As it steadily rose since the early 2000s, the volatility of agricultural commodity prices has become one of the main causes of the increase of global food insecurity. In an article recently available in the Passerelles periodical and published by the International Center for Trade and Sustainable Development (ICTSD)1
, Franck Galtier, an economist and researcher at the CIRAD-UMR MOISA, emphasizes the consequences of this price volatility in developing countries and offers solutions to assist these nations in managing the instability of food prices.
We highly recommend this article, which deserves the credit for calling attention to the weight of an international concerted action based on four key concepts––the implementation of safety nets, the creation of a fund to back policies aimed at stabilizing grain prices in developing countries (DCs), the maintenance of global grain reserves above a minimal level, and a new balance of WTO rules. These propositions represent a required precondition for the establishment of a global agricultural governance system based on principles customized to the specific nature of agricultural markets and to the current post-crisis environment.
momagri Editorial Board
Food price instability creates extremely serious problems for developing countries (DCs). First, it hits consumers hard since they often apply a large share of their income for food purchases. This breeds serious problems of food security (undernourishment and malnutrition), and sometimes major social unrest. For instance in 2008, soaring prices generated urban riots in about forty DCs, even leading to political instability in some countries, such as Haiti where riots caused the fall of the government. Then, agricultural producers are also harshly impacted, since price instability makes investing exceedingly risky and thus hinders the modernization of agriculture (Timmer 1988). Yet, the Green Revolution is now considered a required step for the economic development of DCs, which is then stalled (World Bank 2007; Timmer 2009). Lastly, food price instability can also generate macroeconomic problems (rationing of imports, lower exchange rates) for some fragile importing countries, due to their low currency reserves.
The international community therefore has a key responsibility––assisting DCs in managing food price instability. Initiated this year in the framework of the G20 and the FAO Committee on World Food Security, the discussions are creating the right environment for an international mobilization on this issue.
Innovative propositions are required to meet the challenges raised by instability concerning global food security and agricultural modernization of DCs. The objective of this study is precisely to outline such propositions […]
Proposition #1: Advocating the implementation of multiyear safety nets in DCs
The crisis that swept Niger and other Sahel countries in 2005 brought to light the devastating consequences of household de-capitalization on food security. Indeed, many households had tapped into savings to cope with past crises. Many even had to sell a share of their productive capital (livestock in particular). For the poorest, the adjustment was also made in terms of human capital (under-nourishment). When the 2005 crisis occurred, the ability of households to react to price shocks was very frail (Michiels & Egg 2008).
The “Niger crisis” has therefore shown that emergency assistance (initiated in times of crisis) is not enough. Medium-term programs are necessary to recapitalize vulnerable households and thus increase their resiliency. It can be achieved through safety nets that annually transfer assets to a number of households over a set time span. […] The effectiveness of such programs has been demonstrated, but their cost prevents DCs to implement them or give them an adequate scope. Besides, an external support is often required to set up the databases allowing an effectual targeting of vulnerable households. Assistance by the international community is thus essential regarding this issue.
Proposition #2: Launching an international competitive fund to finance policies to stabilize grain prices in DCs
Multiyear safety nets and emergency aid are needed so that vulnerable households are protected from food insecurity. Yet, they are not enough. Targeting operations can prove to be costly and flawed, especially if the number of people needing assistance is high, which is the case during times of soaring prices. Acting on prices is then advisable to lower the frequency and the scope of price spikes (Newbery 1989). In addition, safety nets and emergency aid only target consumer protection. It is crucial, however, to shield farmers against price drops. This is indeed a requisite condition to stimulate investment, and thus promote agricultural modernization in DCs.
The creation of an international fund would ensure that grain price stabilization policies are no longer applied to emerging nations or DCs that benefit from mining resources. The implementation of conditionality would guarantee the pertinent governance of such policies. The conditions should primarily apply to the fact that activating responses be administered by simple and well-known regulations, such as governmental intervention only if prices exceed a pre-defined range. Such condition is in fact required to guarantee the predictability of public intervention and thus dissuade the buildup of private stocks. […]
Proposition #3: Implementing an international agreement to maintain global grain reserves above a minimal level
DCs have very little means to protect themselves from soaring grain prices in international markets. In 2008, importing countries saw price spikes on their domestic markets, which generated food security issues, and even political unrest. As far as exporting countries are concerned, they sheltered themselves by curbing exports, which led to an increase of already soaring international prices.
It is therefore vital to lessen the frequency and the scope of spikes in international markets. Yet, we know that soaring prices only occur when reserve levels are too low to cushion the shocks impacting production or consumption (Williams & Wright 1991). […]
Only an international agreement establishing a burden-sharing mechanism can allow safeguarding that global grain reserves do not go lower than the required minimum to prevent too frequent and too steep price hikes. For each key grain production (wheat, corn and rice), it would entail setting up a minimal reserve amount to be maintained at the world level (in terms of consumption months). Such minimal level would be defined by a committee of experts and based on the analysis of past market performances for these commodities. The financial effort would then be shared between nations according to their consumption and income levels (the wealthiest nations responsible for a number of months of their own consumption that would be higher than those in poorest countries). Each country would then be free to decide on the most adequate policy to achieve this (subsidizing private reserves, developing public reserves…). A system of governance (controls and penalties) remains to be determined.
Proposition #4: Providing a new balance to WTO rules by enabling small DCs that import grain to resort to custom tariffs and by curbing the right of countries to restrict grain exports
Trade policies are the sole effective means available to DCs to guard against international price instability. In this way, import taxes indexed on international prices allow importing countries to offset the consequences of international market turbulence. As far as exporting countries are concerned, export restriction is the only way to prevent soaring international prices to generate soaring prices in domestic markets.
At the same time however, these trade policies can foster an increase in price instability in international markets. […]
The role of the international community––in the framework of WTO rules––is therefore to best evaluate the trade-off between two partially contradictory objectives: Let countries hedge against international price instability without enabling them to increase it. It consists of finding a balanced dosage. If the WTO rules are too strict, they prevent countries from protecting themselves against international market turbulence. If they are too lenient, they lead to an increase in international price instability.
But the current WTO rules are quite far from such equilibrium. […] It therefore seems to be essential to give a new balance to WTO rules. In particular, it consists in providing importing DCs––especially smaller ones––with more freedom to use variable taxes on grain imports. […] In return, it seems mandatory to limit the right of exporting countries to restrict their grain exports, while giving them the option to protect themselves against soaring international prices. To do so, the best regime is to let nations restrict their exports within the necessary range that provides adequate supply for their domestic market. […]
1 Franck Galtier’s complete article « How can the international community assist developing countries to manage the unpredictability of food prices?” is available at ICTSD, Passerelles, Volume 12, No. 3, August 2011. http://ictsd.org/i/agriculture/112070/