Wednesday, April 30, 2008

Food Inflation Watch: Food crisis is a chance to reform global agriculture

Martin Wolf writes in Financial Times column:

Demand factors:

  • Rising incomes per head in the emerging economies
  • Changing pattern of food consumption (shift from food to meat reduces food supply as it is being used to rear animals)
  • Subsidised biofuels production in the West raise demand for maize
  • Aggregate maize, rice, and soybeans production stagnated in 2006 and 2007 (partly due to drought)
  • Increasing speculation because of declining stock

Are prices going to remain high? Two opposing forces are at work. The first is the market, which will tend to bring prices back down as supplies expand and demand shrinks. But the latter is also what we want to avoid, at least in the case of the poor, since reducing their consumption is not so much a solution as a failure. The second force is the current intense pressure on the world’s food system. This is true of both demand and costs of supply. Prices are likely to remain relatively elevated, by historical standards, unless (or until) energy prices tumble.

Food prices

What needs to be done?

  • humanitarian factors
  • trade and other policy interventions
  • longer-term productivity and production

The present crisis is a golden opportunity to eliminate this plethora of damaging interventions. The political focus of the Doha round on lowering high levels of protection is largely irrelevant. The focus should, instead, be on shifting the farm sector towards the market, while cushioning the impact of high prices on the poor.

Finally, far greater resources need to be devoted to expanding long-run supply. Increased spending on research will be essential, especially into farming in dry-land conditions. The move towards genetically modified food in developing countries is as inevitable as that of the high-income countries towards nuclear power. At least as important will be more efficient use of water, via pricing and additional investment. People will oppose some of these policies. But mass starvation is not a tolerable option.


The ultimate optimist and the dismal science

This article extols Jeffrey Sachs excessively by labeling him as "long before ambition and optimism conspired to make him the Man Who Would Save the World, Jeffrey Sachs was merely the Man Who Would Save Bolivia." Also, now he has a new label: "Barack Obama of economics."

...Philosophically, his proposed remedies are more closely aligned with the left-leaning John Maynard Keynes than they are with Milton Friedman, but Mr. Sachs, who is also director of Columbia University's Earth Institute, has clearly been influenced by both.

...Like Mr. Friedman, he believes in market solutions for many economic issues - he just doesn't think that unfettered markets, left to their own devices, will lift Africans out of abject poverty or stamp out environmental degradation. These crises, he insists, require strong public policies to align private interests with the goals of sustainable development.

...He insists that the path to salvation lies in a multidisciplinary approach; private players must work with willing governments, academics, scientists and non-governmental organizations to create sustainable technologies.These technologies are where he places a great deal of faith - not merely in their ability to help contain some of the environmental damage (carbon capture sequestration is an example he's fond of citing) but to improve agricultural yields with more resistant, bountiful seeds.

Fixing the food crisis: he is obsessed with creation of multi-billion dollar fund (he did that in Bolivia and Poland but attributed the failure of reforms in Russia for a lack of stabilization fund to build confidence on the Russian currency).

  • Provide immediate funds to the FAO
  • End ethanol subsidies
  • Create $5 billion Fund to increase production in the poor countries
  • Improve agriculture (R&D)

Links of interest

Dumb as We Wanna Be (Thomas Friedman on the NYT)

Africa: Why Continent's Poverty is Only Artificial

PhD students living below poverty line

Food Inflation Watch: Export restriction and price decrease?

Last week the Nepali government decided to ban export of wheat. This should have increased price of wheat. Incidentally, the price of wheat decreased by NRs 100 (about $1.5) per quintal. How is this possible? Is the free market, as Cowen argued, really working? See this as well. See Rodrik's take on this.

Oh ya, you might say! But, that's not the case. The response to a change in an economic indicator (mainly price) in the Nepali market is so slow that it takes weeks (at least two months) for the effect of price change to take affect consumer and investor behavior. Too much lags due to information asymmetries and coordination failures. The other reason is that there might be more supply than demand in the domestic market. But this is unlikely because before the ban wheat price was already rapidly rising.

Moreover, the ban would not itself substantially affect wheat trade because most of the wheat is exported to India, with whom Nepal enjoys a free border. With free border and official ban on exports, we will see more smuggling across the border. The net effect would probably, on average, be the same.


Banks merger in Nepal

This is what Nepal really needs. Five financial institutions have merged to become a commercial bank of 'A' level.

...Five financial institutions — Mahalaxmi Finance Ltd, Birgunj Finance Ltd, Siddhartha Finance Ltd, Butawal Finance Ltd and Himchuli Development Bank — have signed an accord yesterday to merge and upgrade to ‘A’ level commercial bank.

...All the financial institutions are planning to increase their paid up capital to Rs 400 million each to make Rs 2 billion in total required for the upgradation for the commercial banks.

Nepal has more than 20 commercial banks, several development banks, and cooperatives. They are fiercely competing with each other to increase market pie, which as of now seems saturated with urban customers. They have not been able to reach the villages, where most of the population lives and engages in farming.

More mergers are good for the economy because it will help domestic banks consolidate their expertise and market power to fend off sharp competition from international banks, which will be allowed to enter the Nepali financial market in 2010, according the WTO agreement.

Merger and acquisition would help banks effectively compete with international banks, which would come with huge capital, human resource, expertise, and attractive scheme. In principle, this is considered good but at times of crisis and uncertainty, we might not even know how fast savings would fly out of the country, thus worsening the situation (remember Argentinean crisis in 2000, East Asian Crisis in 1997). To avoid the same fate, we definitely need some rational capital control that would rightly address this concern but not temper/distort individual and market incentives too much.

