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| The
Global Food Crisis |
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Public
Lecture delivered at the University of Turin, Italy,
21 May 2008.
This is not a sudden and unexpected crisis: the signs
have been around for some time now. Even though international
bureaucrats have been referring to the current problems
in the world food situation as "a silent tsunami",
the truth is that this one could easily have been seen
to be coming. Even so, its impact has been powerful
and already quite devastating, as food shortages and
rapidly rising prices of food have adversely affected
billions of people, especially the poor in the developing
world.
It is also very much a man-made crisis, resulting not
so much from ineluctable forces of global supply and
demand as from the market-oriented and liberalising
policies adopted by choice or compulsion in almost all
countries. These policies have either neglected agriculture
or allowed shifts in global prices to determine both
cropping patterns and the viability of farming, and
also generated greater possibilities of speculative
activity in food items. Cultivators in developing countries
have been ravaged by the fearsome combination of exposure
to import competition from highly subsidised agriculture
in developed countries, removal of domestic protection
of inputs and reduced access to institutional credit
- to the point that even the global increase in agricultural
prices after 2002 did not compensate sufficiently to
alleviate the pervasive agrarian crisis in much of the
developing world.
What are the symptoms of this crisis? The most immediately
evident feature is the recent rise in food prices. Globally,
the prices of many basic food commodities have not risen
faster for more than three decades. In fact, even in
recent years, food prices internationally had shown
only a modest increase until early 2007. But since then
they have zoomed, such that the IMF data show more than
40 per cent increase in world food prices over 2007,
and even more rapid increases in the first three months
of this year. The FAO food price index, which includes
national prices as well as those in cross-border trade,
suggests that the average index for 2007 was nearly
25 per cent above the average for 2006. Apart from sugar,
nearly every other food crop has shown very significant
increases in price in world trade over 2007. This trend
has accelerated in the first few months of 2008.
The increase has been marked in essential food grains
that are staples for most of the world's population.
Global prices of wheat prices increased by 77 per cent
in 2007 and rice prices increased by nearly 20 per cent,
which are some of the most rapid annual increases in
the past half-century. Since the start of 2008, world
rice prices have soared even more, increasing by nearly
150 per cent in the first 100 days of the year. Wheat
prices have been highly volatile in the current year,
increasing by 25 per cent in one day and then falling
even more sharply in early April, but still well above
the levels of most of last year. The price of corn –
another major staple especially in Latin America – has
more than doubled in the past two years.
Across developing countries there is evidence of growing
shortage of food in retail trade, even if not always
in domestic production. Price rises for food grains
have varied in intensity according to how well different
governments have been able to manage the global impact
in their own countries and ensure domestic supply. And
prices of other food items - ranging from meat and vegetables
to edible oils - have also sky rocketed.
The impact of this has been felt most sharply in poor
countries where most people tend to spend around half
of their family budgets on food items. There have already
been food riots in countries as far apart as Haiti,
Guinea, Mauritania, Mexico, Morocco, Egypt, Senegal,
Uzbekistan, Yemen, Bangladesh, Philippines and Indonesia.
And many more countries are threatened by social unrest
as rising food prices cause not merely dissatisfaction
but the spread of hunger. In several countries in Asia,
such as Pakistan and Thailand, troops have had to be
deployed to guard food stocks and prevent seizure of
grain from warehouses.
Even the multilateral institutions that have encouraged
policies that have brought the situation to this pass
have had to sit up and take notice. The World Bank President
now estimates that such high food prices could cause
more than 100 million people in low-income countries
to be pushed back into deeper poverty.
There are many explanations being offered for the recent
increase in global food prices. One of the most common
arguments, given greater impetus by its endorsement
by George Bush and the US administration, is that this
is essentially demand-led - the result of several years
of rapid economic growth, rising incomes in some of
the most populous nations (particularly China and India)
and therefore the growing demand for food. It is pointed
out that as per capita incomes rise, even though people
may spend less of their income on food, the absolute
amount of demand still increases. And even when they
consume less food grain directly because of change in
food consumption patterns, the indirect demand for grain
still increases, often more than proportionately, because
of more demand for animal products, since livestock
also need to be fed and some like cattle require even
more grain than humans. (It is estimated that each kilo
of beef requires seven kilos of grain to be produced.)
