Controlling Food Prices in Turbulent Times – An Agenda for South Asia

Session No. 29 - WTO Forum 2011 Geneva - 20 September 2011; arungoyal.delhi@gmail.com

1.     Background and Issues

2.     Investment in Agriculture

3.     QRs

4.     Biofuels

5.     Buffer Stocks

6.     Market intervention

7.     Global Food Crisis Response Program

8.     Emergency humanitarian food reserves to support safety nets in poor countries

9.     PREPARE – An Instrument and Tool for Controlling Price

10.   Procurement

11.   Size and composition

12.   Trigger criteria

13.   Stock Rotation

14.   Budget

15.   Information and early warning systems

16.   Food Releases

 

1.      Background and Issues

The G20 asked nine agencies to develop options for G20 consideration and manage the risks associated with the price volatility of food. FAO-IFAD-WFO, IMF-WB-WTO, and OECD on controlling world food prices in a market friendly manner.

Food accounts for a very high share of the total budget of poor consumers. They are the first victims on price volatility. Nonetheless, price volatility are complex, net outcomes are important.

Extreme or excessive price volatility is fatal to food scrutiny. However, excessive volatility depends very much on the situation of the individual or nation. Seasonal patterns, climate, world financial situation or break down play an important part in food prices.

Volatility has, however, been higher during the decade since 2000 than during the previous two decades. This specially so in the case of wheat and rice prices in the most recent years (2006-2010) compared to the nineteen seventies.

Food production will fall in future while population will increase by one third.

According to FAO, the rate of growth in agricultural production is expected to fall to 1.5% between now and 2030 and further to 0.9% between 2030 and 2050, as compared with the rise of 2.3% per year since 1961.

Population estimates suggest 34% increase over the next 41 years. By 2050 the planet will be home to 9.1 billion persons, up from the current population of 6.8 billion.

Upward pressure on prices will stay world food markets.

2.    Investment in Agriculture

FAO estimates indicate that global agricultural production must grow by 70% and 100% in developing countries in run up to 2050 to feed the growing population. With increasing supply and better management, markets can work for the poor people who bear the burden of food price volatility.

A key element in any long term solution is investment in agriculture. This can reduce food price volatility and also provide food supply.

3.   QRs

Under WTO disciplines, quantitative restrictions are generally prohibited by Article XI of GATT 1994 Agreement but an temporary exception allow governments to prohibit or restrict essential exports to prevent or relieve critical shortages of foodstuffs or other products.

Transparency ensures that the potential new opportunities created can actually be exploited by competitive suppliers.

G20 has strengthened international disciplines on all forms of import and export restrictions, as well as domestic support schemes, which distort production incentives, discourage supply in response to market demand, and constrains international trade of food and agriculture products.

4.    Biofuels

The share of biofuels is 9% for both oilseeds and coarse grains, and 4% for sugar beet. Biofuels also influence substitute products like wheat on both consumption as well as supply side. The US as well as Canada subsidize production of biofuels while EU requires compulsory use of biofuels in combination with fossil fuels.

Crops will be diverted to the production of biofuels which will increase the price of food.

G20 governments remove provisions of current national policies that subsidize (or mandate) biofuels production or consumption.

Waste occurs in the distribution system, in the restaurant sector and at home. This includes parts of food products which are not economical to use; food that does not meet cosmetic standards, plate waste; food that is discarded because it is spoiled, and excessive easting which contributes to obesity.

5.    Buffer Stocks

Operational costs of buffer stocks are significant. Appropriate storage infrastructure is extremely costly to acquire, and buying the food stock and holding it is also very expensive. Domestic procurement, food releases from buffer stocks and trade programmes require continuing budgetary allocations to cover any operational losses occurring in domestic and international trading. Losses incurred on behalf of policy-dictated objectives for price stabilization may be viewed as direct subsidies.

Expenditures associated with the acquisition and holding of stocks for food security purposes can qualify under the WTO Green Box. In times of price increases, such costs can escalate to significant levels, rendering buffer stocks ineffective in containing price surges.

