Trade and Food Supply Concerns


Last week the Finance Ministers of the G7 countries, the U.S., Canada, Japan, U.K., Germany, France and Italy, met in Washington, DC in conjunction with meetings of the World Bank and the International Monetary Fund. While the ongoing global credit crisis centered in the U.S. garnered much of the attention, it was upstaged at times by growing concerns in 30-40 developing countries over the increased cost of food.

World Bank President Robert Zoellick, former U.S. Trade Representative and Deputy Secretary of State, led the chorus with, “We have to put our money where our mouth is now, so that we can put food into hungry mouths.” He was calling on countries to pledge another $250 million in emergency funding for the UN World Food Program in addition to the already committed $250 million in emergency funding and $3 billion per year regular funding. The World Bank has allocated $10 million in immediate aid for food in Haiti. Zoellick is also promoting a "New Deal for global food policy," to boost agricultural productivity in poor nations and improve access to food. Earlier this month he announced that the World Bank will nearly double lending to agriculture in Africa, to $800 million. Zoellick noted that the larger challenge is to maintain momentum after leaders leave Washington, DC.

Zoellick is correct to think about long-term solutions, not just the immediate problems. Availability of food for the poorest of the poor living on two dollars a day or less and those in areas of political conflict have been ongoing issues, but widespread concern about food supplies has not been a topic since the 1970s when the worries were first about India and then China. Prior to the increase in the price of corn in North America in October of 2006, most long-term projections of food production had real prices continuing to decline for major grains and oilseeds. Food production was expected to increase slightly faster than needed for population growth and improvement in nutrition for the world’s poorest people. The world’s increasing middle class could have a better diet without putting pressure on the food supply.

This scenario led to increased trade in food without significantly higher prices. Except for a few short crop years in the U.S. and/or other major exporters, market prices were stable for 25 years. Food importers naturally became complacent about supplies and prices. Countries in Africa that could increase output with additional investments in infrastructure and technology had few incentives or investment capital to do so.

The current high prices have been influenced by back-to-back low yields in major wheat exporting countries, stronger than expected growth in demand among middle income consumers, the development of the biofuels industry in the U.S. and other countries and U.S. monetary policy that has allowed the U.S. dollar to sharply devalue and caused major price increases for all commodities priced in U.S. dollars. In the short term the situation will remain difficult. The northern hemisphere crops are just entering their growing season now and the first major harvests are still several months away. South American crops are being harvested, but their biggest impact will be felt in the oilseeds crops, mostly soybeans, rather than wheat, rice and corn.

The most immediate need is for traditional exporters to not withhold supplies from the market. From Kazakhstan and Argentina to Vietnam grain exporters have increased tariffs or placed quantity limits on exports. This further shorts the market and causes importers to scramble to secure supplies. U.S. Secretary of the Treasury Henry Paulson also advised importing countries, "to resist the temptation of price controls and consumption subsidies that are methods of protecting vulnerable groups." The World Bank believes income transfers or food assistance for the poorest citizens are more efficient economic policies. The Bank tracks domestic policies like import tariffs and other taxes on staple foods of countries that may need external assistance and has reported that at least 33 countries have reduced import tariffs and/or domestic taxes on food grains.

The longer-term solution is investment in infrastructure and technology in developing countries to increase food output. This is particularly important in countries, like Haiti, without manufacturing and service industries to earn income in international markets to pay for higher priced imports. The availability of supplies in exporting countries is of no benefit to countries without income to pay for imports. Humanitarian assistance is not a long-term solution to ongoing food needs.
Higher food prices are here to stay. That is one lesson from the inflationary monetary policies of the 1970s when nominal prices in the U.S. for corn, wheat and soybeans basically doubled. The monetary policies that forced up the prices of commodities also increased all input prices from fuel and fertilizer to machinery and labor. There is no reason to believe it will be any different this time. What was $2.00-2.50 per bushel corn, $3.00-4.00 wheat and $5.00-6.00 soybeans two years ago will be $4.00 corn, $6.00 wheat and $10 soybeans. Those are all substantially lower than current market prices. For developed countries higher food prices will be tempered by the fact that retail food prices include processing, packaging and retailing costs may increase at a slower rate than commodity prices. For the 30-40 countries where half or more of their incomes are spent on food and most food has little processing or packaging costs, higher prices will be a major economic hurdle to overcome. The situation will be complicated by the growing middle class in developing countries and continued interest in renewable energy.

The good news is that political leaders around the world now understand the world has changed. Regardless of policy changes, international trade will continue to play a key role in connecting food producers and consumers.

Ross Korves

Ross Korves

Ross Korves served Truth about Trade & Technology, before it became Global Farmer Network, from 2004 – 2015 as the Economic and Trade Policy Analyst.

Researching and analyzing economic issues important to agricultural producers, Ross provided an intimate understanding regarding the interface of economic policy analysis and the political process.

Mr. Korves served the American Farm Bureau Federation as an Economist from 1980-2004. He served as Chief Economist from April 2001 through September 2003 and held the title of Senior Economist from September 2003 through August 2004.

Born and raised on a southern Illinois hog farm and educated at Southern Illinois University, Ross holds a Masters Degree in Agribusiness Economics. His studies and research expanded internationally through his work in Germany as a 1984 McCloy Agricultural Fellow and study travel to Japan in 1982, Zambia and Kenya in 1985 and Germany in 1987.

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