However, this argument regarding increasing global demand
is not just overplayed, but actually misleading. It
is certainly true that there has been some diversification
of production and food consumption of the rich in China,
India and other fast-growing developing countries. This
does lead to greater absorption of food grains directly
and indirectly – but only of the group of the relatively
well-off, which is very much a minority in both countries.
And because income distribution in these emerging markets
has been worsening quite rapidly, the bulk of the population
is not part of that tendency. In fact, per capita consumption
of food grain in India as a whole is lower now than
it was in the 1980s! And even in China, per capita food
grain consumption actually fell quite sharply between
1996 and 2003. While it has risen thereafter, the level
in 2005 was still below the level of 1996.
In both China and India, the rate of population growth
has been slowing down, so total food grain demand from
these two countries has been increasing at a slower
rate than they were in the previous decade, when world
prices of food were relatively low even in historical
terms. So rather than demand from these growing developing
countries, global supply conditions must have been significant
in changing the trend in food prices.
Even a recent study by Germany's National Office for
Agricultural Produce Prices has rejected the claims
that growing demand in China is the main reason for
the current spike in world food prices, pointing out
that China's alleged influence on global markets is
exaggerated. It noted that while over the past decade
Chinese domestic consumption of milk and dairy products
rose by more than five times, the bulk of this increase
in demand was satisfied by a simultaneous expansion
in Chinese production. Currently China meets more than
90 per cent of its needs in wheat, maize and rice, and
is aiming for producing 95 per cent of its estimated
future demand for these items.
It is of course true that in certain food products as
well as in oil, China's involvement in global markets
has played a role in affecting world prices. In 2006
and part of 2007 Chinese domestic pork production collapsed
because of animal disease, causing higher imports of
both pork and corn feed for pigs to increase domestic
pork supply. This did lead to higher prices of both
pork and corn, although in the case of corn the impact
of the US in world trade has been much greater, as we
will see. Similarly, 40 per cent of world production
of soya bean is currently imported by China, largely
for use as animal feed. Chinese imports of other primary
products such as cotton, vegetable oils, rubber, timber
and animal skins have soared. But these are not responsible
for higher world prices of wheat and rice, which are
the focus of so much current concern.
In any case, it should be noted that this is not the
first time that the world economy has witnessed increases
in income of a significant portion of the population,
and these phases have not been accompanied by such sharp
increases in food prices in the past. Rather than these
simplistic explanations, it is likely that there are
other forces at work, which come not from changing demand
so much as supply. Five major features of recent supply
conditions have been crucial in changing the global
market situation for food crops.
First, there is the impact of high oil prices, which
affects agricultural costs directly and indirectly in
a variety of ways. This is because of the growing significance
of energy as an input in the cultivation process itself
as well as in transporting food. Changing cultivation
technology has meant ever growing reliance on chemical
fertilisers, whose production costs (for nitrogenous
fertilisers in particular) are directly affected by
oil prices. Greater mechanisation of agriculture in
the form of tractors, harvesters and threshers requires
more oil to run these machines. The spread of irrigation,
especially ground water exploitation, requires energy
in the form of diesel or electricity to run pump sets.
This rise in energy costs has had more of an impact
than before on costs faced by farmers because in most
countries, especially in the developing world, governments
have reduced protection and subsidies on agriculture.
This means that high costs of energy directly translate
into higher costs of cultivation, and therefore higher
prices of output.
Second, there is the bio-fuel factor: the impact of
both oil prices and government policies in the US, Europe,
Brazil and elsewhere that have promoted bio-fuels as
an alternative to petroleum. This has led to significant
shifts in acreage to the cultivation of crops that can
produce bio-fuels, and diversion of such output to fuel
production. For example, in 2006 the US diverted more
than 20 per cent of its maize production to the production
of ethanol; Brazil used half of its sugar cane production
to make bio-fuel, and the European Union used the greater
part of its vegetable oil seeds production as well as
imported vegetable oils, to make bio-fuel.