Poor management makes buffer stocks ineffective. Releases are made too late to influence food prices or to safeguard food security.  Abrupt and unpredictable changes in buffer stock operations raise market risk and discourage private investment. Poor storing practices lead to large and costly physical stock losses.

Holding food in reserve can also have a negative impact on the market as reserves have to be rotated in order to avoid deterioration in quality. This practice often affects the market price, sending the wrong signals to producers and consumers.

6.   Market intervention

Market based initiatives may be superior in countering food price volatility and enhancing food security in developing countries. Private storage, such as village granaries, can help communities to better match local supply and demand. Private sector storage investments in developing countries, either on-farm, in villages or regionally, are constrained by poor policies and a poor enabling environment.

At the farm level, capital costs of new storage and storage technology are prohibitively high.

At the village level, there are clear advantages to collaboration in storage in order to aggregate sufficient amounts of produce to attract traders as well as to share storage and transport costs.

Producer organizations are critical to food storage development.

Relatively smaller food security emergency reserves can be used effectively and at lower cost to assist the most vulnerable. Buffer stocks attempt to offset price movements benefiting both poor and non-poor consumers. On the other hand, emergency food reserves can make food available to vulnerable population groups in times of crisis.

Emergency reserves of relatively small quantities of staple foods will not disrupt normal private sector market development which is needed for long term food security.

Governments in vulnerable countries should integrate such emergency food reserves in their national food security strategies. National emergency food reserve agencies operate independent of political process, with well-defined, clear and transparent triggering mechanisms supported by effective early warning systems.

A regional system could also provide the foundation for an eventual transition to national ownership and control.

WFP is developing a proposal for a cost-effective system of small, strategically positioned emergency food reserves for vulnerable nations and regions.

7.   Global Food Crisis Response Program

Starting at the height of the 2008 food price spike, the GFRP (Global Food Crisis Response Program) of the World Bank provides rapid assistance to the most vulnerable countries, with more than half of support going to Sub-Saharan Africa and around a third to countries in Asia where the numbers of poor are concentrated. Assistance has focused on fiscal support, safety nets for the most vulnerable, and agriculture supply response, including stimulating short-term food production. Budget support under the GFRP provides fiscal space to allow reductions in import tariffs or suspension of custom duties or taxes on food, to mitigate the impact of higher prices. The GFRP has allocated USD 1.5 billion to 44 countries, benefiting nearly 40 million people. It is presently authorized to expedite processing of up to USD 760 million of existing IBRD and IDA funds through the end of 2011, with the possibility that this is extended through 2012.

Japan Social Development Fund Emergency Window has played a role in this.

LICs received assistance (USD 487 million for 16 LICs under shocks-related windows; and USD 761 million for nine LICs under other windows).

Rapid Credit Facility

Standby Credit Facility

Extended Credit Facility

Farmers

Production and price risks

Weather shocks

Catastrophic events, insurance tools

Insuring against frequent weather shocks such as partial drought, either in developed or developing countries presents significant difficulties. Insurance  is very expensive and often commercially unviable.

In developing and emerging economies, risk management faces numerous challenges. Often, financial and insurance markets do not exist, or are under-developed.

Considerable effort and research is being invested in developing innovations such as weather index-based crop insurance, which seeks to address the challenges of insuring smallholders.

Protection against price risks for producers faces similar problems

Warehouse receipts systems can enable producers

Agricultural Market Information System (AMIS)

Committee on World Food Security

Implied volatility represents the market‟s expectation of how much the price of a commodity is likely to move in the future.

Food emergency reserve systems also have implications for smallholders as food producers.

In addition, mandate induced demand is completely inelastic with respect to price and adds to price volatility.

