GLOBAL FOOD CRISIS:

POLICY OR MARKET FAILURE1

By – Dr. Ruby Ojha

Associate Professor,
Dept. of Economics, PGSR,
SNDT Women’s University,
Churchgate, Mumbai – 400020
1. Introduction

It is said that markets are ruthless. In a brutal world of capitalist agriculture, some

people destroy food because prices are too low, and others literally eat dirt

because food prices are too high. In some countries the starving masses are

going to the streets and becoming militants out of desperation when they find it

impossible to feed their hungry children. Skyrocketing food prices are threatening

the stability of many governments around the world. Rich countries of the north

impose "liberalization" policies on debt-ridden southern countries and then take

advantage of the liberalization to capture the market in these countries.

Government subsidies account for 30% of farm revenue in the world's 30 richest

countries, a total of US$280 billion a year, which is an unbeatable advantage in a

"free" market where the rich write the rules. In many poor countries of Africa,

Asia and Latin America, global markets now determine local prices — and often

the only food available must be imported from far away.

For several decades the poor countries were forced to agree to "Structural

Adjustment Programs" (SAP) in order to get financial support from the World

Bank and International Monetary Fund. All this was done with the promise that

the market would produce economic growth and prosperity — instead, poverty

increased and support for agriculture was eliminated. All these contradictions are

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1.Paper was presented in UGC Sponsored Two-Day National Level Seminar on “Gobal Food
Crisis & India” on January 30 & 31, 2009 organized by Dept. of Economics of Smt. B .M.
Ruia Girls’ College, Gamdevi, Mumbai.
not strange since capitalism triumphed so decisively in the Cold War yet they

seem quite unexpected. Capitalist agricultural structure has brought us in the

midst of unprecedented worldwide food price inflation which the affluent countries

and people can bear but the poor cannot tolerate. When the world is left at the

mercy of the market forces, mass starvation, militancy and social unrest resulting

in political instability are the least what we can expect. In my opinion the current

food crisis is not "the greatest demonstration of the historical failure of the

capitalist model" as the Venezuelan president Hugo Chavez expressed on April

24, rather it is a true face of a capitalist world and market driven agriculture which

has resulted in a world wide crisis of the most essential commodity out of three

necessities of life i.e., food, clothing and shelter. When the poor are dying of

hunger, capable governments or social system should intervene and try to

prevent starvation, at least on humanitarian grounds, — and above all, should

not promote policies that deny food to hungry people.

2. Causes

Global Food Crisis stems from a complex range of factors. On the demand side

the current food crisis is largely the result of population growth, urbanization, and

rapid economic development in East and South-East Asia, droughts, slow supply

response, the fall in the dollar, high energy prices, and concerns over increased

demand for bio-fuels. The effects of these factors on food commodity prices were

exacerbated by government export restrictions and market speculation. But, on

the supply side, the crisis has deep-seated, longer-term causes, including low

and declining agricultural productivity in many developing countries. Particularly

in the LDCs, the sector was more productive 50 years ago than it is today,

according to UNCTAD figures. Yet another reason is that governments have

softened the impact of price rises on domestic markets that would otherwise

have encouraged farmers to grow more food. Of 58 countries whose reactions

are tracked by the World Bank, 48 have wildly distorted food markets by

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imposing price controls, consumer subsidies, export restrictions or lower tariffs.

Eventually, no doubt, farmers will respond to higher prices by growing more and

a new equilibrium will be established. If all goes well, food will be affordable

again without the subsidies, dumping and distortions of the earlier period. But the

transition to a new equilibrium is proving costlier, more prolonged and much

more painful than anyone had expected. Bob Zoellick, the president of the World

Bank, reacts that food inflation could push at least 100m people into poverty,

wiping out all the gains the poorest billion have made during almost a decade of

economic growth.

Also contributing to the low productivity are policies that abolished or weakened

the role of key institutional support measures like - state-supported extension

services, marketing boards, and state subsidies for agricultural inputs like seeds,

pesticides, herbicides and fertilizers. Farmers are further discouraged by the

availability of cheap food products on international markets, due largely to export

subsidies in developed countries. Indeed, a number of traditionally food-exporting

developing countries – many of them LDCs – have become net food importers

over the past 20 years. These countries are the hardest-hit by the current crisis.

