dimanche 13 avril 2008

Precious grains

By Alan Beattie and Javier Blas
Financial Times : 18:09
As manager of Unga, a maize miller in the Kenyan capital Nairobi, Dale Wiest sees the effect that panicked trade restrictions are having on global food prices only too clearly.
Last year he bought half his grain from neighbouring Tanzania. But after a bad harvest, the country banned exports in January. “Since then, we had been unable to purchase there,” he says. Maize prices in Kenya are a third higher than a year ago and Mr Wiest is pessimistic. “I think prices will rise more,” he says.
Food production, like most industries, has become increasingly globalised as transport has become cheaper and communication more efficient. But trade in food is far from free: as with textiles and garments, it has long been constrained by government intervention. The resulting distortions have helped to shape a crisis that has seen food riots in about 30 countries this year – and the export bans being imposed by governments across the world are exacerbating it.
The rise of hyper-efficient agricultural exporters such as Brazil and Thailand over the past couple of decades can be likened to the opening of the Argentine pampas and the North American prairie towards the end of the 19th century, which revolutionised trade in wheat and beef. Brazil in particular, endowed with plentiful water and millions of square miles of cultivable grassland (and Amazonian jungle, illicitly) has become to many basic commodities – sugar, beef, soyabeans, orange juice and chicken – what China is to manufactured goods and India is to outsourced business services.
Some developing countries have come to depend substantially on imports for staple foods such as wheat, maize and rice. Egypt, for example, whose population has more than doubled over the past 20 years and is increasingly urbanised, imports around half its staple food, wheat. Tony Allan, an expert in water usage at the School of Oriental and African Studies in London, says the country has no choice, since it can no longer sustainably feed its own population – even with the water resources of the Nile. Last month Hosni Mubarak, Egypt’s president, commanded his army to increase the output of bread at the many bakeries it controls – usually used to bake loaves for its own soldiers – in order to cope with lengthening bread queues and occasional outbreaks of violence.
But although staple grains are easily tradeable, being non-perishable, it is striking how little is sold across international borders. Rice provides nearly one-third of the developing world’s calories, but only around 6-7 per cent of world production is exported, despite wide variations in productivity and price between different countries.
This derives partly from the belief that “food security” – ensuring a regular supply of basic sustenance – is best served by keeping a large proportion of production at home, especially in countries where import supply chains are inefficient or controlled by monopolists who may restrict sales to hold up prices. As a result, the international market for rice is far from efficient, fractured into a series of bilateral arrangements rather than one deep, liquid exchange.
The bias towards home production in richer countries betrays another familiar motive: a historic affection for farming that is often bound up with emotional attachments to culture, cuisine and landscape. The small-scale farmers of Japan and South Korea, for example, who grow rice on terraced mountain hillsides, are among the most cossetted in the world: some of the rice tariffs in Japan that keep out cheaper foreign competition are higher than 700 per cent.