Food Aid Convention - 23 million people

Argentina, Australia, Canada, France, Germany, Italy, Japan, the United Kingdom and the United States

8.    Emergency humanitarian food reserves to support safety nets in poor countries

Small, strategically positioned emergency humanitarian food reserves-

·         The World Food Programme (WFP) did not have sufficient authorised risk management tools and support to protect its supply chain against price and supply shocks, including the ability to forward purchase and pre-position food for its operations,

·         Poor food deficit countries with little resilience to external shocks were at times unable to secure sufficient food to respond rapidly to the humanitarian needs of their most vulnerable population groups, including through national safety net programmes, and

·         Some nations were unable to purchase food on external markets. Risk premiums alone may have raised the cost landlocked African countries paid for food relative to their coastal neighbours by as much as 33.5 percent.

9.   PREPARE – An Instrument and Tool for Controlling Price

By spreading risk across an entire region, the system could hold smaller stocks and rotate those stocks more efficiently. Food would not necessarily need to be stored in each participating country of a region, but could be located strategically based on logistical and cost considerations.

·         Releasing food through national safety net programmes that provide food to eligible vulnerable populations

·         Developing national safety net programmes in a specified period of time,

10.  Procurement

Buy food commodities from unrelated parties through transparent, arms-length transactions at prevailing market prices.

·         Optimized spot purchasing that takes advantage of bulk purchases and seasonal price movements (i.e., post-harvest price lulls), and

·         Virtual mechanisms for long-term price management.

·         Fixed price forward or average contracts with suppliers, including farmer cooperatives located in partner regions and Long Term Agreements,

·         Physical call options on commodities held by the private sector in partner regions, including warehouse receipt programmes, and

·         Drawdown rights on existing national reserves, where a national reserve may agree to make available for purchase (or loan) up to a certain volume of stock from particular locations.

11.      Size and composition

A PREPARE system would seek to optimize the use of physical and virtual stocks for maximum efficiency. The system would hold a small amount of rapidly deployable physical stocks sufficient to cover up to a maximum of 30 days of projected needs for the most vulnerable. Additionally, up to 60 days of supply could be made available through virtual mechanisms.

The volume and accumulation of stocks will correspond to pre-determined targets related solely to food security. The actual physical stock level may require further adjustment based on closer examination of participating eligible countries and their specific challenges.

The size of the reserves could be determined by first estimating the needs of people likely to be vulnerable and require food through safety nets/targeted assistance programmes during food crises in each participating eligible country. This basis amount of food could then be reduced by taking into account the following factors

12.      Trigger criteria

A PREPARE system would release food to participating eligible countries according to clear, transparent and pre-determined access or “trigger” criteria. A participating eligible country could drawdown a limited amount of commodities from the reserve if the following conditions are met

·         At the global level, there is transparent and objective evidence of an external shock, such as a food price surge which is being transmitted to regional and national markets.

·         At the regional, national or local level, there is an existing or emerging food shortage indicated by national early warning mechanisms, the Global Information and Early Warning System (GIEWS) or the Famine Early Warning Systems (FEWS) Network.

·         The participating eligible country formally requests food from the system to meet the humanitarian needs of vulnerable populations.

13.      Stock Rotation

To rotate stocks, the system primarily would rely on commodity exchanges with food assistance organizations, including UN agencies and NGOs. Such organizations could make withdrawals from the reserve upon confirmation of incoming supply.

14.      Budget

A regionally-based pilot programme that would require a physical stock of 150 000 metric tonnes of basic mixed cereals could have an initial stocking cost of USD 65-70 million and recurring management and operational costs (which include virtual stock commitments) of around USD 18-20 million per annum.

15.      Information and early warning systems

Emergency food reserves operations should be based on sound market information and on effective early warning systems. The less reliable market information is, the greater the degree of uncertainty in assessing market developments.

16.      Food Releases

Targeted food release increases the effectiveness of emergency reserves. Compared with cash transfers, in-kind food distribution through safety nets places a lower budgetary strain on government resources.

Incentive for the private sector to engage in trade, especially if the emergency food reserve is large. Sudden export bans, which facilitate domestic procurement by the reserve, may harm traditional trade partners.

Strong linkages between existing reserves, increasing collaboration and achieving pooling of resources will strengthen the regional food security architecture.