On Tuesday, World Bank President Robert Zoellik said the agriculture price risk management tool showed how “sensible financial engineering” could “make lives better for the poor.” He added, “We have been in a period of extraordinary volatility in food prices, which poses a real danger of irreparable harm to the most vulnerable nations.” According to the World Bank, the rising cost of food has pushed 44 million people into poverty since last summer and food prices increased by 30% in 2010.
Based on the last G-20 report, policymakers agree that policies are not intended to remove agricultural price volatility, but to moderate uncertainty and the amplitude of variations by “smoothing out the extremes.” Most importantly, price volatility should reflect market fundamentals and not express flawed signals from omitted or erroneous information, speculation panic, or other disruptive factors. World governments can take three major actions on biofuels production, trade reform, and accountability to prevent food price fluctuations from harming the most vulnerable.
First, biofuels production, which is supported by subsidies and import tariffs in many developed countries, has added to the demand-side pressures diverting staples away from food. It is important to directly tackle this distortion and, indeed, G-20 governments to remove provisions of national policies that subsidize biofuel production or consumption. Also, amending guidelines for grain-based biofuels seems to be an attractive policy option, since introducing call options for biofuels would guarantee that producers shift grain from biofuels to providing food during crises.
Second, trade reforms should be implemented because adverse policy responses, such as export restrictions and import tariffs have aggravated the situation. These policies might be individually beneficial, but jointly they distort world markets, increase prices, and worsen price volatility. Moreover, while net food exporters could benefit from improved terms of trade, there are limitations as on the supply side (fixed hectares of land, poor infrastructure, and restricted availability of inputs) that will constraint responses to higher prices in the short term. Meanwhile, cyclical and structural factors will continue to force food prices upwards. Policymakers should define extreme circumstances that justify export restrictions and short-term aid for humanitarian purposes. The G-20 governments argued for domestic and trade policies aimed at reducing import barriers, trade distorting domestic support, and all forms of domestic subsidies. Indeed, under WTO disciplines, quantitative restrictions are generally banned by Article XI of the 1994 General Agreements on Tariffs and Trade, but an exception allows governments to prohibit a control export provided these measures are “temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party.” In this context, it would be wise to complete the Doha Round of negotiations so that trade-distorting subsidies can be lowered, and maybe involve tighter rules on export restrictions.
Third, since global food security depends on well-functioning global markets, it is important that policymakers ensure financial markets are disclosing information correctly. Monitoring and increasing accountability in the global food system is crucial. Moreover, bankers should provide transparent information on stock levels in order to prevent speculative activities.
Finally, there is a need to protect the poor against volatility. Policymakers could provide conditional, targeted safety nets, and microcredit. Longer-term policy measures could include yield-enhancing investment in agriculture, research and development, and infrastructure that promotes irrigation.
These policy measures are designed to limit the volatility in food prices, not to stop it. Policymakers have the challenge to directly address the distortion through a cost-effective approach to poverty alleviation, especially if policies can be linked to productivity-enhancing investments.
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