Main cause of current food crisis is that handful of countries dominate the global

trade in staple foods. This leaves the world's poorest countries, the ones that

must import food to survive, at the mercy of economic trends and policies in

those few exporting companies. When the global food trade system stops

delivering, it's the poor who pay the price. Besides, there are several other

causes beyond the demand-supply factors, which need special mention:

a. Agro-fuels: The emerging bio-fuels market is a new and significant

source of demand for some agricultural commodities such as sugar, (corn)

maize, cassava, oilseeds and palm oil. The issue is not limited to how

much of each crop may be used for bio-fuels instead of food and feed, but

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how much planting area could be diverted from producing other crops to

those used as feedstock for production of bio-fuels. It is now official policy

in the U.S., Canada and Europe to convert food into fuel. U.S. vehicles

burn enough corn to cover the entire import needs of the poorest 82

countries. Ethanol and biodiesel are very heavily subsidized, which means

that crops like corn (maize) are being diverted out of the food chain. This

increases the prices of agro fuel crops directly, and indirectly boosts the

price of other grains by encouraging growers to switch to agro-fuel.

The Renewable Transport Fuel Obligation (RTFO), introduced on 15 April

in the US, mandates petrol retailers to mix 2.5 per cent bio-fuels into fuel

sold to motorists. This will rise to 5.75 per cent by 2010, in line with

European Union policy. According to the World Bank, global maize

production increased by 51 million tonnes between 2004 and 2007. During

that time, bio-fuels use in the US alone (mostly ethanol) rose by 50 million

tonnes, soaking up almost the entire global increase. According to

International Food Policy Research Institute, producing fuel from crops

accounts for 25% to 33% increase in global commodity prices.

Governments have heavily subsidized the industry as an energy

alternative, but now one U.N. food official labels these policies “criminal”

and has called for a five-year bio-fuels production moratorium. Next year,

the use of US corn for ethanol is forecast to rise to 114 million tonnes -

nearly a third of the whole projected US crop. American cars now burn

enough corn to cover all the import needs of the 82 nations classed by the

UN's Food and Agriculture Organization (FAO) as "low-income food-deficit

countries". There could scarcely be a better way to starve the poor.

It also drives up the cost of producing meat, since corn is the main

ingredient in North American animal feed. In Canada, the federal

government was recently paying $225 for each pig killed as part of a plan

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 to reduce pig production. Pig farmers, squeezed by low pig prices and

high feed costs, have responded so enthusiastically that the kill used up

all the allocated funds before the program ended.

b. Neglected aid for science, technology and innovation in agriculture:

During the 1960s and 1970s the U.S. extended a lot of financial and

technical support into agricultural development in south and Southeast

Asia. Consequently, "green revolution" led to spectacular increase in food

production until the 1990s. Today, The Economist reports that "spending

on farming as a share of total public spending in developing countries fell

by half between 1980 and 2004". As a result reduction in subsidies and

R&D money has adversely affected production growth. In seven of the

past eight years the world consumed more grain than it produced. Donors’

new emphasis on social-sector and emergency aid has meant less

investment in productive sectors like agriculture. It is mainly because of

unglamorous logistics in agriculture. It is not fashionable now to extend aid

for science, technology and innovation in agriculture, which has resulted in

the end of the green revolution. The world grain stocks are now at their

lowest point ever, leaving very little cushion for bad times but "the market"

is supposed to take care of all problems.

c. Natural calamities: Scientists say that climate change could cut food

production in parts of the world by 50% in the next 12 years but the global

climate crisis seems to have already arrived, and it is affecting food. For

example, a multi-year drought in Australia in recent years only has

reduced the wheat crop by 60% and rice production has been completely

wiped out. In Bangladesh one of the strongest cyclones in decades wiped

out a million tonnes of rice and severely damaged the wheat crop, making

the huge country even more dependent on imported food. Other examples

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 are also there. Yields in Australia and Canada fell by about one fifth in

aggregate, and yields were at or below trend in many countries.