These interventions often distort global market signals. Governments impose import tariffs and subsidies to keep farmers’ incomes higher than they would be if subjected to free-market competition. They also sometimes compensate their consumers with subsidies to keep down the prices they pay.
Inevitably, these interventions vary from country to country. The Washington-based International Food Policy Research Institute (Ifpri) estimates that domestic maize prices in Mexico have been up to 35 per cent higher than world prices since the beginning of 2005, while in India rice was on average more than twice as expensive as it was on the global market. But as target prices often stay fixed, signals from world markets are muted.
Placating both farmers and consumers may be relatively easy, though not necessarily efficient, when food prices are stable. But today’s high and volatile prices make it increasingly costly to cushion the blow for consumers and many of the poorest countries’ governments cannot afford indefinitely to hold food costs down. Instead, they have started to remove import tariffs and impose export bans in an attempt to transfer income directly from farmers to consumers – in effect preventing farmers from selling their produce at the highest price they can find on international markets.
Such measures may alleviate domestic supply problems in the short term. But they also create shortages in global markets, accentuating the problems of those who have to depend on imports – particularly when highly efficient net exporters of grain such as Argentina and Ukraine restrict exports. Joachim von Braun, director-general of Ifpri, calls them “starve your neighbour” policies.
World prices of staple foods are highly sensitive to shocks. Both demand and supply tend to be inelastic, particularly in the short run. Since staples are often the cheapest sustenance available, consumers tend not to switch to other foods even when the price goes up.
It is also difficult to get new production up and running quickly. Supply typically increases by just 1-2 per cent for a price rise of 10 per cent. World demand for cereals rose by 8 per cent between 2000 and 2006 but prices increased by about 50 per cent and have accelerated upwards since, partly driven by state-subsidised programmes of biofuel expansion that have diverted crops from food.
This has been exacerbated by the policies of governments. If the first reaction is to keep produce from the world market, prices will jerk even higher. Piet Bukman, the former Dutch agriculture and trade minister who now chairs the International Food and Agricultural Trade Policy Council, an association of trade experts, says: “Agricultural producers require a sound transmission of market signals, which is actually impeded by export or import bans, even if these are implemented in the name of food security.”
Particularly vulnerable are those poor countries, many in sub-Saharan Africa, whose variable and low-productivity agricultural sectors make them highly dependent on imported staple foods. Grains (including rice) account for 63 per cent of the calories consumed in low-income Asian countries and around half in sub-Saharan Africa. Eritrea, for example, imports 87 per cent of its grains and the country’s export earnings cover only 25 per cent of its food import bill, the rest being aid from rich donor countries. African countries typically export tropical crops such as coffee, tea and fruit, whose prices have not kept pace with the basic staples.
Within developing countries, some do badly and some do well from higher prices. City-dwellers who consume but do not produce food tend to do particularly badly, but they are not the only ones.
There is a popular perception that, since most poverty in the developing world is concentrated in rural areas, higher food prices are good for the poor. But this varies considerably from country to country, depending on how many smallholders sell more staple food than they buy. The poor in Bangladesh, for example, on average tend to lose: 22 per cent of the income of net food buyers goes on staples, while only 4 per cent of the income of net sellers of food comes from selling staples. In Vietnam, on the other hand, there are more competitive small producers who tend to benefit from high rice prices.
Overall, Mr von Braun says: “There is not much supporting evidence for the idea that higher farm prices would generally cause poor households to gain more on the income side than they would lose on the consumption-expenditure side”.
Apart from cutting import tariffs, which many developing country governments are already doing, and rowing back on government subsidies to biofuels, which rich world governments are resisting, there are few quick solutions to the rise in food prices. The last time a global food crisis hit was in the early 1970s, during a familiar combination of general rises in commodity prices, financial market turmoil and rising demand for food from the developing world. Policies then were twofold: change government interventions to encourage supply and increase productivity through new technology. The scope to do the same this time may be more limited.

In the 1970s, the US reversed forty years of farm policy dating back to the Great Depression and changed its programmes to encourage output rather than to support prices by limiting production. Subsequent reform, partly spurred by global trade agreements attempting to end distortions to agricultural markets, have since made little difference to this basic pattern. American farmers are paid to produce. The same reform cannot be repeated, and taking away US subsidies to wheat and rice producers – a key demand of developing countries in trade talks – would increase, not lower, global food prices.
In the medium term, the prospects for supply rely on bringing more land into use and improving farmers’ access to finance and markets (see sidebar). In the longer term, hope may rest on technology – wider adoption of genetically modified food or a repeat of the “Green Revolution” of the 1960s and 1970s that produced new strains of crop and helped countries such as India to become self-sufficient in food. But work on similar breakthroughs for Africa, though being urgently pursued by donors such as the Bill and Melinda Gates Foundation and the Earth Institute at Columbia University, is at an early stage.
For the moment, the kneejerk reaction of many governments has been to meet one market distortion with another and make the problem worse. Pedro de Camargo Neto, formerly chief agricultural negotiator for Brazil in global and regional trade talks, says: “It is very disappointing to see our neighbour Argentina making the same mistakes Brazil made 20 years ago, with export bans and prohibitions. The solution is to create market signals that mean more production, better technology and more stability. Export prohibitions are not a solution for anyone.”

