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Effects of the unregulated agricultural liberalization
This memorandum synthesizes the latest result, obtained by the momagri model, their findings and political implications.
The latest momagri model simulations demonstrate that a non-regulated liberalisation of agriculture would, in the coming fifteen years, lead to:
- An explosion of the volatility of international agricultural prices, in particular of cereals, amplified by an exclusively and growing financial approach ;
- A drop in farmer revenues in every country in the world, brutal in the poorest countries (-60%), lasting in the emerging importing countries (China and India -30 à 40%) and as a trend in developed countries. Only emerging exporting countries such as Brazil would be able to get away with it.
Here below you will find the analysis of the results obtained, in economic as well as political terms – an analysis which under any circumstances confirms the dangers which a Doha Round conclusion on today’s basis would expose international equilibrium to.
SUMMARY : A WTO agreement on agriculture would generate a food crisis
Whereas the resumption of the Doha Round negotiations is going to be presented as the global solution to protect us against protectionism, the results from our momagri model are proving the exact opposite.
A WTO agreement on agriculture, without any implementation of global regulation to prevent the destabilizing consequences of agricultural price volatility, would generate a severe structural food crisis that would be far more destructive than the current financial crisis. To such an extent that governments would then have to resort to protectionist measures to guarantee their foremost responsibility: food security for their populations.
Indeed, all our most recent simulations prove that, during the next 15 years, non-regulated liberalization in agriculture would lead to a drastic drop in farmers’ revenues in poorest nations (less 60 percent), a lasting deterioration for importing developing nations (such as China and India: less 30 to 40 percent), and a decline tendency for developed nations (with losses of 30 percent over several years). Only exporting emerging nations, such as Brazil, would come out unscathed.
Beyond the tragic consequences on poverty and rural exodus, global food security itself would be jeopardized in a world already severely undermined by financial and economic crises!
We are thus faced with a “worst case scenario” that further compounds with threats of possible conflicts, such as availability of energy and water resources. It is not a question of blocking liberalization, but of regulating it to prevent the concentration of global food production in a few countries and the price volatility that would drive us straight to a new type of wars.
To reach this goal, it is thus imperative to develop global governance for agriculture that supports food security in a free market, that is to say the search for collective food solvability.
momagri was the only think tank to demonstrate, as early as the spring of 2008, the causes of the high price volatility in agricultural commodities and to call attention to their impending slump, at a time when they were peaking.
Today, momagri presents the latest simulations of its model and the findings they generate in the case of non-regulated liberalization of agricultural trade. For in the case of a Doha agreement, a widespread agricultural and food crisis will emerge in the wake of the financial crisis, unless global governance allowing agricultural market regulation is not implemented first, as outlined in our political analysis presented in conclusion.
I. RESULTS AND FINDINGS : Liberalization et destablization of global agriculture
The liberalization of international trade will severely destabilize global agriculture by heightening agricultural price volatility and shrinking most farmers’ revenues. Its direct consequence will lead to permanent food crises and a return to food insecurity worldwide
A. BASIC QUESTIONS RESOLVED BY THE MOMAGRI MODEL TO CLARIFY LIBERALIZATION ISSUES
We developed the momagri model to resolve three basic questions.
What are the roots of agricultural price volatility?
Before implementing an economic policy pertinent to any specific sector, it is crucial to ascertain the risks it must cope with.
For most experts and international decision-makers, agricultural price volatility is caused by exogenous or natural risks, such as epizootic diseases or climate hazards.
Yet, these risks, which are by definition independent from players’ behavior, should logically be alleviated by the liberalization of international agricultural trade, such liberalization acting as cooperative management of risks worldwide. Undeniably, one cannot believe that one climate hazard can simultaneously and drastically affect production in every part of the world.
While trade liberalization has been in existence for several decades, price volatility of agricultural commodities has not declined, on the contrary. This price volatility can therefore be explained by other factors, whose roots are not external to agricultural markets, but instead stand for one of their inherent components.
This is what we call endogenous risks, or market risks. We analyzed them and included in the model the two major endogenous risks that influence agricultural markets: miscalculations in farmers’ expectations and speculators’ positions on term markets.
If agriculture was only confronted to exogenous risks, such as epizootic diseases or natural hazards, total trade liberalization would lead to an optimal situation: risks would be shared collectively worldwide and the market would thus play a stabilizing role. But if we consider that other endogenous factors occur––as it is the case for agriculture––things get complicated and unregulated trade liberalization can play the opposite role by acting as strong catalyst for volatility.
Will trade liberalization bring some relief to this volatility?