The US has led this shift globally. President George
Bush provided an impetus to domestic ethanol production
by providing large subsidies, in a desperate attempt
to reduce dependence upon petroleum once it became evident
that the imperialist attempt to control Middle East
oil supplies had come unstuck with the failed invasion
of Iraq. According to the IMF, corn ethanol production
in the United States has accounted for at least half
of the increase in global corn output since 2006.
In addition to diverting corn output into non-food use,
this has also reduced acreage for other crops and has
naturally reduced the available land for producing food.
Soya bean production has been adversely affected by
the acreage shift, and therefore oilseed prices have
gone up. Meanwhile, the use of maize to make ethanol
has caused corn prices to rise, and increased the price
of animal feed, thereby causing increased prices of
livestock and therefore meat and dairy products.
The irony is that bio-fuels do not even fulfil the promises
of ensuring energy security or retarding the pace of
global warming. Ethanol production is extremely energy-intensive,
so it does not really lead to any energy saving. Even
in the most "efficient" producer of ethanol – Brazil
- where sugar cane rather than corn is used to produce
ethanol, it has been argued that the push for such production
has led to large-scale deforestation of the Amazon,
thereby further intensifying the problems of global
warming. Indeed, recent scientific research suggests
that the diversion of land to growing bio-fuel crops
can produce an enormous "CO2 debt" from the use of machinery
and fertilisers, the release of carbon from the soil
and the loss of CO2 sequestration by trees and other
plants that have been cleared for cultivation.
Yet, as long as government subsidies remain in the US
and elsewhere, and world oil prices remain high, bio-fuel
production is likely to continue to be encouraged despite
the evident problems. And it will continue to have negative
effects on global food production and availability.
Third, the impact of policy neglect of agriculture over
the past two decades is finally being felt. The prolonged
agrarian crisis in many parts of the developing world
has been largely a policy-determined crisis. Once again,
even international officials are now admitting what
has been obvious to independent observers for several
years. Jacques Diouf, Director of the U.N.'s Food and
Agriculture Organisation, has admitted that the crisis
had been building for decades: "The situation we are
in is the result of inappropriate policies over the
past 20 years."
These inappropriate policies have several aspects, but
they all result from the basic neo-liberal open market-oriented
framework that has governed economic policy making in
most countries over the past two decades. One major
element has been the lack of public investment in agriculture
and in agricultural research. This has been associated
with low to poor yield increases, especially in tropical
agriculture, and falling productivity of land. Greater
trade openness and market orientation of farmers have
led to shifts in acreage from traditional food crops
that were typically better suited to the ecological
conditions and the knowledge and resources of farmers,
to cash crops that have increasingly relied on purchased
inputs.
But at the same time, both public provision of different
inputs for cultivation and government regulation of
private input provision have been progressively reduced,
leaving farmers to the mercy of large seed and fertiliser
companies, input dealers. As a result, prices for seeds,
fertilisers and pesticides have increased quite sharply.
There have also been attempts in most developing countries
to reduce subsidies to farmers in the form of lower
power and water prices, thus adding to cultivation costs.
Costs of cultivation have been further increased in
most developing countries by the growing difficulties
that farmers have in accessing institutional credit,
because financial liberalisation has moved away from
policies of directed credit and provided other more
profitable (if less productive) opportunities for financial
investment. So many farmers are forced to opt for much
more expensive informal credit networks that have added
to their costs.
The lack of attention to relevant agricultural research
and extension by public bodies has denied farmers access
to necessary knowledge. It has also been associated
with other problems such as the excessive use of ground
water in cultivation; inadequate attention to preserving
or regenerating land and soil quality; the over-use
of chemical inputs that have long run implications for
both safety and productivity. Similarly, the ecological
implications of both pollution and climate change, including
desertification and loss of cultivable land, are issues
that have been highlighted by analysts but largely ignored
by policy makers in most countries.
Reversing these processes is possible, and of course
essential. But it will take time, and also will require
not only substantial public investment but also major
changes in the orientation and understanding of policy
makers. So until then global supply conditions are likely
to remain problematic. And meanwhile, increases in global
prices of food are likely to be exploited by large agribusinesses
based in the North rather than benefiting farmers in
low income countries.
