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FOOD CRISIS

Food Is Different

Globalization has made more food available worldwide to more people at lower prices. But the current crisis demonstrates the limits of globalization and that the market for food may not be the same as for other products.

Robert Zoellick, head of the World Bank, warns that the unfolding food crisis could force 100 million people deeper into destitution and set back efforts to reduce world poverty by seven years.

 

In the midst of this crisis, the immediate humanitarian challenge is to feed the hungry. But the suddenness and breadth of the emergency has raised fundamental questions about the future of agricultural policy that will drive debates in Washington and other world capitals for years to come. The questions being posed about agricultural policies are complex and hard to answer.

Was it a mistake over the past generation to increasingly trust market forces to feed the world? Or are the problems that bedevil farmers today the residue of continued government interference in agricultural markets? Are current food prices a problem or the ultimate solution to future food needs? Does the world food system suffer from too much globalization or not enough?

 

In the search for answers to these questions, Washington is a Tower of Babel. Partisans of all stripes have seized on the crisis to justify their long-standing ideological positions on agriculture. Free-market proponents support a swift completion of the Doha Round of multilateral trade negotiations, which would cut American and European farm subsidies and allow developing countries to increase their food exports to rich countries. "The solution is to break the Doha Development Agenda impasse in 2008," Zoellick said in April.

Some recent experience bolsters this argument. Since the early 1970s, when the world last endured a food crisis, production has soared, to the point that, until a few years ago, food experts worried that grain prices were too low to adequately reward farmers' efforts. The global trade in grain delivered cheap food to the poor in the burgeoning cities of the developing world. Malnutrition rates fell in many parts of the globe.

But skeptics contend that leaving the supply of food solely to the market's whims is a mistake. "The mindless liberalization mentality at the World Bank, the U.S. Agency for International Development, and among my fellow economists misses the fact that food is a biological necessity as well as a commodity," said Peter Timmer, a visiting professor at Stanford University's Program on Food Security and the Environment.

With its short-term orientation, the free market has frequently failed the long-term interests of consumers around the world, critics contend. Governments have been pulling back from investing in the underlying infrastructure that supports agriculture. As a result, funding has atrophied for the development of new high-yielding seeds, for the building of better farm-to-market roads, and for loans to small cultivators. International grain traders and speculators have gained unprecedented influence over commodity markets. And world grain stocks have been allowed to dwindle to modern lows.

 

These changes in the worldwide food market are compounded by what economists like to call "externalities," factors that are not susceptible to market discipline but that are rapidly shaping the future of agriculture: rising energy prices, water shortages, and, ultimately, climate change.

"We are looking at diminishing returns in a number of areas," said Lester Brown, president of the Earth Policy Institute in Washington. "We spend a lot of money on research, with disappointing results. We are using more fertilizer, but that does not increase yields. We look [for] but don't find much new water."

In the face of these challenges, said Gawain Kripke, director of policy and research at Oxfam America, "there are no silver bullets. We need a matrix of solutions."

The proper balance between government and the private sector will be at the center of the emerging debate over agriculture. "Some public intervention is needed," said Kimberly Elliott, a senior fellow at the Center for Global Development in Washington. "The question is, what is the right intervention?"

The ultimate matrix may include less direct government interference in the short-term workings of global food markets through subsidies and tariffs, coupled with greater government responsibility for providing a strategic grain reserve, funding basic research, and stewarding the environment to help compensate for inevitable market hiccups and externalities that can cripple food production.

Change in Fortunes

Just a decade ago, humanity's age-old race to stay one step ahead of famine seemed finally won. Grain supplies were bountiful and growing. Food prices were low.

Then, world cereals production fell two years in a row, thanks in part to bad weather. This falloff came at a time of record low food stocks. With poor harvests and low reserves, the market was vulnerable to shocks that could send prices spiraling. That is just what happened. Despite a rebound in harvests in 2007, the U.S. diverted most of the extra corn it raised into making ethanol to fuel its cars and trucks. U.S. corn prices tripled. And, with cropland being diverted from wheat to corn production, wheat prices more than doubled.