d. Rising oil prices: The price of food is linked to the price of oil because

food can be converted into a substitute for oil. Besides, rising oil prices

also affect the cost of producing food. Fertilizer and pesticides are made

from petroleum and natural gas. Gas and diesel fuel are used in planting,

harvesting and shipping. Skyrocketing oil prices have strained every stage

of food production, from fertilizer to tractors to transport.

e. Ban on export of food by some countries: India and Vietnam together

normally account for 30% of all rice exports. Announcement of both the

countries to suspend rice exports in order to make their reserves available

for domestic market was enough to push the already tight global rice

market over the edge. Rice buyers immediately started buying up

available stocks, hoarding whatever rice they could get in the expectation

of future price increases, and bidding up the price for future crops.

f. Market failure: The current food crisis has several causes but there is

increasing evidence that the crisis is being made worse by the

malfunctioning of world grain markets. Given the thinness of major

markets for cereals, the restrictions on grain exports imposed by dozens

of countries have resulted in additional price increases. A number of

countries have adopted retail price controls. Speculative bubbles have

built up, and the gap between cash and futures prices has risen,

stimulating overregulation in some countries and causing some

commodity exchanges in Africa and Asia to halt grain futures trading.

Some food aid donors have defaulted on food aid contracts. The World

Food Programme (WFP) has had difficulty getting quick access to grain

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 for its humanitarian operations. Developing countries are urgently

rebuilding their national stocks and re-examining the "merits" of self-

sufficiency policies for food security despite high costs.

These reactions began as consequences, not causes, of the price crisis,

but they exacerbate the crisis and increase the risks posed by high prices.

Because they restrict the free flow of food to where it is most needed and

undermine the flow of price signals to farmers, these market failures

impose enormous efficiency losses on the global food system, hitting the

poorest countries and people hardest.

3. Preventive measures

Appropriate global institutional arrangements for preventing these market

failures are missing. A global solution that addresses the need for reliable

emergency food supplies and prevents excessive speculation in food markets

may be costly, but given the losses created by the crisis, it will still have large

positive net returns. Keeping the causes of food crisis in mind, some short-

term, medium- term and long-term solutions are suggested here:

a. Short term:

In the short run, humanitarian aid, social-protection programmes and trade

policies will determine how well the world copes with these problems. First

priority should be for ensuring that sufficient food is made available to

the poorest households through emergency UN food programmes and

bilateral food-related development aid. Assistance to poor small farmers

also is equally urgently needed to boost production – for example, by

expanding their access to such vital inputs as seeds and fertilizer.

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 Besides, rising oil prices feed back into the process. With food and fuel

markets interlinked, increases in the price of oil are reflected in increases

in the price of grain. Need of the time is to take a pause on bio-fuels.

The real-world result from this structural shift may be that hundreds of

thousands of people can be saved from starvation in the next few years –

if the policies promoting bio-fuels are urgently reversed. The UK and the

EU can reverse some of the damage by immediately ditching their own

bio-fuels policies and providing vital aid funding, principally through the

World Food Programme, to help prevent widespread starvation in the

short term.

Besides, tackling a global speculation in food prices is another priority.

International coordination could help minimize the potentially dangerous

implications of food hoarding and restrictions or bans on food exports.

Changes in supply and demand fundamentals cannot fully explain the

recent drastic increase in food prices. Rising expectations, speculation,

and hoarding have also contributed to the increasing level and volatility of

food prices. The flow of speculative capital from financial investors into

agricultural commodity markets has increased drastically. The weak dollar

has led to high commodity prices as pension, hedge, and index funds

have bought oil, gold, and agricultural futures as a hedge against inflation.

Excessive speculation in the commodity futures market can, in principle,

push up not only futures prices but also spot prices above levels justified

by supply and demand. Hence, curb on speculative activities is most

urgently needed.

b. Medium Term:

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 In the medium term the question is where does the world get more food

from? If the extra supplies come mainly from large farmers in America,

Europe and other big producers, then the new equilibrium may end up

looking much like the old one, with world food depending on a small

number of suppliers and—possibly—trade distortions and food dumping.