Rising costs wipe out gains at the farm gate
Could record food prices be their own cure, spurring farmers around the world to lift production? A recent fact-finding trip to Kenya by Josette Sheeran, director of the United Nations World Food Programme, provided little evidence to support this view.
When, in a meeting with a group of farmers, Ms Sheeran asked for a show of hands on whether they were benefiting from the rising cost of agricultural commodities, not one among the two-dozen present reached up. “Definitely no benefit,” Carl Tundo, the manager of Lesiolo Grains in Kenya, told Mrs Sheeran. “Input cost has risen ridiculously in the last six months – everything from fertiliser to seed and fuel is much more expensive.”
Even if the prices they achieved rose, higher production costs – particularly of fertilisers and diesel – often prevented farmers in the poor countries of sub-Saharan Africa and south-east Asia from profiting.
In Pakistan, for example, the government has forecast a lower wheat crop this spring and summer, in spite of record prices. This was because farmers there halved their use of fertilisers after a price rise of almost 50 per cent in the past year. A lower use of fertiliser cuts wheat yields, eroding farming income.
Nestor Osorio, executive director at the International Coffee Organisation, says rocketing oil prices are exerting a negative impact on the incomes of coffee farmers. “This could lead them to cut down on the use of fertilisers, with a consequent fall in productivity.”
That is bad news for world supplies of agricultural produce. Worse, farmers in poor countries might not increase their planting – and in some cases could even cut their acreage – in spite of the current record prices and strong demand.
The situation is different in the rich countries of Europe and the US, where farm-gate prices are closer to those on the international market and, moreover, farmers enjoy generous government subsidies. The combination is pushing farmers to plant more in an effort to benefit as much as possible from surging demand.
The US Department of Agriculture forecasts that US farmers will this year plant the highest acreage since 1984, although it is unclear if that expansion will translate into a bumper crop, because of the poor quality of some of the new land.
Net farm income in the US is forecast this year to hit a record $92.3bn (£46.8bn, €58.3bn), up 4.1 per cent from the 2007 level. Joseph Glauber, chief economist at the USDA, told farmers at a recent conference that there could be little dispute that 2007 was “one of the most remarkable years agriculture has ever seen”.
“As we look forward to 2008, the stage seems set for another year of prosperity and growth,” Mr Glauber told the gathering of nearly 1,000 smiling farmers and food industry executives.
Western farmers also enjoy access to commodities forward markets, which allow them to lock in the current high prices. In addition, they can insure their crops – at subsidised rates, thanks to government support – against weather damage.
This is a world away from the export bans and price controls that governments in developing countries regard as their main tools to ensure their own populations are fed. Such mechanisms discourage higher production, not only in the poorest countries but also in bigger developing economies that are key to farming – such as Argentina, Ukraine or Vietnam.
Argentina is a particularly good example. After the government slapped an export tariff of 44 per cent on soyabeans, the harvest has been delayed and analysts have cut their forecast for next year’s soya acreage. Farmers say there is no incentive to plant more if they cannot cash in on record international prices.
In Egypt, where the local rice price rose from $200 a tonne last October to $430 by early this month, the government’s decision to ban export sales for six months knocked $100 off the price in a single day.
National price controls are particularly damaging, according to Joachim von Braun, director general at the Washington-based International Food Policy Research Institute. “Price controls reduce the price that farmers receive for their agricultural products and thus reduce farmer incentives to produce more food,” he says.

Copyright The Financial Times Limited 2008

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