The era of cheap food is gone. Rice has been making headlines around the world, and it may continue to do so in the near future. The global trend has peaked: Stocks of food have continued to decline, ever since 2001. That fact, added to constant population growth, means that some regions of the world are going hungry.
In many emerging nations, the most disadvantaged segment of the population spends about three-quarters of its income on food. Inevitably, rising prices threaten to create suffering, in the best of cases, and massive starvation in the worst case scenario. In those countries where rice is a basic component of the diet, there is a danger that rice will be in short supply.
Governments of these countries have reacted by shutting down their rice exports. Vietnam, the second-largest rice exporter in the world, forecasts a decline of one million tons because [export] sales have been suspended until June. In India, which ranks third in that regard, supplies will decline by more than 30%. Cambodia, Egypt and China, among other countries, will follow. “Rising prices for basic food prices are sufficiently serious to have global repercussions over the long run,” warns Gerard Costa, professor at the ESADE business school. Costa says that we are not facing a global food crisis, but a new, higher level of prices. “What is the correct price for rice?” Costa asks. “The impact of rising prices can only be traumatic in those third-world countries where they lead to real social disturbances,” they warn.
Growing demand for food in China, India and other emerging nations has been fueled by increased per capita income in those countries. That reduces the supply of grains available for human consumption. In addition, growth in the production of subsidized biofuels, stimulated even more by the increase in the price of crude oil, leads to increasing demand for corn, other grains and edible oils. According to the International Monetary Fund’s latest Global Economic Forecast, “Although biofuels still represent only 1% of the global supply of liquid fuels, between 2006 and 2007 they were responsible for almost half of the growth in the consumption of the main food crops, especially because of the ethanol extracted by corn and produced in the U.S.”
Escalating Prices
The current price rises are due to a “perfect storm,” says Costa. Several factors have led to this phenomenon: “Low levels of production because of climate problems and natural causes, mostly in Australia; the fact that the Chinese and Indian markets have moved toward consumption patterns that require the more massive use of grains; the use of grains for biofuels; the increase in raw materials, such as fertilizers, because of the rise in petroleum prices; and the cumulative reduction in the amount of land devoted to food cultivation in recent decades. Speculation has also had an impact: Hedge funds are investing in raw materials in some Asian countries as well as speculating about future price increases,” Costa concludes. Along the same lines, Rafael Pampillón, economics professor at the IE Business School, notes that “Rising prices have led to subsidies for ethanol and biofuels, which in turn has generated the perverse effect of making food even more scarce.”
In addition, the high price of petroleum has had an impact on the advanced agricultural technologies, which depend more and more on energy use. Because of the slow growth of supply and the strong increase in demand, reserves of grains are at their lowest levels since the beginning of the 1980s. Costa says that the natural and demographic impact is changing the relationship between human beings and nature. “The relationship with food will also be one of the effects. I believe that prices will stabilize only minimally, and at a somewhat higher level, although there can be strong fluctuations in that level because of speculative factors.” For his part, Pampillón recognizes that prices will remain at these high levels so long as “biofuels continue to be subsidized; the world economy continues to be relatively strong; and developed countries prefer cheaper energy, even if that means using agricultural products that make food more expensive, especially for poorer people.”
Paradoxical Conditions
The historic growth in the price of basic foods results from strong demand for food and from limitations on exports imposed by some food-producing countries that play an important role in international trade. Paradoxically, the current situation co-exists with a record-high estimate in global food production for the 2007-2008 crop, 425.3 million tons. This pattern of growth has continued since 2004, and is so historic that it has exceeded all expectations, including those of the greatest optimists.
Peter Mandelson, the European trade chief, confirmed recently that there are two ways we can react to the current food crisis. The first way is to speed up growth in agricultural production and promote more protectionism. The second, he said, is to conclude an agreement within the framework of the Doha Round of global trade negotiations. Such an agreement would facilitate more efficient trade in those foods that are economically more feasible. Notes Pampillón:
“The solution must include eliminating subsidies for biofuels. For the first time, even the mass media are unanimous [in supporting this option]. Global farm output has outpaced population growth, and there should be no shortage of food.”
The World Bank and the UN have asked for $750 million to fill the gap caused by the impact of rising prices for basic food commodities, such as wheat, corn and rice. This money would enable the United Nations World Food Program to continue distributing food to the neediest places on the planet. Governments must respond to that call in order to save millions of people from what many experts call “the hunger tsunami,” and to avoid a new destabilizing force in the global economy.
