As the world staggers from one economic crisis to another, it seems
easy to forget the global food crisis that occupied centre stage in
2008.
World prices for essential grains more than doubled between 2006 and 2008.
Rice,
the staple food of most of Asia, doubled in price in just seven months.
And, despite their commitments to trade liberalisation, a few
significant grain-exporting developing countries rushed to protect
domestic grain stocks by banning exports.
The poor, who typically spend between 50 and 70 per cent of their meagre incomes on food, were most affected by the crisis.
According
to the United Nations Food and Agriculture Organisation, the food
crisis raised the number of undernourished people from 923 million to
more than one billion by this year.
In late 2007 and 2008, the
crisis caused food riots in at least 15 countries across the world,
from Brazil to Bangladesh, and international media and forums spoke of
little else.
Then, as suddenly as it struck, declining prices relegated the food crisis to collective global amnesia.
Causes not addressed
However,
while prices for grains and foods have declined in 2009, they are still
higher than pre-crisis levels and the fundamental causes of their
volatility have not disappeared.
The international economic system has witnessed a dramatic disbanding of trade and investment barriers.
However,
the international market for agricultural commodities, the nature of
industrial agriculture, changing consumption patterns and international
finance all threaten to make food price volatility and food insecurity
a recurrent feature of the early 21st century.
Agriculture
offers a textbook case of international market distortion. And in this
case, the market distortion is created by precisely the developed
countries that extol the virtues of free markets.
Double standards
The developed world protects its domestic agriculture with any number of subsidies and technical barriers to trade.
In
2006, for example, the Organisation for Economic Co-operation and
Development (OECD) estimated that agricultural subsidies in OECD member
countries were about $230bn.
In contrast to the magnitude of
those subsidies, Official Development Assistance from OECD member
states amounted to $120bn (the US alone had a military budget of $600bn
in 2007).
The agricultural subsidies cover a host of measures - from domestic
price support, to compensation to farmers for maintaining fallow land,
to export price subsidies to dumping, some of which is disguised as
food aid.
Paradoxically,
international trade negotiations and, more importantly, International
Monetary Fund (IMF) lending conditions expect developing countries to
remove agricultural subsidies and liberalise domestic markets to
imported foods.
While these measures allow for the increased
availability of food, they have also eroded domestic agriculture and
impoverished the rural economy, often in the most economically fragile
states.
It was not surprising that the most impoverished
countries were unable to meet the international price surge with
increased domestic production, or the release of buffer stocks of
staple food commodities.
In fact, those countries became ever
more aid dependent as governments struggled to find the resources to
pay the bills for imported food (and fuel), in the face of sharpened
threats of hunger and undernourishment.
Industry domination
The opening of developing country markets does not benefit the average farmer in the developed world.
The international agricultural industry is dominated by a few grain, seed, chemicals and oil companies.
Such
is their market power that three companies control the global grain
trade and one company controls 60 per cent of seed production.
The grain trading conglomerates have unchecked market power to hoard and influence world prices.
Seed
companies have employed breakthroughs in biotechnology to produce seeds
that are compatible only with certain brands of pesticide or supply
patented terminator seeds which germinate just once, and therefore the
seed from a harvest cannot be used to grow a second crop.
This
last feature of the seed business ensures a seed serfdom for the
farmer, who cannot set aside part of the harvest for replanting.
It
is no wonder, then, that the profits of the grain traders soared to
astronomical heights in 2007, in one case up by 60 per cent over the
previous year.
And it is no wonder that small farmers are
bankrupted by one crop failure because of their inability to afford to
buy or finance the procurement of seed for a new crop.
Industrialised agriculture
The
other facet of industrialised agriculture is its energy intensity and
reliance on hydrocarbon resources, whether as fertiliser or as fuel.
During
the heyday of the Green Revolution, one study noted that between 1945
and 1994 US energy input for agriculture increased four-fold while crop
yields only increased three-fold.
Since then, energy input has continued to increase without a corresponding increase in crop yield.
Barring
a breakthrough in seed technology, industrial agriculture has reached a
point of diminishing marginal returns from energy usage.
In
addition, the fact that oil resource availability has peaked suggests
that oil prices will be on a long-term increase, thereby increasing the
costs of food production.
Given the nature of the financial
crisis in developed countries, it is highly doubtful that governments
will have the fiscal resources to increase subsidies to the
agricultural sector, in order to contain the increase in prices.
For
the developing world, fiscal constraints on governments and the likely
drying up of development assistance will have the same impact.
Food to fuel
The recent movement in the developed world to produce bio-fuels is yet another factor propelling the price of grains.
A
World Bank study, prepared in April 2008, pointed out that a third of
US corn production goes to produce ethanol and half the vegetable oils
produced in the EU to the production of biodiesel.
This
diversion from food to fuel is subsidised extensively, while imports
from Brazil (which has had the longest standing and most extensive bio
ethanol production) are subjected to tariff barriers that effectively
prohibit imports of Brazilian ethanol into these markets.
Commodity
speculators, seeing the potential from increased demand for grains in
these subsidised programmes, drove up futures commodity prices which in
turn raised current prices in grain markets.
The same World Bank
study contends that 75 per cent of the food price increase was due to
bio-fuels, a figure hotly contested by the Bush administration at the
time.
An International Food Policy Research Institute study
asserts that the effect was somewhat less, at 30 per cent of the food
price increase.
Ideology of the rich
The financial crisis in itself was a cause for the food price hike.
While prices rose steadily through 2006 and 2007, the latter half of
2008 saw a sharp increase in prices, in a so-called price spike.
However, little had changed in the fundamental conditions of supply or demand to cause such dramatic market adjustments.
By now it is clearly evident that as the unregulated and complex
financial sector of the US was facing the unfolding effects of the real
estate bubble, trillions of dollars moved across sectors and spaces and
invested in food and primary commodities, causing another price bubble,
this time of an altogether more serious consequence.
The
simultaneous inflation of oil and food futures caused cost increases in
the production of food while inflating its trading prices at the same
time.
It seems that finance had run out of opportunities for
profit, so it turned to the earth as a means of generating speculative
profit, whether through real estate or primary commodities and food.
As the more recent financial crisis has shown, there is no regulatory capacity to stop such profiteering from reoccurring.
These are the difficult prospects and consequences of a world run by the ideology of the rich and powerful.
Development lessons
There are development lessons to be learned here.
First,
food security is an issue requiring long-term international effort and
food security demands that local agriculture be able to supply domestic
needs wherever possible and that reserve stocks are garnered for
difficult times.
Second, the developing nations are justified in
holding out in the Doha Round of trade negotiations until real and
tangible concessions are made with regard to trade in agricultural
products.
Third, national development efforts need to be
replenished with such 'old fashioned' endeavours as investing in rural
production, water availability and the empowerment of the small farmer.
Economic
history shows us that industrialisation was preceded by agricultural
transformations, with the state playing a heavy role.
And economic history is a better guide to policy than the theorising of free marketers serving powerful corporate interests.