foodFIRST for Thought

Food and Geopolitics, Vijverberg session 21 november 2011

© 2012-01-26 | Hans Groen

The new scarcity of food and energy is a catalyst for a process of reversed globalisation. Next to a market where there is competition, the world is again an arena where countries occupy positions of power, and where there is fighting and spying. This process has been accelerated with the financial crisis. The protectionist reflexes of states in panic that saved their banks and industries have incited geopolitical instincts and perceptions.

Food is dynamite in the hands of politicians. Will they handle this responsibly? With this question, the theme of the Vijverbergsesion on Food and Geopolitics was introduced to the participants and speakers.

We see this contradictory movement:
-- On the one hand, there is globalisation, the unification of the world as global market, coupled with de-staticising and de-nationalisation;
-- On the other hand, there is the reversed globalisation, the re-nationalising and re-politicising of economic life and the geo-politicising of international relations.

This situation leads to dilemmas for policy makers in The Netherlands and the EU. It seems to be inevitable that both movements have to be taken into consideration, but trade-offs are just as inevitable.
Food remains to be a major issue. The EU guidelines for the Common Agricultural Policy explicitly leave room for stimulating agricultural production at home. Though there are good reasons for this, it will also be seen by our global partners as an act of mistrust and unwillingness to reach a collective settlement.
The next step should be the reopening of the Doha round on trade liberalisation which shipwrecked in 2008. Food is the primary point of controversy. The parties know that the collective interest â?? global economic growth â?? is best served by trade liberalisation. But that insight does not count when what is lacking is the trust that is necessary for parties to relinquish the freedom to choose for their self interest and instead opt for the better outcome for all. Are countries willing to be vulnerable and even give up some of their sovereignty in favour of a workable international order â?? or is distrust growing?

The last decade has seen a sharp increase in food prices. Does this recent rise in food prices mean that we have entered in a new world, governed by scarcities? One can question this. During the â??70-ties and â??80-ties, we also saw a rise and then a decrease again in food prices. The current rise is a result of the extreme low prices during the period 1980 till about 2002 and as a result the lack of investing and a slower growth of agricultural output. Add to that the greater demands from rising countries, the increased demands for bio fuels, and the decommissioning of existing food buffers. Speculation is just an added factor. A few of these causes have to do with the global liberalisation of agricultural trade. Liberalisation has led to decommissioning of stocks and to greater fluctuations in prices; liberalisation does not seem to be the solution to our problems. There is also a great surplus of land in Latin America and Sub Sahara: here more yields are still possible; the high prices of today may lead to a faster cultivation of these areas, leading to lower prices again.

However, on the longer term, scarcities can develop. The amount of land at our disposal is limited, seed improvement has reached its limits, and fertilizers become more expensive due to higher phosphate and fuel prices. There is also a higher demand for organic material by industry, due to these higher prices â?? bio fuels and chemicals (bio plastics). Higher income around the globe leads to a higher demand for meat, and thus for a higher demand for cereals and cattle food. This higher income also leads to a higher demand for consumptive land, such as golf courses. The demand for land shifts from agriculture to energy production and entertainment, and the claim these latter uses put on land will be disproportional to what is available worldwide for agriculture.

Is the reform of the EU Common Agricultural Policy (CAP) sufficient to face a future of scarcities? That is not the goal for which the CAP has been designed. The reform was decided upon in the context of the Blair House Agreement (1992), which also shaped the WTO agreement on agriculture in 1994. The main component of this compromise is that agricultural support via surcharges remains possible, but that protectionism is not allowed â?? a mercantilist policy in favour of the rich countries that wanted to have entrance to other markets for their agricultural products. After all, poorer countries of course cannot subsidize their export. Regulating supply is not mandatory anymore (under GATT, only subsidies for products that you grew yourself were allowed, which made it possible to regulate and control production), the export is most important. The collateral damage was the decommissioning of buffer stocks â?? these buffers were a result of the price policy under GATT. If we still had had these buffers, draughts or sudden rises in demands would not have had great effects on the prices.

Neither geopolitics, nor liberalisation is an adequate answer. Multilateralism aimed at organising the agricultural market (the original idea of the Bretton Woods institutions), and price control via buffer stocks is a better approach. It is about guaranteeing a sufficient price level that there is an incentive to invest in agriculture and at the same time (via the buffers) preventing huge price fluctuations to protect the poorest groups. Investment and safety nets set up in this way would be the way to go in the future.

For the CAP one conclusion can be formulated: Invest in the areas where the production is; instead, investing in developing countries has been abandoned in WTO.

What then was wrong with GATT, why did we reform it? First, the GATT institutions failed in relating to redistribution; second, there is a need for a â??greenerâ?? agriculture; third, the idea that when agricultural prices were getting higher, there is no need for income support or subsidy.
The result of the reform s is a very important change with major implications for food. The logic of trends seemed to indicate a downward movement of prices, with regular spikes, but that logic is gone. Also gone is the logic that increased food prices mean higher income for farmers. That urges to a reform of the CAP: we have to deal with market failure, and we have to deal with policy failure. Our policies made sense when they were designed, but now we need a better redistribution and targeting of support; we also need more consideration of public goods, a greener agriculture; and we need to bridge the gap between knowledge and practice with research and innovation. Added to this is the realisation that we cannot have a sound agricultural policy without linking both environment and economy.

Around 2000 the downward trend of food prices that existed since 1960 has been reversed. Agriculture produce, as well as prices for energy, metals and minerals, and fertilizers have significantly increased in price â?? the World Bank prices index 2010 for agriculture almost doubled compared to the level in 2000 (a spike in fertilizer prices in occurred in 2008).