Farmers in rich countries have indeed started responding to the rising food

prices. America's Winter wheat plantings are up 4% and the spring- sown

area is likely to increase more. The Food and Agriculture Organization

(FAO) forecasts that the wheat harvest in the European Union will

rise by 13%.

Ideally, a big part of the supply response would come from the world's 450

million smallholders in developing countries. There are three reasons why

this would be desirable. First, it would reduce poverty of three-quarters of

those living on $1 a day, live in the countryside and depend on the health

of smallholder farming. Second, it might help the environment. Those

smallholders manage a disproportionate share of the world's water and

vegetation cover, so raising their productivity on existing land would be

environmentally friendlier. India feeds 17% of the world's people on less

than 5% of the world's water and 3% of its farmland—and, along with

China, is seeing its cereal crop rise this year. More such success stories

can be identified. Thirdly it should be efficient in terms of returns on

investment. It would be easier to boost grain yields in Africa from two

tonnes per hectare to four than it would be to raise yields in Europe from

eight tonnes to ten. The opportunities are greater and the law of

diminishing returns has not set in. The smallholders are not responding

enough.

Producing higher yields and growing better crops makes sense to

consider improved crops because conventional breeding has produced so

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 much success. More productive strains of rice and wheat accounted for 21

percent of the growth in crop yields in developing countries from 1961 to

1980 and an astonishing 50 percent increase in yield from 1981 to 2000.

"We need another breakthrough," says Norman Borlaug, who won a Nobel

Prize for launching this so-called green revolution.

A top priority therefore, in the medium term is to address cheap and

reliable credit needs for small farmers and enhanced public investment in

infrastructure and irrigation that will not only improve their own nutrition

and incomes but also will take care of national and global food security.

Other medium-term priority measures must be for developed countries to

consider some flexibility for their bio-fuel policies without ignoring the

opportunities that bio-fuels can present in terms of reduced energy bills

and a more dynamic agricultural sector. Yet another priority is to

reduce long-standing agricultural export subsidies and domestic

support policies in developed countries, which have hurt developing-

country agriculture.

Eating less meat may also increase the availability of food in medium

term. It takes about 7 pounds of corn to produce 1 pound of beef, 6.5

pounds of corn to produce 1 pound of pork, and 2.6 pounds of corn to

produce 1 pound of chicken, according to the USDA.

c. Long Term:

Raising agricultural productivity needs to become a priority in development

strategies around the globe for addressing both the increased demand

that has arisen mainly due to substantial increase of food consumption

and the supply deficiencies that have arisen mainly due to increased land

use for non-food purposes.

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Yields cannot be switched on and off like a tap. Spreading extra fertilizer

or buying new machinery helps. But higher yields also need better

irrigation and better seeds. Spending on farming as a share of total public

spending in developing countries fell by half between 1980 and 2004.

In a perfect world the response to higher prices is higher output. But,

farming faced with market failures does not react to price signals in

emerging scenario. Besides, it always takes a season to grow more food.

A 10% increase in prices leads to a 1% increase in output. But the food

crisis of 2008 suggests farm prices in developing countries may be even

higher and output even lower. Increasing acreage or improving farm

productivity for increasing output may take decades and not more if the

cities are not extended on good productive agricultural land.

Another reason why farmers in developing countries may not positively

respond to rising food prices is week links between farmers and suppliers

due to increasing supermarket culture. In theory, the growing importance

of traders and supermarkets ought to make farmers more responsive to

changes in prices and consumer tastes. But supermarkets need uniform

quality, minimum large quantities and high standards of hygiene, which

the average smallholder in a poor country cannot manage. So traders and

supermarkets may benefit commercial farmers more than smallholders.

Smaller smallholders are also at a disadvantage in getting loans, new

seeds and other innovations on which higher yields depend.

Such bottlenecks and market failures make it harder for smallholders to

respond to higher prices. They mean the transition to a new equilibrium

will be prolonged and painful. But they do not mean it will not happen.