As early as the spring of 2008, the first simulations of our economic model showed that the liberalization considered by the Doha Round would lead to increased volatility in agricultural prices.
This concern, still overlooked only a few months ago, is beginning to be recognized by the scientific community as well as by many political leaders.
Indeed, only our model has the technical capability to simulate this price volatility. Accordingly, we take into account farmers’ expectations, the influence of speculation and the consequence of natural hazards. Now completed, our model will be introduced to a panel of 30 top-level international economists at a seminar to be held next June 4 and 5 at La Sorbonne in Paris.
This year, we tested again the hypothesis of a global trade liberalization to measure its impact on prices. The results obtained are irrevocable: the price volatility of agricultural commodities is permanent and is aggravated as soon as parameter values diverge from average (see results and findings #1).
What winners and losers in trade liberalization?
Answering this question seems to represent the Holy Grail for international decision-makers since the 2001 launch of the Doha Round.
If the answer proposed thus far by the WTO––trade liberalization is a “win-win” strategy for all nations of the world––is increasingly blamed, no satisfactory solution has yet to be brought forth.
This is one of the explanations for the successive breakdowns of negotiations, especially during the latest ministers’ meeting in July 2008 that focused on the special safeguard mechanism.
We developed the momagri model to bring a comprehensible and transparent solution to this critical issue, contrary to the usual evaluation tools (the World Bank and the OECD models) that are certainly not designed for that purpose. We brought up the fact that the use of their results bordered on “an official lie”, since these models were made to assert things that they could not possibly assert.
That is the third question we tried to answer in our most recent simulation operations.
There again, our model results are uplifting: in case of full liberalization, almost all farmers in the world are subjected to revenue losses. Only farmers in emerging nations, with Brazil in pole position, show revenue gains (see results and findings #2).
To tackle this last question, our method consisted in:
> Sorting countries in ten economic zones that would be the most homogenous possible;
> Setting apart agricultural revenues from other revenues, so that we could evaluate the consequences of any given policy on farmers’ income, since we must remember that they account for 70 percent of the population in poorest countries.
This approach thus enables us to verify if trade liberalization can really contribute to economic development. We indicate that the World Bank model does not differentiate agricultural populations from non-agricultural ones, which means it does not distinguish the poor from the wealthy in developing nations. It was therefore imperative to measure this never-assessed impact before recognizing the real consequences of a Doha agreement on agriculture.
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Consequently, we tested the theory of an elimination of custom duties in 2010, without any adjustment to national incentive programs. This hypothesis is somewhat more radical than the one currently negotiated at the WTO, while it is more conservative regarding national incentives.
We scanned a field of over 15,000 different simulations by providing all possible values––including the most extreme––to parameters indicating farmers’ expectations, the consequence of speculation as well as natural hazards.
B. FIRST RESULTS: UNREGULATED LIBERALIZATION OF AGRICULTURAL TRADE LEADS TO HIGH VOLATILITY OF AGRICULTURAL COMMODITY PRICES DURING THE NEXT 15 YEARS…
Synthesis of results
Whichever scenarios are considered and tested, results are irrevocable: partial or total unregulated liberalization will be linked to increased volatility in agricultural commodity prices for the entire 2010-23 time span (see graph #1), contrary to linear variation estimates given by the World Bank and the OECD, that lean toward an upward trend. According to these international organizations’ forecast, liberalization would provide a stabilizing and leveling influence on price volatility, such phenomenon supposedly caused by the disturbing outcome of agricultural policies.
Our results prove the exact opposite and reconfirm the first simulations completed in 2008: trade liberalization will increase agricultural price volatility.
Key conclusions
The occurrence of agricultural and food crises is bound to intensify and their magnitude will increase tenfold because of the destabilizing power of factors that fix agricultural commodity price variations (as outlined in our model).
Indeed, the high volatility of agricultural prices recorded in 2007 and 2008 generated not only food riots, but also strongly undermined agricultural activities (the global dairy crisis is one example).
What would have occurred if agricultural markets had been entirely liberalized and if the support mechanisms set up by public authorities had been totally dismantled?
Following the high levels that were registered, agricultural prices declined in such proportions that many farms are now in a state of near bankruptcy.
Farmers abandoning their land never come back to it. Skills are thus lost forever and countless indirect jobs, in agribusinesses for instance, are doomed to disappear!
One can no longer ignore these facts and consider that a completely liberal treatment of markets would lead to price stabilization. The momagri model demonstrates that this is not possible. Banking on the pacifying virtues of “the market’s invisible hand” is the worst possible political option for agriculture.
Regulation must not be the exception but a policy based on information tools and systems that are seriously missing today.
