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.