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"The Rise in Food Prices and the Role of Trade"

Berlin Agriculture Ministers’ Summit, 22 January 2011

Date:
22.01.11
Location:
Berlin
Speaker:
Mr. Pascal Lamy, WTO Director-General

Opening address by Mr. Pascal Lamy, WTO Director-General

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Ladies and Gentlemen,

it is my pleasure to participate at the Berlin Agricultural Ministers' Summit of 2011. Today I would like to focus my comments on the rise in food prices, since it is impossible to speak about agriculture without addressing what has become a major preoccupation across the globe. Barely out of the 2008 food price crisis, the world appears to have entered yet another phase of higher prices. Rising food prices are now stoking global inflation, not to mention political unrest of proportions that we could have seldom imagined. This topic is, of course, right at the center of the G20's priorities. And Bruno Le Maire will be informing us of progress in this regard.

The United Nations' food agency – the FAO – has just told us that food prices have hit a record high last December, above 2008 levels. Contrary to 2008, one overriding factor appears to be at play in today's crisis; bad weather. What we are looking at is mainly a supply constraint. Last year, US wheat futures rose by 47 per cent, buoyed by a series of weather events, including the drought in Russia and its Black Sea neighbours. While supply constraints are the main culprit of today's crisis, there are other contributing factors too. And this is what I would like to discuss with you today.

I worry that whereas various reasons for food crises have been repeatedly rehearsed in the press, and many figures circulated – a serious analytical exercise of why and how the world appears to be experiencing repeated crises has yet to start. My aim in the few minutes that you accord me, will simply be to create an analytical framework within which we can collectively brainstorm. I will be, as you would expect, positioning international trade in that framework.

In examining food price crises in general, I believe that our point of departure must necessarily be an exploration of the world food consumption and production pictures – distinguishing within them between transitory and structural factors. In fact, it is almost vital that we have an accurate diagnosis of the problem before designing a response.

World food consumption is driven by three principal long-term, structural, factors as you know: income growth rates, population growth rates and dietary preferences. The most extraordinary development of our times, of course, is that food consumption is also driven by energy production. In pumping biofuels into our tanks, we are in fact pumping corn, sugarcane, and other foods into our transportation systems. It is, of course, a matter of debate as to whether biofuels are transitory or structural, and will very much depend on how experimental biofuels policies across the globe fare, and the public's reaction to them.

Globally, we know that income is rising and will continue to rise, although unevenly. With rising incomes, comes rising demand. Population growth rates, on the other hand, have been falling for almost 30 years now, and the world has certainly passed its peak population growth rate of the late 1960s. But the absolute rise in population remains.

In terms of dietary preferences, we know that at the global level, dietary preferences are converging – the so called "nutritional transformation." There are many reasons for this, like the spread of food chains, and greater exposure to North American and European dietary habits (for better or for worse, I might add)! Meat, milk, and dairy consumption in the developing world, in particular, are rising.

Biofuels, as I said earlier, also add an entirely new dimension to the consumption picture. The OECD and FAO tell us that, if current policies continue, by 2019 about 13 percent of the global production of coarse grains will be used for ethanol, 16 percent of vegetable oil, and 35 percent of sugarcane.

In short, what this food consumption picture tells us is that demand for food will continue to grow. But what does the food production picture tell us then? Will world food production be able to keep up with this increased demand? Again, there are three main sources of growth of crop production: one, expanding the current agricultural land area; two, boosting the frequency with which that area is cropped; and, three, trying to boost actual yields (through mechanization, better irrigation, or biotechnology for example). These are the structural long-term options that are before us.

But contrary to popular perception, it is not the amount of new land that is brought into cultivation that will be the determinative factor of growth in production but, rather, increasing yields. In fact, over the past four decades, rising yields alone have accounted for 70 percent of the increase in crop production in the developing world. The progress we make in our agricultural productivity will therefore be central to continued food security.

We must also recognize that bad weather events, natural catastrophes, and climate change in the medium to long-term, will all collaborate to inject uncertainty into the supply-side picture. It will make the creation of social safety nets for consumers and farmers, and research into climate-resistant crops, paramount.