Strengthened by these findings, we opted for the least chaotic possible central scenario to illustrate the probable price variations that, as seen below, still remain very volatile.
Yet, even in such framework, we obtain volatility levels that cannot be sustained by farmers or by society. That is the meaning of the following result.
Results concerning the central scenario
In this central scenario, price volatility in grain (the basis of global food) could, during the next 15 years, vary between indexes ranging from 70 to 320 (based on a 2001 index of 100), or a volatility range of 4.5.
Alternating episodes of high and low prices could then occur in a single year, as that was the case in 2008. This inter-annual volatility is assessed from a “price variability spread” based on the highest differences recorded in the past, and developed around an average price variation.
These differences (plus or minus 45 percent), when applied to the annual average price variation provided by the model (average volatility of 1.7 for indexes ranging from 135 to 220), determine the probable price fluctuation range between 2010 and 2023.
The highest inter-annual volatility recorded between 2005 and 2009 is also shown on this “candlesticks” graph. Such volatility rightfully fits into the spread of maximal variability, thus justifying the results presentation.
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Graph #1
Annual variations of grain prices in the framework of the central scenario
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Key conclusions concerning the central scenario
It is therefore totally deceptive to suppose that unregulated trade liberalization can ease price volatility, since it remains very strong in the case of average market conditions. It is thus imperative, even in times of crisis, to benefit from stabilizing policies at the international level. Otherwise, jolts in farmers’ revenues the world over could produce irreversible situations:
> Uncertainty of food supplies and precariousness of related jobs
> Return to protectionism, the only tool currently available to guarantee the food security of nations in times of crisis;
> Land desertion, a direct consequence of terminating farming activities;
> Escalation of “financialized” agriculture.
While agricultural policies succeeded in preventing these precarious situations so far, a worrisome course of action is now emerging! Several investment funds are currently purchasing tens of thousands hectares of agricultural land in Africa, with the goals of producing large quantities at low cost and generating sizeable margins.
We are now facing a major breakdown of the very meanings of national power policies and of future geopolitical equilibriums. These potential risks are even more serious for the planet than the current financial crisis.
C. SECOND RESULTS: … AND A GENERAL DOWNTURN––OR EVEN A COLLAPSE––IN FARMERS’ REVENUES WORLDWIDE, WITH THE EXCEPTION OF EXPORTING EMERGING NATIONS
Synthesis of results
Unregulated liberalization in agriculture would lead, during the next 15 years, to a drastic drop in revenues for farmers in the poorest nations (less 50 to 80 percent), to a significant decline in importing emerging nations (such as China and India: less 30 to 40 percent), and a long-lasting deterioration that could prove difficult for developed countries. Only exporting emerging nations, such as Brazil, would possibly show long-term gains.
Key conclusions
Everywhere in the world, agricultural trade liberalization will:
> Aggravate revenue volatility;
> Trigger extreme turnarounds for these revenues from one year to the next, as well as periods of long-lasting low levels.
Upheavals resulting from this situation will seriously impact global equilibrium, since the weakening––or even the loss––of agricultural economies would mostly occur in nations with high population growth (such as Africa, India and China).
Wealthy European nations and the United States could also experience severe disorders that would affect not only their food security but also that of the rest of the world. Undeniably, as we face strong global demographic growth and the consequences of climate change, we will need all the world’s agricultural activities to feed the planet.
Such farmers’ impoverishment practices augur gloomy times for food security and will lead nations to set aside their national production for their own population: we will then go directly to a mandatory return to protectionism.
This is not an unrealistic scenario: In 2008, 17 countries (among which Argentina and India) have already imposed quantitative export restrictions––or even directly vetoed any export––to face up to soaring international prices and thus protect their national food supplies.
Far from being the development round, Doha could thus become the round of turmoil!
And far from preventing it, a WTO agreement on agriculture could drive the world straight to protectionism!
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Graph #2
Evolution of grain producers’ revenues in developed nations by 2023,
following full liberalization in 2010
Graph #3
Evolution of grain producers’ revenues in emerging and less developed nations by 2023,
following full liberalization in 2010
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Results and Findings by large economic zones
Producers in developed countries (North America, the European Union, former Russia/Ukraine) are experiencing very similar variations, showing a very long period (2011 to 2018) when revenues will shrink by an average of 20 to 30 percent and a decline trend of about 10 percent starting in 2010 (see graph #2).
These countries were rescued by the ongoing support and incentives mechanisms of the CAP or the Farm Bill, which preclude them from a general collapse of revenues. Otherwise, it is highly probable that some farmers will cease operations or sell to financial investors. In both cases, food security will be jeopardized and the issue concerning the role of public authorities will need to be raised.