In the broader economic strategy context, there are
also issues related to the loss of cultivable land because
of industrialisation. Predictably, this has been most
rapid in recent times in fast-growing Asia, but that
is also because the process was already more advanced
in the more industrialised regions of Latin America.
For example, in Vietnam it is estimated that around
40,000 hectares of rice paddies are lost every year
to urban construction, industrial zones and roads. In
Thailand, the world's major rice exporter, the amount
of land under rice cultivation dropped by more than
13 per cent between 1995 and 2005.
Fourth, there is the impact of recent climate change,
which has caused poor harvests in different ways ranging
from droughts in Canada and Australia to excessive rain
in parts of the US. Scientists are projecting that warmer
and earlier growing seasons will increase crop susceptibility
to pests and viruses, which are expected to proliferate
as a direct result of rising temperatures. Some more
arid regions are already more drought-prone and in danger
of desertification. The rapid melting of glaciers in
Asia is of huge consequence to China and India, where
important rivers such the Yangtze, Yellow and Ganges
are fed by such glaciers. This will deprive the hinterland
of much-needed irrigation water for wheat and rice crops
during dry seasons. This is of global significance since
China and India together produce more than half the
world's wheat and rice. Once again, official policy
has been tardy in considering such problems, much less
in addressing them.
Fifth, there is the more proximate impact of changes
in market structure, which allow for greater international
speculation in commodities. It is often assumed that
rising food prices automatically benefit farmers, but
this is far from the case, especially as the global
food trade has become more concentrated and vertically
integrated. A small number of agribusiness companies
worldwide increasingly control all aspects of cultivation
and distribution, from supplying inputs to farmers to
buying crops and even in some cases to retail food distribution.
This means that marketing margins are large and increasing,
so that direct producers do not get the benefits of
increases expect with a time lag and even then not to
the full extent. This is certainly known to be true
in developing countries where large corporate players,
both national and multinational, are able to control
markets and prevent farmers from getting most of the
gains of international price increases. But it is also
true in the United States, where giant agribusinesses
rather than farmers have been reaping the rewards of
higher government subsidies and higher global prices.
This concentration in global agribusiness also enables
greater speculation in food, with more centralised storage.
Financial innovations, such as the development and expansion
of commodity futures exchanges, have aided and accelerated
this process by allowing purely financial speculators
to engage in transactions in commodity markets as well.
Even in the United States, there is now an intense ongoing
debate on the role that the large influx from hedge
and index funds into commodity futures are playing in
the present situation, when both commodity price levels
and their volatility have reached unprecedented highs.
It is probably not a coincidence that this has happened
over the same period that governments across the developing
world in particular (with the notable exception of China)
have reduced public holding of food stocks. The US Department
of Agriculture estimates that global stock holding of
wheat is at its lowest level in thirty years, despite
substantially increased world demand. It should be noted
that the same multilateral donors (the IMF and the World
Bank) whose representatives are now breast-beating about
the food crisis have earlier played a major role in
this reduction of state involvement, by encouraging
or forcing developing country governments to reduce
"wasteful" and "expensive" holding of food grain stocks.
Such a policy promoted especially by the World Bank
had already led to major famines and humiliating dependence
on aid for food imports in countries like Malawi and
Ethiopia a few years ago.
Even in other countries where the governments were not
forced to do so, there has been a general reduction
of publicly held stocks as part of the wider climate
of reduced government involvement in all economic matters.
This has inevitably reduced the capacity of public intervention
to prevent speculative activity from dominating markets
and prices. And because public food reserves necessarily
take time to build, they cannot quickly be created to
ensure a reduction of speculation-induced price rises.
The point has been made bluntly, if belatedly, by Jose
Graziano, the UN Food and Agriculture Organization's
Regional Representative for Latin America and the Caribbean:
"The crisis is a speculative attack and it will
last... Speculative attacks become possible when you
have low reserves."