Like most other industrial sectors, agricultural production will also remain dependent on fluctuations in the price of oil. A rise in fuel prices makes it more expensive to produce fertilizer, and to deliver products.

Having looked at the various factors that influence production and consumption, we must now turn to what it is that links them. At the global level, the link is established through international trade. Trade becomes the transmission belt through which supply adjusts to demand. It allows food to travel from the land of the plenty to the land of the few. When that transmission belt is disrupted through trade barriers, unexpected turbulence arises on the market.

But let us take a closer look, then, at these "trade barriers," and their impact on the production picture. Export restrictions play a major role in food crises. There are other trade barriers too, which harm agricultural production, such as tariffs and subsidies, and which prevent food from being produced where this can be most efficiently done. But I would like to begin by export restrictions because of the very direct role they play in aggravating food crises. In fact, some analysts consider them the principle cause of the food price rise in 2008, for some of the most vital staples.

Export restrictions lead to panic in markets when different actors see prices rising at stellar speed. They were the single most important reason for the 2007-08 price explosion on the rice market; there was no fundamental market imbalance at the time. The FAO tells us that international trade in rice in 2008 witnessed about a seven percent decline (down to 2 million tons) from its record 2007 level, largely due to export restrictions. Equally, the 2010-11 price rise for cereals has much to do with the export restrictions of Russia and Ukraine; imposed after both countries were hit by severe drought.

These restrictions hurt net-food-importing countries; and could actually starve them. Not to mention that they can prevent the World Food Programme from fulfilling its role, depriving it of the food with which it can help others.

Clearly those that impose these restrictions have a logic, they do not wish to see their own populations starve. So the question then is, what alternative policies could allow them to meet this goal? The answer to that question must reside in more food production globally, more social safety nets, and more food aid and possibly food reserves. I would argue that what we must at least explore is the exemption of humanitarian food aid from export bans.

But ladies and gentlemen, we must also reflect on the Doha Round. Export restrictions are but one element of the trade barriers that prevent efficient agricultural markets from emerging. The Doha Round of trade negotiations can contribute to the medium-to-long term response to food price crises, by removing many of the restrictions and distortions that have harmed the supply-side picture. The Round would greatly reduce rich world subsidies that have stymied the developing world's production capacity and which have, in certain commodities, cornered it completely out of the market. The worst kinds of subsidies, which are export subsidies, would be completely eliminated. It would also bring down tariffs, although with certain "flexibilities;" thereby increasing consumer access to food.

Globally, what we would be likely to see as a result of Doha is more food being produced where this can be done more efficiently. We would also see a fairer, more level international playing field, in this critically important sector to some of the world's poorest nations.

That, of course, does not mean that for WTO Members food is like socks or tyres. There are many reasons why farming and manufacturing are different, a point stressed by many WTO Members. But reconciling the specificity of agriculture with the benefits of trade opening, is precisely what lies at the core of the Doha negotiations. To put it simply, trade plays or can play a better role in addressing the rise in food prices and tackling food insecurity. Trade is part of the solution, and not part of the problem.

Very broadly, this is the analytical framework that I would set out for our common reflection. As to the response measures: clearly we need greater investment in agriculture, a sector in which we have under-invested for a while. In particular, to prepare our agricultural system for the impending climate change that we are likely to witness. This will be vital to prettying the supply-side picture.

I would also add, greater reflection on our biofuels policies. Social safety nets for our consumers and farmers. More robust food aid systems. And strong support for the World Food Program.

The G20 aims to tackle agricultural price volatility. In Seoul it announced its intention to increase agricultural productivity and food availability through innovative mechanisms, responsible agricultural investment, greater smallholder agriculture, and to make proposals to better manage and mitigate price volatility without distorting markets. Bruno Le Maire will be walking us through these elements.

Some say that part of the solution to price volatility may lie in market instruments; financials instruments, such as futures. Others say that these instruments, while perhaps intended to stabilize markets, can in reality increase harmful speculation. The definition of speculation, in my view, remains open. It is an issue which farmers and food producers have had to contend with since the beginning of time!

With these comments, ladies and gentlemen, let our brainstorming begin. A brainstorming that starts with a diagnosis of the problem. I thank you for your attention.

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