Food crises and world trade policy: A primer

Sep 13, 2010

There is no way around it: international trade policy is always messy. Recently, each round of WTO has drawn angry mobs and protests--and, more often than not, very little change. The pattern, it seems, especially holds true for discussions about food subsidies: developing countries want the U.S. and, to a lesser extent, Europe to remove the subsidies and genuinely open up their markets to developing country stocks, and the U.S. and Europe refuse to do so. And the stalemate replicates each WTO round, seemingly ad infinitum. 

But the food crises of 2007-2008 and 2010 are demonstrating, more than ever, the dangers of nationalist, isolationist (and ultimately myopic) food policies.

Let's rewind. What happened during these food crises, who was responsible, and what made the 2007-2008 crisis so much worse than this one?

The 2007-2008 grain crisis

In theory, it was caused by droughts in grain-producing countries in late 2006, but the reality is much more complicated. The depressed production mixed with other factors like:

  • rising oil prices, which translated to higher fertilizer and transportation costs too
  • a growing biofuels market (linked with the rising oil prices), whose demand both raised the price of grains in general and lessened the supply of grains for food
  • gradual international shift in diet preferences toward more input-heavy foods (e.g., processed foods, meat)
  • population growth, i.e. growing world food demand
  • economic growth in Asia, leading to higher demand for food and oil
  • declining world food stockpilers

The 2008 rice crisis

Some of the same issues facing grain also impacted rice (e.g., costlier inputs and transport). Moreover, as food grains became scarcer and more expensive, people in developing countries began replacing the wheat in their diet with rice, thus increasing the demand (and price) for rice. However, the main problem was not a shift in the free market supply/demand curve; it was short-sighted measures taken by governments:

"India and Vietnam, the world's second- and third-largest rice exporters, saw the prices of soybeans, wheat, and corn skyrocket. In an attempt to keep a lid on domestic inflation, in late March [2008] both countries announced export restrictions. The idea was to ensure plenty of domestic stock of rice so prices wouldn't rise. But it backfired, because as soon as international prices shot up domestic traders jacked prices up at home anyway, leading to panic buying and hoarding" (Businessweek). Thus the main issue wasn't a rice shortage, but rather government policies and the resulting hoarding/speculation at all levels of the food supply chain (traders, millers, wholesalers, and retailers).

Repercussions

The result was a huge spike in food prices, and corresponding protests and food riots around the world. In different countries, angry and hungry citizens clashed with police; dozens died. Beyond these immediate reactions were the slow and painful aftershock effects. Because developed countries have protectionist agricultural subsidies, they are able to produce much cheaper outputs than their developing country counterparts. As a result, the poorer nations are often net food importers: the sub-Saharan Africa region imports 45% of its wheat and 84% of its rice. So when prices are high, the poor eat less or switch to lower quality foods, risking malnutrition. They also have to spend more to get the baseline amount of food, extra expenses that can be economically disastrous. According to the World Bank, 130m-155m people have fallen into poverty in the last two years because of food crises. Moreover, in practice, price shocks are not necessarily short-term: even after international food prices level off (which they haven't), local market prices in developing countries may take a while to readjust. Today, in 2010, maize is 50% more expensive than its average price in 2003-2006, and rice prices are 100% higher. 

More worrisome may be that, given some of the larger trends at play (e.g., increasing demand for food and input-heavy foods), food prices across the board were rising, and in a gradual way even before the price shocks.

The 2010 wheat crisis:

Russia, one of the world's biggest wheat exporters, experienced drought and wildfires that wiped out a third of the country's grain crop. So to ensure domestic food security, the country ended up banning exports until next year's harvest. Consequently, wheat prices spiked, doubling since the low point in June of $4.26 a bushel.

However, despite all the headlines about this year's wheat "crisis," the good news is that it's nowhere near as severe as the 2007-2008 one. For one thing, wheat is growing elsewhere, and at much higher productivity rates than in the past (due to better seeds and practices). As The Economist reported, "this is not Food Crisis 2.0. In 2007-08 prices rose across the board for months; this summer, the rise has been confined to a few commodities (notably wheat); average food prices are only slightly above where they were at the start of the year. In 2007-08 grain stocks were at their lowest relative to output for 30 years; now they are back to normal."

Adding insult to injury

So what's the issue? Why didn't the market simply absorb the supply shock, as it should have? Just as in the case of rice, it's self-interested (and perhaps ineffective) government policies: namely, hoarding. To prevent the same sort of protests that followed the 2007-2008 crisis, "Egypt, the world’s biggest importer of wheat, as well as Tunisia, Algeria and Jordan, all reacted to the Russian ban by buying extra wheat on the spot market." Others are trying to pursue policies of self-sufficiency by growing at home.

But this exacerbates global food security problems. Closing off markets, subsidizing shallow markets, continued barriers to trade, and national emergency stocking/heaving buying/hoarding are not fixes to a long-term problem, one that will only get worse as climate variability and temperature rises continue. (The Russian incident is likely just a taste of what's to come.)

Enabling future food security

So what needs to be done? The policy arena is always a difficult one to navigate, even more so at an international level. However, perhaps climate change and  growing food security concerns will help catalyze change. The Economist outlines three good policies, to start:

1. Remove agricultural subsidies in developed countries (ahem, corn belt USA)

2. World insurance/policies against export bans during food shortages/crises

3. Global food stock system, perhaps managed by the UN World Food Program

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P.S. As an American, I can say that the anti-agricultural subsidies movement is indeed gaining steam in the U.S. Recently, a whole stream of books (e.g., Michael Pollan's The Omnivore's Dilemma) and documentaries (e.g., King Corn) have examined the economic and health effects (obesity) of corn subsidies and national food policies.

Further Reading:

"Don't starve thy neighbor," The Economist, 9 September 2010.

"Wheat prices: Field events," The Economist, 9 September 2010.

"Understanding the Global Rice Crisis," Bloomsburg Businessweek, 28 April 2008.

"Food Price Watch," World Bank, May 2010 -- pdf on domestic food price volatility

"UN calls meeting on food price concerns," BBC, 3 September 2010.

Photo credits: Photo by Fleur Phillips; Graph by The Economist