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« On dead zones, flooding and money | Main | Agriculture to feature as a key issue on the Road to Durban: opens up critical debates »

June 22, 2011

Spotlight G-20: Agriculture Ministers should strengthen government role in volatile markets

Grain Tomorrow the first ever summit of G-20 Agriculture Ministers will take place in Paris. The French government is to be commended for the initiative. Concerned by the evident disarray in government responses to the food price crisis of 2007-08, the French government moved quickly and deliberately to consider how best to respond. One of their investments, one that might be overlooked in the drama of a G-20 summit, has been in research to understand what kinds of tools governments have used to respond to price spikes and volatility, and how effective those tools have been, particularly in developing countries, and particularly with an eye on reducing poverty and vulnerability to hunger. The results of that investment is informing the debate at many levels, and is a welcome addition to a literature that is otherwise rather too orthodox.

One of the main contributors to this research is Franck Galtier, who works with part of the French agricultural research institution CIRAD. Galtier makes the point that countries are each quite different and need their own distinct mix of policies to respond to the specificities of their situation. Galtier has built a typology of responses to price volatility with four categories: measures to prevent (or mitigate) volatility and measures to cope with it, crossed with measures that are designed to leave the private sector in charge versus measures that require the state to intervene. One of his important conclusions is that, by far, the largest share of international policy advice (and money) for the last twenty years has focused on policies and programs that use public funds either to build infrastructure and open borders, or to manage risk and facilitate participation in commodities markets. Public interventions to mitigate volatility—to keep prices stable—have been widely neglected. Yet common sense and long experience suggest they might be the best use of money.

 A number of governments (notably the U.S., Canada, U.K. and Australia) remain firmly committed to this lopsided policy agenda. We can expect the neglect of important public policy tools to regulate markets to be evident in the summit outcomes, even though a number of G-20 countries intervene heavily in their domestic agricultural markets, and to great effect, successfully limiting the incidence of hunger in their countries (for instance in China and Indonesia). The report prepared for this meeting at the G-20’s behest by ten international institutions (and discussed on this blog by Jennifer Clapp last week) also betrays an allergy to public regulation of markets.

 It is ironic that many of the countries so averse to public policies that interfere in markets have biofuel policies that illustrate the worst kinds of market distortion. The U.S. even dares describe its biofuel sector as an “infant industry”! Demand from the biofuel industry, propped by billions of dollars worth of public subsidy and minimum use mandates, has exacerbated price spikes and increased the vulnerability of populations whose food supply is in some measure dependent on imports from international markets. Another example of market distortion is the role of excess speculation in financial markets. In 2009, the G-20 Heads of State set themselves the task of improving the governance of commodity futures markets, acknowledging their role in causing price volatility: “We have agreed to improve the regulation, functioning and transparency of financial and commodity markets to address excessive commodity price volatility.” Yet on this question, too, the U.S., Canada and others continue to block action (see here for a commentary on U.S. efforts to block reform).

One of the most obvious ways to intervene to reduce the likelihood of excessive price volatility is to manage a public stock. The international organization report was dismissive of the tool as expensive and ineffectual and made no recommendations for any stocks policy beyond an emergency reserve to be operated by the World Food Program. Even this is too much for the U.S. and—U.S. officials claim—some others in the G-20; this small but important step is now the only issue still not agreed ahead of the summit. The U.S. suggests a feasibility study is needed ahead of the pilot project now in discussion. This is nonsense, of course. The point of the pilot is to see if the idea can work; there is more than enough experience—and need—to move on this question without holding things up with time-wasting exercises.

In practice, the question is not whether or not to hold stocks—countries mostly have stocks—but how best to use them. The international community is letting developing countries down, especially the poorest developing countries, by refusing to acknowledge the political necessity of stockholding and applying themselves to ensure they are managed as well as possible. The U.S., Canada, Australia and others are firmly set against anything that might “interfere” in the market (unless it’s a biofuel mandate). They argue public stocks crowd out the private sector, which is no doubt true, but is Cargill holding stocks for the same reason a government might? How much might they hold? Would they tell anyone what they hold? Will they release stock to ease pressure on prices, or might they be tempted to hold stock to nudge prices higher? Is it reasonable to depend on the handful of global grain traders to handle something as politically sensitive as supply to international food markets? Remember, no one actually knows the exact numbers, but a 2003 estimate from the Boston Consulting Group claimed only four grain traders controlled 73 percent of global grain trade. Competition has definitely not improved since then.

Over the last twenty years, developing countries have shifted from net food exporters to net food importers and are more dependent than ever on international markets. Richer countries are managing things their way: China is not going to stop stockholding. Russia is not going to allow a prohibition on export bans. Yet the U.S. is all but refusing to allow a discussion of stocks, even though high levels of price volatility are closely correlated to low levels of reserves.

Meanwhile, G-20 Agriculture Ministers might want to think about who it is they hope to export their surplus grain to. Unless agricultural exporters are willing to give meaningful assurance to importers that there is plenty of supply in international markets, importers are going to look for other solutions. Indeed, they already are. And while much greater investment and support for local food production is essential, trade is a useful and important part of most countries’ food security strategies. Stocks provide a limited but essential tool in this mix; they provide a necessary level of comfort that the market will deliver. As such, they deserve more space on the G-20 agenda—too late for tomorrow’s summit, maybe, but it’s time to look again at that neglected quadrant of tools called public regulation to curb the likelihood of excessive volatility. It’s time for political pragmatism to prevail.

—Sophia Murphy, IATP's senior advisor on trade, food security and global governance issues. This post also appears on the Triple Crisis blog. 

Ben Lilliston


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