Such speculation is not likely to dissipate any time
soon. As the global financial system remains fragile
with the continuing implosion of the US housing finance
market, investors will continue to search for other
avenues of investment to make up their losses and find
new sources of profit. As already noted, commodity speculation
has increasingly emerged as an important area for such
financial investment. Such speculation by large banks
and financial companies explains at least partly why
the very recent period has seen such sharp hikes in
price. Once again, government policies, especially with
respect to the financial sector, are largely responsible
for this, since financial deregulation has allowed many
more complex forms of speculative activity that affect
trade in commodities.
The role played by private traders and speculators has
been especially evident in countries where aggregate
domestic supply has been adequate to meet demand but
there have not been enough stocks in the hands of the
public agencies. Thus in India, in the previous year
private trade played a role in pushing up prices of
essential food items even though there was no absolute
shortage in aggregate terms, because the public food
distribution agency had not procured enough to dampen
market expectations of prices rises.
So it is clear that the entire process that has led
to the current food crisis has been largely policy-driven.
This may actually be good news in a way, because it
means that reversing such policies and developing alternative
strategies can also reverse the process. But it is important
for governments to recognise the precise role played
by specific policies and think strategically on how
to change them in a progressive and sustainable manner,
rather than simply engage in knee-jerk reactions.
Unfortunately, it seems that knee-jerk responses are
dominating at present. Of course, some of these are
necessary to deal with the immediate crisis and ensure
access to food especially for the poor. Of 58 countries
whose reactions are tracked by the World Bank, 48 have
imposed price controls, consumer subsidies, export restrictions
or lower tariffs. But another response has been to slash
import duties: at least 24 nations have reduced duties
and value-added taxes on food items and allowed cheaper
imports. Many countries are restricting or prohibiting
exports, especially of rice or wheat. These include
Egypt, Argentina, Kazakhstan, Cambodia, India and China.
Meanwhile, net importers, often poor countries in Asia
and Africa, are scrambling to secure supply contracts
as the domestic production of food staples cannot meet
consumption requirement.
Meanwhile, one positive result is that governments are
once again turning their attention to the need to maintain
public food stocks. In January, the Malaysian government
announced that it would create a new agency to stock
up on oil, rice and other items. Other countries in
Asia are also busy stockpiling grain. The Indian government
has recently put fresh energy into ensuring that the
public agency procures enough wheat from the recent
harvest to ensure more than adequate buffer stock.
Another possibly less desirable fallout of the food
crisis is the greater willingness of some governments
to consider genetically modified crop production. Thus,
the Mexican government, which had banned GM crops for
a long time, is now considering lifting the ban on genetically
modified corn. It is possible that similar bans in the
European Union and some countries of Africa could also
be reconsidered if the aggregate shortages continue.
In this context it is worth considering the case of
countries that have managed to avoid severe crisis.
Venezuela in Latin America stands out as a country where
food prices have increased only marginally, largely
because oil revenues have been used to subsidise essential
items consumed by the poor. In Africa, Malawi was one
of the countries earlier laid low in terms of food self-sufficiency
because its government relied on World Bank advice.
But now it has not only weathered the current storm
but has achieved recent success in food production,
allowing it to achieve food self-sufficiency and even
to export food, by ignoring World Bank advice and extending
substantial subsidies for fertiliser and other inputs
to farmers. Even China, blamed so often for high global
prices, has actually increased domestic production to
meet domestic needs and also stockpiled large quantities
of grain, so that rice and wheat prices have not increased
much in China despite rapid global inflation in these
crops.
In India, the banning of futures trading in four essential
commodities last year, the recent control of foreign
trade and the ability of the government to use public
procurement to feed the Public Distribution System have
played some role in keeping grain price rises below
the global increases. However, in India even small increases
in food prices directly impact upon the poor and adversely
affect food consumption, because most workers do not
get inflation-indexed incomes. The problem is more severe
because such a large proportion of the population is
already malnourished and thereby more prone to debilitating
illness and inability to achieve normal growth. Even
small reductions in food consumption can have devastating
social effects in such a context, quite apart from the
political destabilisation that can occur.
All this suggests that real solutions to the present
food crisis will not be found until governments across
the world seriously reconsider the neoliberal economic
strategies that have created the crisis in the first
place. This means that unless there is much wider public
outcry and socio-political pressure against such policies,
the food crisis is likely to continue.
May 22, 2008. |
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