unctad.org | World Food Day: Asia-Pacific Regional Office observance
Statement by Mr. Supachai Panitchpakdi, Secretary-General of UNCTAD
World Food Day: Asia-Pacific Regional Office observance
Bangkok
17 Oct 2011

Food prices: from crisis to stability

[Speaking notes]

Over the course of the past few years the advanced countries have found trillions of dollars at very short notice to mitigate the damage caused by the biggest economic crisis since the Great Depression and to shore up their banks and financial institutions whose reckless behaviour itself brought on the crisis.

During these same years the number of undernourished people has been on the rise worldwide, even during the boom years of the millennium, and there are now over one billion malnourished people worldwide. According to World Bank president Robert Zoellick, as many as 44 million people were directly pushed into hunger as a result of the 2008 food crisis and many more by the subsequent economic downturn. The Horn of Africa is currently suffering one of the worst famines in living memory, largely due to a devastating drought which has decimated local food production.

The contrast between support for wealthy bankers in rich countries and the neglect of poor farmers in the most vulnerable countries, and the unprecedented levels of food waste in rich countries in the face of starvation elsewhere tell us a lot about the world in which we are living. Specifically, it serves as a reminder that inequality has been a defining feature of the global economy in recent years. This is a world that has lost its sense of perspective and balance.

In my report to the next UNCTAD conference in Doha I will argue that, for the world to regain economic and moral balance, we need to break with the "business as usual" policies and practices that characterized the model which I call "finance-driven globalization". We must urgently find a new set of priorities, principles and policies around a truly inclusive and sustainable development-led globalization.

We have also learnt from the crisis that markets as well as countries have become much more interdependent in recent years. We can no longer separate out the food, fuel and financial crises as distinct events. Consequently, we need a much more integrated policy framework, at the national and the international levels, to tackle the current imbalances and to build the new and more inclusive development path which I have just mentioned.

It is paradoxical that, over the past two decades, agriculture has largely dropped off the development agenda, when the relative neglect of agriculture was part of the critique of an earlier generation of development models by those advocating a greater role for market forces. It is true that many big push development strategies downplayed the significance of rising productivity in agriculture, falling food prices and rising incomes in rural and urban areas for economic development and social welfare. However, that transition has certainly happened in a number of successful developing countries, in East Asia for example. Moreover, up to the early 1980s robust investment in the agricultural sector worldwide meant that something of the modernizing pattern could be seen on a global scale as well. According to FAO figures, from 1960 to the early 1980s, the cost of food was generally on a strongly downward trend, albeit with a sharp upward spike with the oil price shocks of the early 1970s. Prices were relatively stable over the following two decades, but began to rise in the new millennium and particularly sharply after 2006. In real terms they are now back to the levels of the early 1980s.

This rise in prices is not unprecedented - the spikes in the 1970s were even larger - but it has coincided with a significant increase in price volatility. It is the combination of rising and volatile prices which has been worrying many policy-makers. Evidently, price fluctuations are inherent in agricultural markets. This is partly due to the supply-demand dynamics of this sector, and the unpredictability of weather patterns and harvest yields. The interesting questions are why, in recent years, has the previous downward trend been reversed, why fluctuations have intensified, and why the damage from price shocks has become greater.

Recent trends are likely due to a combination of factors. For example, it is often claimed that increased demand for grains in emerging economies has been a significant factor explaining recent price trends, but the evidence does not support this argument. Supply shocks are certainly an issue, including in the recent price spikes since 2008, and there are real concerns that, if these shocks are linked to a changing climate, they may become more frequent. The use of food crops for fuel has also played a significant role in these market outcomes.

In UNCTAD we have insisted that financialization has been a significant causative factor in higher and more volatile food prices. Although it is difficult to fully assess the financialization of commodity trading due to the lack of data, several indicators suggest that it is becoming an increasingly important driver of food market developments. The value of commodity-related assets managed by financial investors rose five-fold between 2005 and 2010, and it has increased very rapidly subsequently, reaching a historic high of US$410 billion by March 2011. Similarly, the number of futures and options contracts outstanding on commodity exchanges started increasing rapidly in 2004, dipped during the first half of 2008, but then continued to increase at a rapid pace. By mid-2010, the number of these contracts had reached about five times their pre-2004 level.

Trends in global price indices are not identical to what happens in local markets: there are often time lags in transmission, which vary by country and commodity, and the gains from price rises are often not reaped by the producer but by a series of middlemen. In contrast, the trend towards ever higher prices has unquestionably resulted in higher household food bills in many countries. This is a particular challenge for households on low incomes who are also net food buyers, including poor urban dwellers and even many small farmers. For example, the average share of consumer income spent on food in the USA is 9.8 per cent, compared with 65.5 per cent in Bangladesh. Thus, even short episodes of high food prices for consumers or low prices for farmers can have adverse welfare and distributive implications, and they can lead to the sale at low prices of productive assets (e.g,. land and livestock), creating potential poverty traps. The problem also emerges at the macroeconomic level. The food import bill of developing countries rose from US$113 billion in 1995 to US$329 billion in 2008, which poses a major challenge for the balance of payments of smaller food-dependent countries.