In October 2007, spooked by mushrooming food prices, India, one of the world's largest exporters of rice, banned most of its rice shipments. Vietnam followed with export restrictions in January 2008. Rice prices rose sharply.

Not surprisingly, consumers rapidly felt the pain in America, yes, but all over the world, too. Food prices rose 11.4 percent in Indonesia, 11.6 percent in Guatemala, and 18.3 percent in Botswana in a year. In such societies, where the poor may spend more than half of their income on food, this was a severe additional burden.

Nevertheless, a bit of light has appeared on the horizon. Higher prices have already spurred farmers around the world to plant more this spring. And the U.N. Food and Agriculture Organization expects harvests to improve this year. World prices have already begun to fall from their recent highs as a result. Still, over the next decade, experts predict that crop prices will remain well above the mean for the past decade. The days of cheap food may be over.

High Prices: Problem or Solution?

In the midst of so much want, it may seem heartless to question whether high food prices help or hurt the poor. But that is exactly the debate raging among development economists.

Higher prices reward farmers, who receive more for their harvests, and punish consumers, who must pay more to feed their families. Many people in the poorest parts of the world--Africa, Asia, and Latin America--sell more food than they consume.

A recent FAO study found that half of the households in Madagascar and two in five households in Ghana, all classified as extremely poor, were net sellers of food and stood to benefit from higher prices. A recent Carnegie Endowment study of India found that "the poorest households and the most disadvantaged groups saw the largest gains" from a rise in rice prices, thanks to greater demand for their land and their low-skilled labor to produce that staple.

But the vast majority of poor households in Bangladesh and Pakistan are net buyers of food. Overall, conclude World Bank economists Maros Ivanic and Will Martin, in a recent paper, "even though many rural households gain from higher food prices, the overall impact on poverty remains negative."

The fact is, higher prices create both losers and winners, even among the poor. And the distribution of winners and losers varies from country to country. Nor is the market for food the same from country to country. Thus, warned Sandra Polaski, director of the Trade, Equity, and Development Program at the Carnegie Endowment, generalizing from the experience of particular countries about the effects of food price increases on poverty can lead to incorrect one-size-fits-all policy prescriptions. Today's food crisis is highly differentiated, requiring tailored solutions.

Too Much Globalization

Current food shortages are also a reminder that what globalization gives, it can take away.

Since the food emergency in the early 1970s, world trade in agricultural products has increased severalfold (see chart, p. 26). The globalization theory was that increased trade in food crops would lead to more production at lower prices. The notion that countries had to be self-sustaining in agriculture would fade away.

But the current crisis suggests to some critics that globalization may not have worked as intended. "Removal of tariff barriers has allowed a handful of northern countries to capture Third World markets by dumping heavily subsidized commodities while undermining local food production," said Anuradha Mittal, executive director of the Oakland Institute, a California-based think tank that advocates food sovereignty.

The Doha Round of trade talks threatens to make this situation worse, the critics contend. To safeguard their food security, some developing countries demand the right to exempt "special products" from tariff cuts, with each country's list targeted to its individual needs. In addition, they want to slow unexpected surges of food imports.

"Let's not put policies in place that make the current situation worse," said Polaski, who argues that farming in the developing world can be nurtured only behind trade barriers. "You can't do it in the face of global competition," she said.

Trade liberalization is part of a broader set of market-oriented economic reforms that the World Bank and International Monetary Fund began to impose on many developing countries in the 1980s in return for loans. These reforms were intended to balance governmental budgets. But critics complain that they often harmed farmers. In 14 developing countries, farm spending fell from an average of 6.9 percent of gross domestic product in 1980 to 4 percent in 2004, according to a recent World Bank survey.

Globalization also encouraged a more efficient food market, in which grain moved around the world rapidly. Surpluses in one region easily replenished shortages in another. There seemed little need to maintain large, costly grain reserves. China, the European Union, and the United States let their food stocks dwindle as a result.