Lennart Båge, the head of the International Fund for Agricultural

Development, a UN agency in Rome, argues that if farmers can keep the

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 higher prices, they will overcome the problems that beset them. This may

represent an important opportunity for promoting agricultural and rural

development in many low-income countries, provided an enabling policy

environment and supportive measures are established quickly.

The industry claims that the damage made by bio-fuels can be reversed

in the long run because "second-generation" bio-fuels, using by-products

such as corn stalks and woodchip as a feedstock, will be able to redress

the balance. But if this technological advance is achieved, which is by

no means certain, it could result in an even worse scenario: the

annihilation of the world's forests. If all plant life was seen as potentially

convertible for transport fuel, there would be nothing to stop what was left

of the planet's biosphere from being striped to keep rich motorists on

the road. There is no simple solution. Much of the increased bio-fuel

demand comes from the US, where achieving "energy security" - with US-

grown corn is on top of the agenda.

Politicians need to realize that there is no such thing as "sustainable bio-

fuels", either now or in the future. As for investors, they need to realize

that pouring money into bio-fuels is a bad bet: subsidies will be quickly

withdrawn when policymakers face up to the reality of their ghastly error.

In the meantime, millions face starvation and death from increasing

hunger and malnutrition. There is no time to lose.

4. Towards an Effective World Food System

A traditional approach to coping with the market failures revealed by the food-

price crisis would involve building up a physical, public, globally managed

grain reserve. These reserves could be released to cope with excessive

price increases. This option has the disadvantages of high storage costs and

slow transactions.

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 Alternatively, commodity exchanges could be reformed. The incentives for

speculation in food commodities could be reduced by (1) limiting the

volume of speculation relative to hedging through regulation; (2) making

delivery on contracts or portions of contracts compulsory; and (3)

imposing additional capital deposit requirements on futures transactions.

These reforms could be implemented case by case or through an

international alliance of commodity exchanges.

But, required market regulation also raises political economy concerns,

such as lack of institutional capacity to implement and enforce regulations

and the possibility that regulatory measures could benefit relatively small

groups.

A global intelligence unit can be set up which would have three main

roles: (1) advising when the emergency stocks should be made

accessible to the WFP; (2) designing and implementing a dynamic price

band system; and (3) triggering sales in the futures market by the high-

level technical commission until a speculative attack is eliminated.

Any solution must balance external regulation with internal corporate

governance in a way that combines market development and welfare

objectives. Some argue that achieving this balance is too difficult, but in

fact the world cannot afford not to do so. Markets are needed to offer

choices, but policymakers must play a role in assuring that the global food

system meets the needs of the poor and vulnerable.

References:

1. Afsar Jafri, Food Crisis Exposes Failings of India's Economic Reforms, Published

in - Focus on The Global South, 2009.

2. Ian Angus, Food Crisis: "The Greatest Demonstration of the Historical Failure of

the Capitalist Model", Global Research, April 28, 2008.

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3. Joachim Von Braun and Maximo Torero, Physical and Virtual Global Food

Reserves to Protect the Poor and Prevent Market Failure, Policy Brief No. 004,

International Food Policy Research Institute, June 2008

4. Tackling The Global Food Crisis, UNCTAD Policy Brief, UNCTAD, No. 2, June

2008

5. Ronald Bailey, The World Food Crisis and Political Malthusianism Government

Failure, not Overpopulation, is the Cause of Higher Food Prices, Reason on Line,

July 8, 2008

6. Mark Lynas, How the Rich Starved the World, New Statesman, Published 17

April 2008

7. Soaring Food Prices: Facts, Perspectives, Impacts And Actions Required, High-

Level Conference on World Food Security: The Challenges of Climate Change

and Bio-energy, Rome, 3 - 5 June 2008

8. Marianne Lavelle and Kent Garber, 8 Ways To Fix the Global Food Crisis: Ideas

Range From Improving Aid Programs to Taking a Break on Bio-fuels, U.S. News

And World Report, Jan. 2009

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