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Summer Programme on the WTO, International Trade and Development

The Price of Food

Patrick LowGraduate Institute

Thursday, 24 July 2008

The Price of Food

The Facts

The Consequences

The Causes

Policy Responses

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The Facts

The FAO Food Price Index Increase of 57 per cent in the year to March 2008

Prices rises from 2005-2007 Maize 80% Wheat 70% Rice 25% Powdered Milk 90%

Prices of many other foods also higher, including palm oil, cassava, poultry, meat

Prices of most foodstuffs projected to stay high through to 2015, well above 2005 levels

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The Consequences

Effects on price levels and macroeconomic feed-through

For many developing countries, threats to food security, livelihood, rural development and nutrition

10-20% of income spent on food in rich countries, but 60-80% in developing countries, so strong poverty implications

Estimated that 20% increase in prices puts another 100 million below poverty line ($/day)

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The Consequences (cont.)

Civil disturbances (Burkina Faso, Cameroon, Egypt, Guinea, Haiti, Mauritania, Mexico, Morocco, Nepal, Senegal, Uzbekistan)

According to FAO, 37 countries face a food crisis

Policy responses (emergency response, trade and trade-related policies, longer-term development policies)

WFP needs an extra $700 million just to stand still

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The Consequences (cont.)

Not all downside – agricultural share in output/net food exporters

But opportunities potentially blunted by obstacles to price transmission: Policies (e.g. export restrictions) Infrastructural bottlenecks Remoteness

To the extent these challenges not addressed, truncated supply responses

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The Causes

High oil prices ($100+ per barrel)

Raising agricultural input prices (effects on mechanical working, transport, fertilizers, chemicals – maybe 15% of explanation)

Stimulating bio-fuels production (sugar, cassava, wheat, maize, palm oil, soy)

Effects on land use and land prices

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The Causes (cont.)

Consumption mandates and production subsidies diverting considerable agricultural output away from traditional uses

Incentives for biofuel production partly responsible for: 30% US maize output to ethanol in 2008, 20% in

2007 50% Brazilian sugarcane production for biofuels in

2007 68% EU vegetable oils output (plus imports) for

biofuels

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The Causes (cont.)

A secular shift in demand Economic growth in key developing

countries, in particular China and India Increased food demand in oil-exporting

countries Increased demand accounted for 20% of

food price rises in 2007 Changes in taste, with shift from cereals

to meat (several kilos of grain to produce one kilo of meat)

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The Causes (cont.)

Weather patterns reducing supply (climate change?)

Australian drought since 2002 Floods in West Africa and Mozambique Cyclones in Bangladesh Poor harvests in EU and Ukraine in

2006/7

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Causes (cont.)

Low stocks, especially cereals

Global stocks of food have dropped by 3.4% per annum since 1995

Use of buffer stocks for supply management and as a response to export controls in other countries

The challenges of stock replenishment against a background of food shortages and rising prices

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Causes (cont.)

Role of speculation

Does forward buying and selling of food on futures markets Independently raise prices Provoke price instability

Standard economic theory suggests possible short-term price effect (assuming elastic supply) and price-smoothing rather than volatility-generating effects

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Causes (cont.)

The effects of subsidies in rich countries on world production Price-reducing Inhibition of efficient production in developing

countries Low productivity through low investment Reduced R&D

What of the argument that subsidies should continue in order to relieve current prices and shortages?

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Policy Responses

Export restrictions Lowers domestic prices and reduces

export volumes, so inhibits supply beyond the short-term

Effect on world prices depends on terms-of-trade effects (a large country could gain welfare from an export tax, a small country cannot)

Deadweight costs of a trade tax But emergencies?

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WTO Rules on Export Restrictions

Export taxes are permitted, and could be negotiated down in the same way as tariffs

Quantitative export restrictions are illegal unless (among other reasons) they seek to relieve temporarily critical shortages (Art. XI:2(a)). But due consideration for net food importers, plus developed countries have to pre-notify details and consult upon request. Developing countries exempted from notification and consultation obligations except in the case of net food importer

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Policy Responses (cont.)

Price controls

Reduces returns to farmers, which comparable consequences to those of an export or output tax

Costs of administrative interventions

Ultimately, costly and counter-productive, but a short-term argument?

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Policy Responses (cont.)

Consumer subsidies/rationing Consumption subsidy more efficient than production

taxes, but still a send-best redistributive mechanism Potential production-distorting effects Affordability?

Consumption subsidies used in Middle East and North Africa on continuing basis (wheat, bread)

Rationing of subsidized food in order to target consumer groups (e.g. Pakistan on wheat), but administrative costs

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Policy Responses (cont.)

Reduced trade taxes

Lower import duties and reduced VAT

Efficiency gains and lower prices

Budgetary impact

Implications for WTO negotiations

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The Role of Trade Policy and the Doha Negotiations

Tariffs, subsidies (production and export) and export taxes

The different effects of agricultural trade liberalization – removing subsidies may raise prices, but probably only in the short-term, and removing tariffs should lower them.

Both actions will better balance underlying

supply and demand, stabilize prices and boost production in many developing countries