Some remarks relating to this development:
-- the increased demand for metal is driven by real production (in China);
-- the prices of fertilizers have increased more than was, and could be, expected;
-- agriculture prices trail behind this trend.

In this light there are four basic questions about commodity prices:
1. Is price volatility higher than in the past?
2. Is this driven by higher yield variability?
3. Is it due to a sharp increase in food demand?
4. Are prices more responsive to stock changes?

1. Is price volatility higher than in the past? Yes, that seems to be the indication: Price volatility increased during the last decade compared to previous periods of spikes for most agricultural products
-- Exceptions are beef, poultry, and sugar, where price volatility was higher in the 1970s;
-- EU agriculture price volatility increased more than world price volatility (CAP reform process of market orientation).

2. Is volatility driven by higher yield variability? That is not clear at all.

3. Is volatility caused by a sharp increase in food demand?
The common wisdom was that we needed to double food production by 2050, but according to FAO, the additional growth necessary is about 7%. Further on, the biggest increase in prices in 2008 were for wheat and rice, and there is not a strong rise in demand that can account for that.

-- The annual rate of demand growth has decreased over the last 50 years for most products and countries;
-- Notable exceptions are vegetable oils, and recently dairy products and maize;
-- Compared to demand growth rates, crops yield growth rates are slowing down faster;
-- Energy and minerals/metals: Demand growth is on the increase since the mid 1980s (iron, aluminium) and the mid 1990s (crude oil).

The main cause of higher prices seems to be a decrease in yields, notably for rice, maize and soybeans.

4. Are prices more responsive to changes in stocks?
-- A certain increase in the responsiveness of prices to stock changes can be observed for the main crops (wheat, maize, soybean) in the two past decades;
-- Sugar prices on the other hand were more sensitive to stock changes in the 70s and 80s than recently;
-- No strong pattern for rice and vegetable oils.
A work in progress is to identify the impact of the link with energy.

We are confronted with a boom in prices in energy, metals and agriculture, and the longest lasting in history.

When analyzing these fluctuations, there is something that is unexplained. People have looked at very different factors which could explain these fluctuations, pointing to fertilizer prices and bio fuel production as major causes. Of the possible factors, about 50 to 70% of volatility is explained by oil prices, supply and use factors, and economic indicators (such as inflation). A big part of volatility is unexplained: is it speculation or are there other factors. Compared to an extrapolation of trends up till 2005, actual prices from 2006 to 2010 have developed much less extreme. But for all indices the link between energy and non-energy has strengthened. Thought the increase in food prices is attributed to the production of bio fuels, other indices show larger increases â?? bio fuel has an impact, but less than it is suspected.
The commodity markets are evolving, adding new elements to the demand and supply fundamentals
1. Macro linkages (e.g., exchange rates, interest rates);
2. Increased weather variability due to climate change;
3. Domestic and trade policies (from G-2 to G-20 and from 3 pillars to export bans);
Added to which are:
4. Energy links (high energy prices and biofuels, especially 3nd generation);
5. Financialization of commodities (maybe not so much an influence on prices as such, but the feeling is, it has an impact on volatility).

Main challenges for farm policies
Agriculture faces a major cost-driven commodity price boom:
-- the â??baselineâ?? outlook of agricultural markets is full of major uncertainties;
-- the energy link weighs heavily, directly and indirectly, on production costs;
-- the terms of trade for world agriculture deteriorated significantly with the price boom .

Economic crisis and climate change introduce new challenges:
-- price volatility and extreme weather events add more uncertainty to the sector;
-- environmental and climate change targets depend on and influence farm policies;
-- the economic crisis impacts upon agriculture on both supply (costs) and demand (prices).

Productivity growth has slowed down; trend needs to be reversed:
-- distinguish endogenous from exogenous factors affecting agriculture;
-- invest not just in new technology, but also in better spreading existing best practices;
-- put the link of private and public goods delivery at core of farm policy debate.

Some tentative conclusions for the CAP
Food security has become a worldwide concern:
-- the EU context of food security is not linked to risks about the supply of food;
-- EU food security relies on the environmental and regional balance of its production;
-- market signals should dictate what to produce, policies should affect how to produce.

Price volatility is expected to stay high in the future:
-- both output and input price levels in agriculture are expected higher than past trends;
-- price volatility has markedly increased and productivity slowed down;
-- farm income will also be more volatile in the presence of current expectations.

Food chain transparency needs to be improved:
-- the functioning of the food chain shows signs of asymmetric price movements;
-- the bargaining power of producers is weakened, and results in loss of value share;
-- for market orientation to be effective, transparency in price formation is essential.

If this instability is the result of the reform of GATT, one can wonder whether we have solved much problems. In light of future scarcities, one has to invest in productivity, but price volatility discourages investing in more efficient food production. Though not the best, Europe had a system that stabilised prices, the system under GATT. Did we have good reasons to put that aside after the 1980-ies, in favour of income support? Now, 2011, the issue is the redistribution of the income support towards the new EU-members and about a greener CAP. But the new proposals do not help to stabilize EU-markets, nor the world markets.

Related to this is the difficult link between the CAP and development cooperation. There seems to be only one link, that it should not do harm to development cooperation. EU policy does not do much for improving agricultural production in developing countries. How to make both worlds meet?

However, the factors that cause price volatility are all over the chart and it is very difficult to pinpoint the determining factor(s). What do we need to stabilize, prices, stocks, quantity? In that light, it seems better for the moment to guarantee a certain income for the farmer. What is discussed too little is that one cannot roll out one scheme of income support over the whole of the EU, one has to look at regional differences, and differences between produce (think of areas where bears and wolfs live, or areas where there is regular flooding: the schemes have to accommodate to local circumstances).

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