Recent price volatility suggests that the global food system now lacks flexibility because food stocks declined too far. In 2007, reserves equaled 54 days of world consumption, down from a high of 130 days in 1986.

The United States and other countries maintain strategic petroleum reserves. Through the International Energy Agency in Paris, they have agreements to share supplies during an emergency. So why not a strategic grain reserve?

It is a question of cost and control. American and European taxpayers have bad memories of out-of-control government spending to maintain grain and butter "mountains" in silos and warehouses. Recent rice export bans suggest that hoarding by producer nations does more harm than good--it just drives prices even higher.

With the FAO now predicting that grain prices could remain high for a decade, resulting increases in production may rebuild reserves on their own. But to be prudent, Stanford University's Timmer suggests new international incentives for producing countries to hold greater stocks, coupled with agreements on what market conditions would trigger their release. Oxfam argues for village-level cereal banks that would ensure adequate local supplies during hard times.

Globalization, driven by the theory of comparative advantage, has also encouraged agricultural specialization. "This led to the dedication of good land to export crops with food crops forced into less suitable soil, thus exacerbating food insecurity," wrote Walden Bello, a professor of sociology at the University of the Philippines, in a recent issue of The Nation. In years when specialty crop prices were high and food staple prices low, this was a rational trade-off for farmers to make. It was a bet that many countries are now losing.

Finally, globalization of the world food system exacerbates the effects of sudden policy shifts, such as the recent U.S. rush to use corn to increase ethanol production. In 2006, the approximately $6 billion in U.S. subsidies for ethanol production spurred demand for corn, triggering chain-reaction price rises around the world for corn, wheat, and soybeans. Never has the energy policy of a country that is not a member of OPEC had such a devastating global impact. (See "Is Ethanol Really the Culprit?" p. 30.)

Not Enough Globalization

It is no surprise that defenders of globalization hold a quite different view. They contend that a stronger, more open market is part of the solution to the food crisis.

Paul Collier, a professor of economics at Oxford University and the author of the recent award-winning book The Bottom Billion, criticizes the seductive notion of peasant-based, food self-sufficiency as hopelessly romantic. "We laud the production style of the peasant," he wrote in a recent blog. "In manufacturing and services we grew out of this fantasy years ago, but in agriculture it continues to contaminate our policies. Unfortunately, peasant farming is generally not well suited to innovation and investment."

Trade, these globalization defenders argue, has been the salvation of consumers in poorer countries, not their bane. "If you are for self-sufficiency, you must be willing to live with high prices," wrote Dani Rodrik, a professor of international political economy at Harvard University in his blog. "If developing countries had all kept their import protection, the global supply of food would have been lower today, not higher."

Globalization advocates condemn continued government intervention in agriculture. Farm subsidies in rich countries have long boosted production there, holding down world prices and undermining market incentives for farmers in poor countries to grow more food. High industrial-country tariffs, meanwhile, have kept out food imports from developing countries. If African, Asian, and Latin American food production is to increase, U.S., European, and Japanese subsidies need to be eliminated and their tariffs slashed, the globalization advocates argue.

If they are right, the path ahead will be long. The 2008 U.S. farm bill actually increased permissible American farm payments. If high prices continue, much of that money may never get spent. But the very availability of those subsidies reduces farmers' risk, encouraging more planting. And some of the highest remaining industrial-country trade barriers apply to some of the very products, such as sugar and cotton, that farmers in developing countries may be most competitive at growing.

The Doha Round, if it is ever completed, will not significantly cut farm subsidies or import tariffs in rich countries. Doha negotiators also seem unlikely to liberalize some of the most important agricultural commerce, trade between developing countries. Cutting import barriers between developing countries--spurring more South-South trade--would be far more important to the economic welfare of such nations than reductions in farm support or export subsidies in developed countries, according to World Bank studies.