Importing emerging nations (China and India) would see their farmers’ production decrease by a 30 percent trend, with drops that could reach up to 60 percent (see graph #3).
When one is familiar with these farmers’ survival difficulties and the grim social issues they cope with, resulting in suicide surges, such prospect should be enough to immediately terminate any WTO negotiation. In any case, one can easily understand India’s position regarding the safeguard clause in July 2008.
For poorest nations, mainly African nations, liberalization intensifies revenue volatility and, above all, leads them to a massive downturn of 60 percent between now and 2023, with drops of 80 percent (see graph #3).
We might as well say that it will be the final collapse of all grain production in Africa. We can thus measure the extreme thoughtlessness of those advocating a quick progress in the agricultural issues of the Doha Round, by insisting that it will be beneficial to the poorest nations.
Lastly, the only countries to come out unscathed are exporting emerging nations (Brazil in particular), where farmers’ revenues are less volatile and even increase by 10 percent during the same period.
One can better understand Brazil’s demands for agricultural liberalization against minimal concessions in the industrial and service sectors. As for lobbies––especially European lobbies––that back a rapid conclusion of the Doha Round, they only see gains in the short-term expansion of industrial or service activities to the detriment of food security, a topic that is bound to become one of the main strategic issues for the 21st century.
II. FINDINGS TO BE LEARNED FROM THESE RESULTS :
Food security should be at stake on the G20
The international community must therefore:
Make food security one of the issues of the G-20 Summit, just as financial market regulation or economic recovery programs.
Prevent a Doha Round agreement for agriculture based on the current groundwork under the pretext of fighting protectionism: It would be the best way to produce a lasting food crisis and to support a return to protectionism.
Liberalizing the international trade of agricultural products without regulation will weaken a significant portion of agricultural activities worldwide: Most certainly those in poor nations and in the two large Asian countries, but also those in wealthy nations, to the benefit of countries, such as Brazil, or investment funds.
The aborted attempt to purchase 1.3 million hectares of land in Madagascar1 is a recent example. Companies specialized in securing territories––that is to say private militias of tens of thousands men––escort investors to make sure that future production sites will not be subjected to social or environmental protests.
Through their active role in fostering speculation to enhance their investment and obtaining an “exclusive” supply to countries whose food needs are increasing, these funds will be the big winners of the global trade liberalization, as will be emerging nations that export agricultural products and which sometimes use similar social and environmental dumping techniques.
Do we want tomorrow’s global agriculture to reach this state of affairs, which is practically identical to the situation that oversaw the ongoing deregulation of financial markets since the early 1980’s and that brought on the current disaster?
We are still able to stop this course of action; but we would need to make food security in the world one of the issues for the G-20 Summit, just as regulation of financial markets or economic recovery. Indeed, what would really happen if the current crisis were to be finally contained and an even more destructive food crisis were to occur, with its human and social consequences?
Beyond the creditworthiness of banks, it is now imperative to tackle global food “creditworthiness” and not let a neo-liberal ideology take over the WTO international negotiations, under the pretext of fighting protectionism.
Fortunately, opinions against this lasting and misleading “perinde ac cadaver” (to obey as if a corpse) reasoning are being heard, such as the views expressed by:
> Olivier de Schutter, UN Special Rapporteur for the Right to Food, who insists, in a report published on March 9, on a new vision, so that trade can foster the right to food, and maintains that “the Doha Round will not prevent another crisis!”
> Mairead McGuinness, Irish Member of the European Parliament, whose resolution was recently adopted with an overwhelming (85 percent) majority. She considers that “policies of opening up agricultural product markets in the framework of the WTO […] damaged […] food security in many developing nations”, and thus requests that the European Commission revise “its policy of agricultural product trade liberalization” accordingly.
The objectives for world leaders…
> “To restore confidence, the engine for economic recovery”
> “To make an expected gesture toward poor nations”
> “To fight a return to protectionism”
… can only be met by the implementation of a global agricultural governance, whose mission would ensure food security worldwide by allowing open but regulated agricultural markets to guarantee adequate revenues to all farmers throughout the world, since they alone can maximize production factors.
By Jacques Carles,
Executive Vice President of momagri
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1 Madagascar’s new leader, Andry Rajoelina, decided to cancel the agreement concluded by his predecessor with Daewoo Logistics of South Korea, arguing, “In the Constitution, it is stipulated that the land in Madagascar is not for sale or rent”.
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Advocating for
agricultural market
regulation and global
food governance | |
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