High agricultural commodity prices over the last three years have caused some developed and developing country governments and/or private companies to buy or lease large tracts of land in developing countries to use for food production to be delivered to their home country. This is a logical response to high food prices after 20 years of general agricultural price stability, but not the best economic response.
The key public policy problem underlying this rush to invest in land is that food importers have lost trust in exporters to meet food needs when market prices increase sharply. The WTO has an important role to play in getting commitments to not use export controls. WTO Secretary General Pascal Lamy in a recent speech to the International Food and Agricultural Trade Policy Council said, “To my mind, global integration allows us to think of efficiency beyond national boundaries. It allows us to score efficiency gains on a global scale by shifting agricultural production to where it can best take place.” Export controls are fundamentally at odds with that vision and must be addressed, perhaps at the December 2009 WTO Ministerial meeting.
The roots of the current food market reactions are two economic policy conditions that created the market responses that led to the sharp commodity price rises of 2004-2008. The U.S. Federal Reserve pursued a monetary policy of low interest rates after the terrorist attacks of September 2001 that encouraged investing in more risky financial assets and other speculative activities and led to the economic bubble that topped out in first half of calendar year 2008. Some agricultural exporters responded to the rapid rise in food prices in 2007 and 2008 by restricting exports to limit price increases at home and forced economic adjustments associated with high market prices onto other importing and exporting countries.
The difficult challenge now for commodity markets, investors and political leaders is to understand how much of the price increases were related to central bank monetary policies and restrictive agricultural trade policies and how much were related to changes in long-term supply and demand. We know that low market prices for many grains and oilseeds in the first few years of this decade were not sustainable without major subsidies from developed countries and led to under investment in agricultural assets. At the same time, rising incomes among middle class citizens in developing countries were putting upward pressure on market prices. The usual approach after a speculative bubble is to assume that the price increases for grains and oilseeds are permanent changes and farmers expand output assuming the recent high prices are the new “normal.” This attracts some investments that must be squeezed out at some point in the future.
Major food importing countries can see the recent high prices as transitory with market prices clearly higher than they were five years ago, but not close to the highs seen in the first half of last year, or as permanently high prices signaling a huge shift in the demand for agricultural products. Countries and companies now investing in large tracts of land are taking the latter view of the events.
Increased investments in agriculture were one of the outcomes of rapid commodity price increases of the early 1970s. U.S. farmers in the middle of the country who are now 50 years old and older remember the huge investments make by Japanese companies in Brazil to grow soybeans after prices doubled, tripled and more and the U.S. government embargoed soybean in 1973. Those same farmers were caught in a sharp decline in prices in the 1980s as world food consumption grew slower that the worldwide increase in supplies. Some U.S. farmers who survived the 1980s eventually invested in Brazil, the Ukraine and other places in the 1990s.
The world clearly needs increased investment in agriculture to meet the often cited expectation that demand for food will double between now and the year 2050. Additional amounts will also be needed for biofuels production. Based on recent reports of attempts to control hundreds of thousands of acres of potential farm land in developing countries, there will likely be huge mis-investments in agricultural resources that will need to be forced out by low prices in the years ahead. These will likely total billions of dollars, including the infrastructure needed for inputs for the new lands and to move output to markets.
The impact on the economies and cultures in the developing countries could be even greater. The International Food Policy Research Institute (IFPRI) based in Washington, DC has identified from media reports beginning in 2007 land buying or leasing activities in 24 countries with 50 projects. In an April 2009 Policy Brief IFPRI outlined key elements for a code of conduct for foreign land acquisition including: transparency in negotiations; respect for existing land rights, including customary and common property rights; sharing of benefits; environmental sustainability; and adherence to national trade policy. Earlier in the policy brief the authors noted that land in these projects may be considered by developers as “unused land” when in fact it is an important part of the economy as pasture or temporarily fallow land.
The Japanese Ministry of Foreign Affairs has announced that Japan will lead an effort at this summer’s G-8 meeting where food security will be a major issue to commit developed countries to a set of principles on greater transparency in investment deals, respect for existing land rights, sharing benefits with locals and environmental sustainability. Their goal is to promote investments to increase food production without “neo-colonial” actions with little benefit to local populations. Given the rush of activity, efforts by IFPRI, the Japanese government and others may be too late.
The foreign land acquisition programs identified by IFPRI are a second best solution. The best solution is freer trade. Importing countries need to push the WTO to adopt policies against export controls. To do otherwise is to accept a second best economic solution to the food production challenges ahead.