International rice and wheat prices have doubled or tripled in
the last two years, but world grain production will reach a record
high this year. So how come millions are falling into poverty and
starting food riots across the world? The answer lies not in any
outsized surge in world demand or fall in world supply, but in the
fact that several countries have imposed duties, quotas and
outright bans on agricultural exports. This has reduced the amount
of grain available for world trade.
The United Nations Food and Agriculture Organization estimates
that world production of cereals was a record 2,108 million tons in
2007, and will hit a new record of 2,164 million tons in 2008. Rice
production will rise by 7.3 million tons and wheat by 41 million
tons. World cereal consumption has been growing slightly faster
(3%) than production (2%) for a decade, so global stocks have
fallen to 405 million tons. But this is not a disaster scenario,
and it hardly explains skyrocketing prices.
In the U.S., one-fifth of the corn crop has been diverted to
ethanol, and in Europe, some vegetable oil has been diverted to
biodiesel. These ill-conceived policies have induced farmers to
switch significant acreage from wheat to corn, soybeans and
rapeseed, but world wheat output has nevertheless risen from 596.5
million tons in 2006 to an estimated 647.3 million tons in 2008.
Corn-based ethanol cannot explain the runaway increase in the price
of rice, which grows in very different conditions.
Biofuels caused an initial spike in prices, which then led to
panic, export protectionism and speculation in commodities futures
— and these latter factors have increased prices much further. To
protect domestic consumers from rising world prices, dozens of
governments have curbed the export of rice and wheat — principally
Argentina, Brazil, Russia, China, India, Ukraine, Vietnam,
Cambodia, Pakistan, Egypt, and Indonesia.
EXPORT CONTROLS have reduced the amount of rice and wheat available
for world trade. The FAO estimates that world trade in rice will
fall from 34.7 million tons in 2007 to 28.7 million tons in 2008,
and trade in wheat from 113 million tons to 106 million tons.
Actual trade may fall even more, as more and more countries impose
export controls. Absent these limitations, it would be
inconceivable for trade in grain to contract so sharply after
record world harvests.
Countries limiting exports hope to reduce hoarding, which could
send prices even higher. India has set limits on the stocks that
each trader can hold.
But countries imposing export controls, have, in effect, become
hoarders themselves, creating an artificial scarcity in the world
market, and an artificially high world price. Farmers know what
their crops could fetch on the world market, so they demand higher
prices at home. And around and around we go.
This has eerie similarities to the Great Depression, when many
countries resorted to import protection to protect jobs at home,
and simultaneously devalued their currencies to try and push up
exports. Yet the Great Depression got worse, thanks to what John
Maynard Keynes called the fallacy of composition.
If one country alone resorts to import protection and
devaluation, it can temporarily increase jobs. But at a global
level, one country’s exports are another’s imports. If all
countries reduce their imports, they unwittingly end up reducing
their exports, too. And job losses get worse.
Today, each country wants to curb agricultural exports and
stimulate imports to reduce prices. But if every country limits
exports, the result is a decline in world imports, so prices rise
instead of falling.
SOLVING THE PROBLEM may require coordinated international action.
After the Great Depression, the world community created the Global
Agreement on Tariffs and Trade — which later morphed into the
World Trade Organization — to negotiate simultaneous cuts in
import barriers by major trading powers. This coordinated approach
thwarted free riders, and gradually gained acceptance by all.
WTO rules permit food export limitations. In the Doha Round of
trade negotiations, WTO has sought to reduce agricultural subsidies
causing excess production. It never anticipated that export
controls might create scarcities.
The new developments may improve the prospects of the Doha
Round. But quick action is needed to tackle rising hunger. The WTO
should convene an emergency meeting for countries to jointly reduce
export controls. Even modest concessions can be in exporters’
self-interest, as they would cause world prices to fall sharply,
and thus ease domestic price pressures.
The terrible irony is that world grain production will be at a
record high in 2008. People are hungry, and it’s not because there
isn’t enough food to go around.
