Regulating the International Agricultural Markets – A Decisive Challenge for Development

In 2005, the GREMA1 agricultural markets research group and think tank held a series of three seminars2 addressing regulation of the international agricultural markets. A book entitled “La régulation des marchés agricoles internationaux: un enjeu décisif pour le développement” [“Regulating International Agricultural Markets: A Major Challenge for Development”]3 was compiled under the direction of Jean-Marc Boussard (former Director of Research at INRA, France’s national research institute, and WOAgri economist) and Hélène Delorme (associate researcher at CERI4) from the papers presented by the 27 authors, who wrote the book’s 17 articles.
WOAgri highly recommends this book, which with great relevance, and counter to current mainstream thinking, analyzes the current state of global agriculture and the related challenges. The publication illustrates the historic structural instability of agricultural raw materials prices as caused by the presence of exogenous and endogenous factors. It likewise shows that a coordinated approach at the international level is needed to regulate the agricultural markets, an approach that must be guided by strategic, geopolitical and macroeconomic choices made at the national and international level. It furthermore highlights the importance of initiating a global governance for agriculture to renew the multilateral framework that the WTO alone cannot represent.

The experts that contributed to this book hail from various countries (France, Italy, Germany, Brazil, United States, Canada, United Kingdom, etc.) and represent the research field (CERI-Sciences-Po, CIRAD, INRA), academia, the World Bank and NGOs. Their analyses jointly address two questions: why is regulating the international agricultural markets a decisive challenge for development and what public and private institutions must be established to stabilize those markets?

The book’s first section provides a well-argued response to the first question by demonstrating that the agricultural markets are by nature erratic. The strong, irregular and continuing fluctuations of agricultural prices partly arise from factors that are exogenous to agricultural economies (vagaries of weather, social crises, etc.) but also arise in particular from endogenous factors (rigidity of demand, forecasting errors and risk mitigation strategies used by farmers and other key players in the agrifood fields) related to the very operation of those markets.

Under such conditions, efforts to open up trade and the disengagement of States underway since the early 1980s cannot stabilize prices. On the contrary, those actions end up amplifying and in particular spreading fluctuations, as evidenced by the variations in international agricultural product prices observed since 1982. With the succession of booms and depressions, full, long-term fluctuations continued, tending to decrease throughout the 1990s while having increased since the 2004 oil shock, which has boosted the agrofuels sector.

The instability of international agricultural prices constitutes a major challenge to development. Firstly, this instability weighs more heavily on developing countries than on wealthy countries, for production of agricultural raw materials for the export markets plays a more significant role in their economies. Furthermore, due to the requirements of structural adjustment programs, those same countries are more vulnerable to global competition than others. In particular, however, the instability of agricultural prices disturbs growth in those countries because of its direct effects on agriculture (income and investments) and its indirect effects on macroeconomic variables (equilibrium of external accounts, tax revenues, exchange rates, investment rates).

These findings are corroborated by those of the "ID3" global economy model built at CIRAD. Contrary to the standard models used by the international organizations, the ID3 model was the first to take into account forecasting errors and the risk mitigation behavior of operators, which changes entirely the “idyllic” conclusions of the standard models. According to the international donor agencies (World Bank, IMF), if full liberalization were to be accomplished, it should by the law of large numbers cancel out the effects of the multitude of “small” crises that destabilize a world market split into more or less closed national spaces. In showing that liberalization does not mitigate price instability but rather spreads it, the ID3 model was the first of its kind to reveal the illusory nature of that hypothesis. Contrary to the fabulous estimates promised by the econometricians at the World Bank, one must expect liberalization to lead to losses, rather than gains, in well-being, that furthermore will be highly unevenly distributed given that developing countries will have lost the most as a result of this policy.

The second section of the book explains why regulatory interventions are essential. Short-term trade objectives and long-term objectives must be rendered consistent to meet this essential condition for diversifying developing economies. For the economist, this means getting efficacy/competitive edge and equity/justice to mesh. The legal expert will insist on the need to not sacrifice the societal functions of agriculture (environment, food security and safety) for its trade functions.

History has proven that stabilization can be achieved. From 1950 to the early 1980s, product-level agreements managed to regulate short-term fluctuations and achieve a long-term decrease in worldwide prices of agricultural and industrial raw materials. This stabilization, carried out under the auspices of American and British policies, did not stand up to the monetary crisis of the 1970s and the debt crisis of the 1980s, which led to the rollback of the economic clauses of the agreements and reduced them to mere information forums. The historic approach also sheds light on the difficulty in regulating the agricultural markets.

This sector-based regulation, despite the fact that it has specific technical characteristics, is not autonomous but rather participates in major geopolitical and macroeconomic choices at the national and global levels. Certainly, free from the limitations of the Cold War and in the absence of the doctrinal framework of Keynesianism, Western countries would not have held themselves to the disciplines and market sharing related to the raw materials markets as they did until the early 1980s. Since then, the situation has changed entirely. As several of the authors analyze, capitalism triumphed over communism, the “liberal revolution” ended closed-economy growth, the agrifood sectors (on the heels of the other economic sectors) integrated and concentrated into a few large, globalized industrial and commercial groups. Regulation of the agricultural markets nonetheless remains necessary, but the forms, instruments and actors of that regulation must be reworked.

In view of preparing for this “reworking,” the third section of the book examines the two main families of regulatory tools available. Private mechanisms for risk regulation are favored by the international economic organizations and the World Bank in particular. Insurance plans (on income, harvests, natural disasters, etc.) can provide useful protection to operators but are costly for government budgets because to function they require significant State subsidies.

Risk transfer systems (futures markets, options and other derivatives) are not accessible to small- and medium-scale farmers (in developing and wealthier nations alike) who lack access to the necessary financial and intellectual means. Additionally, private mechanisms do not eliminate price instability even though stabilization is (or should be) a priority of public policy.

An important lesson from this publication is that the first thing to be done in implementing government regulations is to improve the level of organization among producers. In all countries, rich and poor alike, agriculture remains a competition-based economy made up of a large number of productive units that, when isolated, have no economic power when up against the oligopolies upstream and downstream, nor when up against government administrations. Getting producers to organize their efforts is particularly urgent in the developing countries where building their capacities for action calls for bringing together two driving forces: producers and outside operators whose expertise has been mobilized (NGOs, design firms, etc.).

The intervention next must be adapted to the political capacities at the various levels of agricultural governance. Supply control policies are well adapted at the national level. By balancing volumes of supply and demand, they avoid disrupting the international market. They are also more advantageous for producers and consumers alike. For example, a comparison of the dairy policies of “liberal” countries (United States, New Zealand and Australia) with those of "interventionist" countries (Canada, France and the Netherlands) reveals that for the second group, consumer prices are lower and producer prices higher than for the first group. At the regional level, it is easier and more useful to establish common markets such as the one sponsored by Europe’s CAP, a model that is the envy of many but still has not been sufficiently taken up by other regional bodies. At the worldwide level, two things must be done: product-level agreements must be redefined, a situation that is urgent for tropical foods produced for export markets; and the multilateral framework must be renewed, for the WTO, having failed to replace national regulations, has only been able to maintain the illusion of liberalism by continually adding exemption clauses to the 1994 deal.