Agricultural price volatility was described as one of the chief causes of food insecurity at the Meeting of the G20 Agriculture Ministers this past June. As outlined in a recent note from the Centre d’Analyse Stratégique1
, this volatility is a structural issue and is progressively spreading to domestic markets, as a result of the liberalization process initiated in the 1980s and the dismantling––particularly in Europe––of agricultural price support policies. We highly recommend this document, which emphasizes, “It is mostly price unpredictability that hinders agricultural development, and more widely economic development”. It deserves the credit for presenting the various measures that could be implemented to address the issue. It also points out that if short-term measures––such as the implementation of safety nets––are imperative to protect the most vulnerable people, only agricultural policies to achieve the long-term development of agriculture and closer cooperation between international organizations will be able to durably and effectively limit price volatility.
momagri Editorial Board
While there are various ways to describe volatility, we will use the following definition––volatility is associated with sharp and wide-ranging price swings. This characterization allows us to point fingers at the key problem experienced by market players––whether they are governments, traders, farmers or consumers––namely the unstable incomes and significant risks they have to confront.
The 2007/08 crisis cannot be considered as an isolated event, as the emblem of new market instability––the agricultural price volatility recorded in the 1970s holds its own with that occurring in the late 2000s.
At the country level however, it is a different matter. Price movements on international markets can spread to domestic markets with a speed and a range that are more or less keen depending, in particular, on the trade policies applied at borders (customs duties and importation barriers). The liberalization process begun since the 1980s has been a factor in the transmission of price volatility from global markets to local markets. The progressive opening of borders has obviously gone hand in hand with the dismantling of agricultural policies to support prices, especially in Europe, which has generated a greater exposure to erratic prices for farmers. Consequently, the 1992 reform of the Common Agricultural Policy gradually lowered the guaranteed price level. Agricultural markets have always experienced unstable prices, but farmers and consumers were protected by public policies. If today’s prices are not significantly more unstable than they were in the second half of the 20th century, trade liberalization––and its related removal of support policies––have altered the perception of the phenomenon, since consumers as well as farmers end up even more subject to the vagaries of prices, and the quantities involved are increasingly considerable.
The 2007/08 surge in world prices certainly had consequences for the average basket of consumer goods in industrialized countries. Yet, income levels are better equipped to shoulder soaring prices, in view of the low part of foodstuffs in their budgets. The consequences are much more drastic in poorer countries, where households devote close to half of their budget to food. […]
At the same time, some observers could argue that farmers might have profited from the 2007/08 soaring prices to boost their incomes. Such thinking, unfortunately, does not apply to all nations. While higher prices are beneficial to farmers in industrialized countries, they do not have the same impact in developing countries, where farmers are less assimilated to the market (lack of transportation and communications infrastructures).
Far more important than rising prices, it is mostly price unpredictability that hinders agricultural development. In fact, most of the poorer countries rely on agricultural imports and exports. Consequently, revenues are almost as erratic as prices, which represents a major obstacle to economic growth. The unstable nature of commodity prices creates a high risk for farmers, which explains the lack of agricultural investment in developing countries, all the more so since these farmers have very little access to credit (to expand farms or purchase the necessary inputs to improve yields) and to financial markets that could cover the risks tied to price volatility. […] Today, volatility is therefore a priority issue in the public debate, all the more so since future pressure on supply and demand will be even stronger.
First and foremost, a renewed vision for agriculture is required to limit the volatility of world prices
Until now, agriculture was regarded as the poor relation to economic development. Such view has had its day. Under the title “Agriculture for Development”, the 2008 World Bank Annual Report gives a new place to agriculture. This new direction from Bretton Woods’ organizations––the World Bank and the International Monetary Fund––breathes new life to the development strategies of poorer nations. Yet, it is slow to materialize on the ground. Agriculture is far from attracting capital, subsidies or investors, especially in Sub-Saharan Africa where farming progresses are insufficient. […]
Price volatility could intensify and be more frequently in the future, due to impending market tensions. Only an increase in supply will resolve the problem, which entails significant investments in agriculture, particularly in Sub-Saharan Africa, which has accrued considerable delays in this regard.
While global prices are one thing, domestic prices are another. The most vulnerable countries must be able to protect themselves against price spikes through the establishment of regional zones. But this must not exempt them from designing agricultural policies that advocate the development of food crops and increases in productivity.
While agricultural policies and increased international cooperation will partly limit volatility, a posteriori policies are required to prevent the sometimes drastic consequences of erratic movements––safety nets and short-term policies must not be overlooked. But let’s keep in mind that the resilience of agriculture to price swings is primarily an issue of economic development and diversification. Such thinking, which involves development and coordination issues, must therefore brought to the attention of the G20, and be incorporated in the expected WTO agreements.
1 The complete article is available on the website of the Centre d’Analyse Stratégique at: http://www.strategie.gouv.fr/content/note-d%E2%80%99analyse-207-volatilite-des-prix-des-matieres-premieres-volet-2-janvier-2011