be pleased with the international community's newfound awareness of agricultural issues, the proposals put forth are superficial and perhaps even counterproductive – because they do not attack the problem at its roots.
The FAO report, entitled "Soaring Food Prices: Facts, Perspectives, Impacts and Actions Required" represents a break from the traditional outlook on agricultural realities. Far from considering agriculture as an economic sub-sector, it underscores the strategic dimension of agriculture and the many aspects that set it apart from other sectors of the economy.
Three principal points can be made and are highlighted below, because we at momagri believe that they, in and of themselves, justify the establishment of global agricultural governance.
> First, the FAO recognizes that "High-price events, like low price events, are not rare occurrences in agricultural markets," thereby validating one of the main, intrinsic characteristics of agriculture markets, i.e., that price volatility is structural.
>The FAO report goes on the stress that soaring prices can be attributed to "the strengthening of linkages among different... markets[,] …rapid economic and population growth in many emerging countries;... biofuels," speculation and shrinking stocks. This shows that the growing interconnectedness of markets, facilitated by the liberalization of trade and economic globalization, exposes agricultural markets to greater volatility.
> Finally, in declaring the "the possibility of further sharp price hikes and continued volatility as a result of unforeseen events seems to be likely for the next few seasons," the FAO invalidates the prevailing belief that prices will stabilize. In reality, agriculture is subject to several disruptive factors that are increasingly removed from the traditional factors affecting agricultural supply and demand. The recent subprime crisis in the United States, accompanied by the destabilization of cacao and coffee prices, is a good example. Uncertainty therefore reigns for the future.
While momagri is pleased with the FAO's sudden awareness, we must not assume that the solution to the food crisis has been found. The truth is quite different, indeed, because the strategy proposed remains the same as always – the complete liberalization of agricultural markets: "The world community must ensure that governments have the human, financial, technical and material resources they need to implement the priority reforms... [in particular] heightened advocacy in international negotiations to reduce international trade barriers and market distortions..."
Indeed, despite its more realistic vision of agricultural issues, the FAO continues to believe that prices will miraculously stabilize at high levels and that the complete liberalization of markets will be beneficial for all regions of the world. This is what emerges from the projections carried out by the FAO and the OECD using the AGLINK economic model.
Contrary to its own observations, then, the FAO forecasts that agricultural prices will remain perfectly stable, progressing in linear fashion over the next 10 years.
|We, however, have shown that such forecasts are completely misguided, because prices for agricultural raw materials cannot "magically" stabilize. For that to be possible, a combination of events defying the laws of probability would have to occur, as we have illustrated with the momagri model. This is what we have called the "Utopia scenario," one that assumes the absence of speculators, the perfect forecasting ability of farmers and ideal climatic conditions. |
In other words, a "Garden of Eden" in which supply would adjust automatically to demand and where neither the financialization of demand nor climate change exist!
This Utopia scenario, the "unreal" results of which we presented at our April 9, 2008 press conference at the European Parliament, presents striking similarities with the FAO scenario.
The scenario is one of a world without risks, where prices for agricultural raw materials evolve linearly. At this level of oversimplification, it is very easy to choose a high or low curve. It's merely a question of determining the starting point for the projection.
The FAO believes that current high prices will remain high, thereby prolonging the trend toward high prices.
Momagri sought to illustrate the absurdity of such a method, rather than to "predict" the stabilization of global prices at a low level, even though, in the long term, there is a downward trend for agricultural prices.
|What stands out is the strange similarity between the two curves presented, leading us to question the soundness of the FAO and OECD AGLINK model projections. |
In any case, we must not forget that prices will not stabilize at high levels. Price volatility is structural, and results from the combination of exogenous and endogenous risks that the report mentions without drawing their consequences.
When the FAO states that "in some countries where the barriers are effective, farmers have reduced planting of cereals in the face of low domestic prices for their products coupled with high prices for inputs such as fuel, seeds and fertilizers," it is therefore putting its finger on one of the unique characteristics of agricultural markets: forecasting errors by farmers who, depending on their level of optimism or pessimism, do not respond perfectly to market signs. In this case, for example, farmers responded to rising agricultural prices by cutting production, which exacerbated the supply-demand imbalance and thus contributed to soaring prices.
The economic model used by the FAO and the OECD is, therefore, quite imperfect, and is made to produce results it is absolutely incapable of producing, as we demonstrated in 2005 when we ran the leading economic models used during international agricultural negotiations through our test bench.
Following the Rome Summit, the international community must, therefore, become aware of the need to establish a new form of cooperation with an appropriate strategy. While momagri applauds the proposals of several Heads of State, these proposals currently remain very fragmented. They are knee-jerk responses lacking a solid foundation, insufficiently substantiated by a positive vision of the future. International organizations must urgently stop working from imperfect hypotheses and outdated models. While this task is not easy, it is not impossible. We have already demonstrated this by building the momagri model, and will continue to do so in the next few weeks by proposing a strategic action plan for international cooperation in agriculture.