According to estimates by the World Bank, 33 countries are on the verge of social disruption because of the food crisis. Nevertheless, Pampillón does not believe humanitarian aid will solve the problem. “I believe that these gifts are poisonous. The only thing that we have achieved [with humanitarian aid] has been to destroy much of the production that existed in underdeveloped countries. Because of the aid they were receiving from the EU, people stopped growing their own crops. There are regions of Africa and Asia where there is a great deal of hunger, yet there are abundant natural resources that are hard to exploit either because of climate change, a shortage of irrigation or insufficient fertilizer… They need technical help; they don’t need free food. They need to use agricultural machinery to produce food on their own land; we need to make it easy for them to access fertilizers, and have access to agricultural extension programs. They need to be taught how to produce what they need; they need to get high-yield and hybrid seeds; they need tractors and pesticides…”
In the short term, Costa sees no real solution. “There will be an increase in the use of grains for other objectives; production will drop because of the scarcity of water; and speculation will continue,” he predicts.
How should public-sector organizations behave in order to save millions of people who are dying of hunger? Pampillón sees three possible solutions: “Put a stop to the agricultural policies of the U.S. and the EU; stop subsidizing biofuels; and change food aid programs that currently enable countries that have a deficit in food trade to continue to make some food but not enough to supply their own needs.”
Experts warn that protectionism and subsidies pose a grave threat to agriculture, more than to any other sector. They argue that no one has taken advantage of the opportunity that high prices provide to eliminate protectionism against imports. Instead, some countries are imposing export taxes, which contribute even more to fragmenting the global market while reducing incentives to increase production and penalizing the poorest net importers. Costa believes that tariff barriers on trade with the developed countries should disappear “in order to promote changes in global production, which would increase the supply [of food].”
Long term, the experts believe that Europe should take a critical look at its own performance. The first thing to go should be the EU’s Common Agricultural Policy (CAP), which guarantees minimum prices to European farmers and grain producers; establishes restrictions on production; and imposes onerous tariffs on agricultural products from outside the EU The CAP absorbs almost half of the EU’s annual budget and closes the market to competitive products from the Third World.
“Clearly, the CAP is a protectionist tool,” says Costa. “It has been as disastrous as any centralized planning measure made by bureaucrats. Its limitations enable the free market to make only partial corrections. However, it also helps the parties involved and is therefore fulfilling its [political] goals.” For his part, Pampillón believes that the CAP is a mistake that has a significant and profound impact. “It doesn’t just act as a brake on the development of the neediest countries.”
Eradicating Interventionism
The academics agree that the current situation is a perfect opportunity to eliminate harmful interventionism. The political goal of the Doha Round, which is to lower today’s high level of protectionism, is practically irrelevant now. The priority at this time should be to adapt the agricultural sector to the market and diminish the impact that high prices are having on the most disadvantaged peoples. Another goal should be to dedicate more resources to guaranteeing the long-term supply of food, and to increase spending on research. Farmers in poor countries cannot market their products in Europe, so there is a disincentive to invest in agriculture in those countries, which undermines productivity. “The protectionist policies injected by the U.S. and the EU are one of the great errors in economic history because they make it harder for poor countries to produce and export foods that they could produce by themselves. The solution is not to send them more food, but to make it easier for them to develop skills at producing it,” says Pampillón.
The experts agree that no major change in policy is in the works. “All of these natural events are not generating any real sensitivity, but rather a search for emerging [investment] opportunities. We call for increased productivity to compensate for the reduction in available water. The world can now live with petroleum at $110 a barrel, and we are beginning to think that we could live with a price of $300,” says Costa. Pampillón believes that the current trend in both the U.S. and the EU is toward greater protectionism. “Short term, the markets are becoming even more fragmented. Whenever there is a crisis, economies become more closed and more protected. But the [long-term] trend is toward globalization. When there is sustained growth and fear recedes, markets will tend to become more integrated.”
The Moment to Act Has Arrived
The most extreme impact of the crisis will hurt the neediest countries the most, according to most experts. “There are 10 countries that currently face a food crisis, and another 30 countries have the potential to do so. They all require the most drastic measures,” says Costa. Pampillón recognizes that, on the global level, this crisis will lead to disturbances, riots and mass migration.
In the future, Costa adds, human beings will gradually adapt themselves to “seas that are exhausted [of life] and cannot be used because of plagues of jellyfish; and to energy that costs $300 a barrel. However, there will also be environmentally sound cars that reduce their consumption and emissions. Agricultural raw materials will cost seven times more [than today] because of occasional, spectacular price spikes caused by rain shortages and desertification. One result will be the growing wealth of investment funds that have staked their future on these trends …” he adds.
Nevertheless, the answers to thousands of questions remain up in the air. Experts warn that now is the time to wake up; to choose between fragmenting markets even more [than today] or integrating them; between helping poor people or abandoning them to their fate; and between investing in ways to improve supply or enabling food deficits to grow. The solutions are obvious. Everyone agrees that the time to take action is now.