Food Inflation Watch: Birdsall and Subramanian on rising food prices

Food and Free Trade

Each country is trying to keep domestic supplies high on the justifiable grounds of food security. But by holding prices artificially low, export bans keep the market from sending accurate demand signals to domestic farmers. This penalizes farmers, who can't get the full, world price for their produce. That impairs efficiency, and undermines the incentives for investments that can increase long-term supply. Topping it all off, such measures subsidize high-income households, not just the poor.

Moreover, as more countries implement export controls, global supply contracts even further, pushing prices up by at least 10% and possibly much more. A vicious spiral lurks here, as panic- and policy-induced speculative hoarding drives world prices even higher.

Without a collective agreement to undo these restrictions, the world's poor, already at terrible risk, will be even worse off. Industrial countries should eliminate any practices, including all forms of ethanol subsidies and tariffs, that divert food production toward biofuels. In turn, developing-country food producers should eschew export restrictions and allow market forces to help boost agricultural supply. The assurance that all countries will do so should give each developing-country government incentives to better target assistance to the most affected and vulnerable consumers in their own countries.

Unfortunately, the ongoing Doha Round of trade negotiations won't on its own address these problems. And that's not just due to the poor prospects for completing these negotiations in the current environment in the U.S. when the antitrade lurch during the primary season has made even the U.S.-Colombia free trade agreement difficult to ratify.

More important is that in the Doha Round, the key trade policy culprits – biofuel subsidies and export restrictions – are not the focus of negotiations. The round has been devoted to traditional forms of agricultural protection – trade barriers in the importing countries and subsidies to food production in producing countries – which are becoming now less important as food prices have soared and import barriers have declined. While concluding the round would be good for the world and the trading system and would help secure long-run supply incentives for developing country food producers, it makes no immediate contribution to alleviating the current crisis.

It sounds counterintuitive, but the challenge of the food crisis affords a win-win opportunity: to collectively agree to policies that promote trade and efficiency while also boosting agricultural production and reducing the vulnerability of the poorest around the world. The challenge for world leaders is to seize that opportunity.

Food Inflation Watch: The Washington Post Global Food Crisis series III

The quest for higher profits is changing production pattern in the West.

Emptying the Breadbasket:

...Fleishman and his customers are hardly alone. Across America, turmoil in the world wheat markets has sent prices of bread, pasta, noodles, pizza, pastry and bagels skittering upward, bringing protests from consumers.

But underlying this food inflation are changes that are transforming U.S. agriculture and making a return to the long era of cheap wheat products doubtful at best.

Half a continent away, in the North Dakota country that grows the high-quality wheats used in Fleishman's bagels, many farmers are cutting back on growing wheat in favor of more profitable, less disease-prone corn and soybeans for ethanol refineries and Asian consumers.

...Problems started last summer with poor European harvests and a disappointing winter wheat crop in the southern Great Plains. U.S. prices moved above $7 a bushel, then crossed $10 after Australia harvested yet another drought-damaged crop in December. As supplies of wheat ran low, foreign countries began grabbing limited stocks of premium wheat from the northern plains -- the variety used to make the flour for Fleishman's bagels. Morocco, its own harvest of wheat to make traditional couscous inadequate, jumped in with a purchase of 127,000 tons.

Food Inflation Watch: The Washington Post Global Food Crisis series II

The irony of specialization, globalization, and the 'Dutch disease' (well kinda)!

Where Every Meal Is a Sacrifice:

...By sacrificing the she-goat last month, the 39-year-old day laborer and goatherd traded the family's morning milk for dinner meat. It lasted a few days. With the family unable to afford skyrocketing prices for basic foods, he said, his two young children now cry in the morning from hunger. One recent morning, he could take it no more. He took the goat's kid -- one of the last two animals in his flock -- to the squalid livestock market here in the hopes of selling it to buy food. "Everything -- the wheat, rice, sugar and animal feeds -- is higher priced than I have ever seen them before," he said. "What will we do? Soon we will have nothing left to sell."

Like most of the world's poorest nations, Mauritania is caught in a global food trap, producing only 30 percent of what its people eat and importing most of the rest. As prices skyrocket, those who can least afford it are squeezed the most as the world confronts the worst bout of food inflation since the Soviet grain crisis of the 1970s.

...Mauritania's government abandoned long-standing policies of fixed food prices in the 1990s. But it also gave up on large-scale efforts to boost agricultural production, shifting resources to iron ore mining and other industries.The last big agricultural push here -- an internationally backed effort to grow irrigated crops in the country's south -- failed more than 15 years ago, officials say, because money went to businessmen rather than farmers. They lacked the motivation and know-how required for large-scale cultivation.


Food Inflation Watch: The Washington Post Global Food Crisis series

I thought of blogging this one two days ago but could not do so due to busy internship work schedule and other stuff happening in D.C.

The Washington Post has been been publishing a series of articles related to the food crisis. It is very comprehensive, analytical, and informative.

The New Economics of Hunger:

On the usual list of the demand-push factors for driving up prices add this one as well: "Food was becoming the new gold. Investors fleeing Wall Street's mortgage-related strife plowed hundreds of millions of dollars into grain futures, driving prices up even more." is outpacing even the Soviet grain emergency of 1972-75, when world food prices rose 78 percent. By comparison, from the beginning of 2005 to early 2008, prices leapt 80 percent, according to the United Nations' Food and Agriculture Organization. Much of the increase is being absorbed by middle men -- distributors, processors, even governments -- but consumers worldwide are still feeling the pinch.

...A big reason for higher wheat prices, for instance, is the multiyear drought in Australia, something that scientists say may become persistent because of global warming. But wheat prices are also rising because U.S. farmers have been planting less of it, or moving wheat to less fertile ground. That is partly because they are planting more corn to capitalize on the biofuel frenzy.