This serves as a reminder that countries cannot easily trade their way to food security, although this was the hope of the Uruguay Round. In UNCTAD, we have insisted that there is not a level playing field in agriculture, because global trade is shaped (some would say distorted) by producer subsidies in the advanced countries and the dominant role of large transnational conglomerates in food production and trade. Looking beyond that, a healthy trading environment for farmers requires a healthy investment environment. This has been missing in recent years, partly because of the overall stagnation (and, in many cases, decline) in real investment rates under finance-driven globalization and, partly, because price volatility deters producers from making the necessary investments for increasing productivity and output, which has been one of the underlying causes of world-wide food insecurity.

What can be done to reduce price volatility and improve food security? In UNCTAD we have been suggesting a three-pronged strategy.

First, action will be required at the national, regional and international levels; even the G-20 has acknowledged that the financialization of the global food system needs to be addressed. Several measures can be considered, including:

  1. A global countercyclical financial facility to support demand management in food- dependent countries, particularly the least developed countries. This should allow for the fast disbursement of funds with low policy conditionality and high concessionary elements at times of price shocks.

  2. Greater transparency in physical markets, where this is appropriate, in order to assist producers and traders´ estimates of stocks and spare productive capacity, areas under plantation, harvests and likely demand shifts.

  3. Better access to information in commodity derivatives markets, especially regarding position-taking by different categories of participants.

  4. Tighter regulation of financial market participants to contain financial investors´ impacts on commodity markets. Measures could include position limits and the prohibition of proprietary trading by financial institutions involved in hedging transactions on behalf of clients, because of potential conflicts of interest. A transactions tax could also slow down financial market activities.

  5. There must be better international coordination of the use of strategic and emergency food stocks to prevent and deal with food crises.

  6. It is commonly believed that mechanisms to stabilize commodity prices with internationally held buffer stocks and/or supply controls are not successful in reducing price volatility and tend to be more effective in moderating downward price movements than price surges. However, such intervention could be reconsidered if reforms aimed at achieving greater market transparency and tighter market regulation either were not in place or proved ineffective.

The second prong is increased investment, both public and private, to raise productivity and correct the structural causes of food insecurity. The FAO has estimated that over $80 billion a year in additional investment is needed in developing countries to solve the problem of food insecurity by 2050. Most of that will have to be private but in many developing countries the initial push is likely to be from the public sector. Public investment can crowd in private sector investment in upstream and downstream sectors, such as those supplying inputs, storage, transportation and other facilities for food production. Investment is also needed in new agricultural technology to raise food production levels in developing countries, including increased public spending on research and development to improve agricultural technology and raise productivity. In this context, the case for development banks, including institutions specifically tailored to support the rural economy, needs to be revisited.

Increased investment will need to be matched by greater support services, particularly for small producers. These are needed to strengthen the resilience of all producers, including women farmers, manage risks, and improve their capacity to provide adequate supply responses through increased application of technology. They can also help improve capacity to monitor supply developments and stock levels, and the transparency, depth and accessibility of information relevant to food producers. UNCTAD has also suggested that support for small-scale organic farming deserves much closer attention, particularly given the urgency of the challenge of environmental sustainability. In all these respects UNCTAD considers that enhanced South-South cooperation efforts can support the agricultural sector in developing countries. We have been encouraged by growing efforts in this direction from countries such as Brazil and China.

The third and final prong of this strategy is strengthened social protection at the national and multilateral levels. Food security cannot be left to economic policy alone. Instead, it requires social measures to secure the means to purchase food by the poorest families. Recent experience in several countries shows that this can be achieved relatively rapidly and at low administrative costs through a combination of cash payments with support for local markets and communities.

At the international level, efforts must be stepped up to better monitor vulnerable countries and communities and provide early warnings of possible shocks. In this context, regional food stocks to help governments mitigate price shocks are something that needs to be considered, as suggested recently by the UN Special Rapporteur on the right to food.

Advanced countries have long protected their rural populations, including through heavily distorting subsidies. If it is not possible to phase these out, then these subsidies should be matched dollar for dollar by resources to establish a global agricultural fund that could address the structural and urgent problems facing the sector in developing countries. Such a commitment could help to advance the stalled negotiations on the Doha Development Round. Land-grabbing, which has acquired a good deal of attention recently, is another area where the international community could play a constructive role, through support for more responsible investment practices in agriculture. UNCTAD is working closely with other international agencies to advance principles and guidelines governing responsible investment in agriculture and in similar areas, and we firmly hope that our efforts will contribute to the resolution of these urgent problems affecting hundreds of millions of people.



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