For the World Bank, No Risk of World Food Shortage
On December 9, 2008, the World Bank released the 2009 edition of its Global Economic Prospects. As mentioned in its introduction, the document is published as the international community finds itself at a crossroads: we are confronted to an accumulation of major crises––in the food, energy and finance activities––and we are stepping into a troublesome economic recession.
Commodity markets became strategic challenges in the 1970’s because of the oil crises and the expected decline of traditional energy resources. Since then, the international community focused its concerns on fossil fuel commodities and, today, commodity issues are all the more significant, as international decision-makers recently understood the strategic value of a new type of assets: agricultural products.
In addition, the World Bank Global Economic Prospects 2009 is relevant as variations prospects regarding commodity markets are very carefully examined because of their crucial role in the stability of mankind (growth, economic development and food stability). While this year’s edition focuses on an analysis of commodity markets, and agricultural commodities in particular, it brings about a series of strategic economic policy recommendations to meet the challenges brought about by high commodity prices.
Yet, if the examination and diagnostic are indeed relevant regarding energy resources and metals, they do not seem to relate to agricultural commodities: the report under-estimates, and even neglects, some basic factors in its explanation of the current crisis: speculation and the very operating procedures of global agricultural markets.
1. The World Bank expresses some optimism regarding commodity price variations…
The Global Economic Prospects 2009 starts out by studying the impact of the financial crisis on developing nations and emphasizes the more drastic consequences for these countries, already weakened by food and energy crises of the 2008 first half. These crises, set off by unprecedented high agricultural commodity prices during the past twenty years, have undeniably led to soaring inflation and trade balance deficits in many countries. The situation considerably reduces national tax and currency negotiating room that constitutes traditional public policy tools to fight recession.
According to the World Bank, the crisis mainly results from a gap between rising supply capabilities and demand. We can set forth three main causes to explain soaring commodity prices:
> A bursting demand in developing countries, particularly in emerging nations, such as China where the share of basic products per GNP is four times higher than in wealthy nations and twice higher than in other emerging nations;
> An investment shortage in the 1980-90 decade, outlays that were not encouraged by especially low commodity prices and that generated a production deficit;
> The impact of the first generation of biofuels on energy and agricultural markets that generated additional demand on coerced markets in terms of outlet and use (food and noon-food).
Nevertheless, the World Bank prospects are optimistic: the institution thinks that the current crisis should not last since it considers that we do not face a shortage of natural resources worldwide. Combined with a forecast of declining global economic growth and of a drop in global exports, these findings lead the World Bank to deduce that commodity prices should lose ground in the short term as well as in the long term, since productivity increases at a 2% yearly rate, against demand which rises by near1.5%. The World Bank 2009 report thus mathematically concludes that supply will exceed demand.
Still according to World Bank forecast, oil price should average about $75/barrel in 2009 and food prices should decline by 23% against their 2008 levels. In the long term, prices should prevail at a lower level than that observed in the 21st century’s first decade, but still be higher than during the decade between 1980/90.
In addition, the World Bank estimates that the crisis situation experienced during the past few months will resolve itself naturally, provided that “political acts follow”, as stated by Andrew Burns, the lead economist in charge of the chapters on commodities. The report thus advocates to increase investment in infrastructures and agricultural research, to provide reliable financing to food assistance agencies, to improve coordination and information regarding global food inventories and to back international agricultural trade flows.
2. … but, by disregarding the specific nature of agricultural commodity markets, the World Bank outlines flawed and risky recommendations.
Indeed, we must not forget that the agricultural crisis is specific compared with the general crisis endured by commodity markets. Yet, by disregarding this, the World Bank report steers clear of the key measures required to exit the crisis.
We therefore must point out three specific issues to understand the current problems faced by agricultural commodity markets.
First, the current situation is different from past agricultural crises because the crisis occurs in a “financialized” market system, in which investors and speculators play an increasing key role. Indeed, these players are more and more inclined to consider agricultural products as a new type of assets and thus manipulate agricultural commodity prices: in 2007, they contributed to soaring prices by turning agricultural commodities into hedge funds, while in 2008, some investors’ need for cash drove prices down. Their role in the current crisis has been far weightier than, for instance, that of biofuels, which is highlighted by the World Bank: out of a two billion grain production, only one hundred million was allocated to biofuels, a fact that strongly put their impact in perspective.
Secondly, supply is far less predictable than in other commodity markets because of the specific elements tied to the irreversible nature of production and investment decisions. In agriculture, there is no just-in-time, one cannot slow down production rates and even less downgrade production output to adjust to demand variations.
Lastly, contrary to other commodity markets for which there are no short-term natural resources shortage, the agricultural production input is extremely tight and is the cause of “scissor-like effects” (price decline and soaring costs) that directly impact farmers income.
This explains why agricultural commodities require a specific policy that takes into account the specific nature of food markets. Such a policy is all the more necessary because, contrary to energy commodities or metals markets, agricultural goods are vital goods that affect mankind future.
This past May, Robert B. Zoellick, the World Bank president, stood up to put agriculture at the core of development policies implemented by the World Bank. But how can we implement appropriate policies if the specific nature of agricultural markets, the role of speculators and the need to acknowledge the “agricultural exception” are not appreciated? This however has been recognized by momagri from the start but is still ignored by the World Bank, in spite of the past year’s events. In fact, the World Bank concedes the value of agriculture for global economic growth (2008 Report). It must act accordingly but still does not seem ready to do so. This state of affairs will not prevent momagri, far from it, to institute joint study guidelines to correct the situation.
by momagri’s editorial board