So if globalization is to ease food supply problems, proponents argue for more of it, not less.

Dealing With Market Breakdowns

However the world ultimately resolves the debate about globalization, the food crisis is a reminder that market forces are notoriously shortsighted and governments too often scrimp on the kinds of long-term investments that can sustain productive agriculture.

Between 1960 and 1970, thanks to the green revolution, global grain yields grew by 2.6 percent per year on average. From 1990 to 2007, the annual increase had slowed to only 1.2 percent. Apparently, the reservoir of agricultural technologies that farmers can readily rely on to boost harvests is shrinking.

Yet both the private and the public sector have failed to address this market failure. The proportion of World Bank lending devoted to agriculture has declined steadily since the 1980s, and the proportion of all foreign aid from all sources going to farmers is now only 4 percent. As a result, the seed company Monsanto spends seven times as much on research and development as the 14 international agricultural research institutes combined. And that private spending often concentrates on developing seed varieties for commercial agriculture, not for food staples that make up the diet of the very poor.

Similarly, the food production and distribution infrastructure has been given short shrift. In much of sub-Saharan Africa, concluded the World Bank in its 2008 World Development Report, poor market access was almost as important a constraint on food availability as poor rainfall. Transport costs, in part because of bad roads, account for about a third of the price that African countries pay for fertilizer. A public-private partnership to build roads and ports is needed to break these infrastructure logjams.

Oligopolies, which concentrate market share in the hands of a few companies, may be further aggravating global agricultural problems. The four largest agrochemical companies now control 60 percent of the world fertilizer market, up from 47 percent in 1997. The four largest seed firms have cornered 33 percent of the market, up from 23 percent in the same timeframe.

This concentration is also evident on the distribution side. International traders control 40 percent of the international market for coffee, which is the source of livelihood for an estimated 25 million farmers and farmworkers around the world. With greater market power, these traders can charge higher prices. The share of the retail price Americans pay for a pound of coffee beans that actually goes to the coffee-producing countries of Brazil, Colombia, Indonesia, and Vietnam has declined from about a third in the early 1990s to only about 10 percent in 2002.

"It is generally believed," the 2008 World Development Report concluded, "that when an industry's [market share] exceeds 40 percent, market competitiveness begins to decline, leading to higher spreads between what consumers pay and what producers receive for their produce." In laymen's terms, the middlemen win; consumers and farmers lose.

The global food system might well benefit from a little Teddy Roosevelt-style trustbusting.

Coping With the Externalities

A final problem with the world market for food is that it is deeply affected by those unpredictable "externalities" that the economists talk about--factors, such as weather, that are important but not easily controlled. These include:

* Population growth. Strides have been made since the last food crisis in the 1970s in slowing population growth, a major driver of food demand. In the world as a whole, the average number of children per woman has fallen from nearly five to fewer than three. Yet even as population growth slows, the sheer number of women of childbearing age has driven annual population growth: About 81 million new people appeared on the globe in 2007, far more than in the early 1970s.

"You don't have to be an agronomist to know that if you keep adding that many mouths to feed each year, you are going to be in trouble," said Brown, of the Earth Policy Institute.

In nearly all developing countries, the number of women of reproductive age will increase between 2005 and 2015.

* Rising affluence. Higher incomes enable more people to eat higher on the food chain. The World Bank estimates that by 2030 more than a billion consumers in the developing world will have sufficient income to eat a middle-class diet. China provides a foretaste of this future. Between 1990 and 2006, per capita Chinese meat consumption grew by 140 percent, and individual milk consumption by 300 percent.

To produce 1 pound of meat takes up to 7 pounds of grain. So with developing countries' meat consumption expected to double in a generation, demand for grain will grow much faster than population.

Slowing such consumption may prove impossible. European and American consumers could change their diets, but large-scale reform of consumption patterns is unlikely. And for African, Asian, and Latin American consumers, eating richer diets is one of the long-sought benefits of development. The stresses on the food system associated with rising affluence will simply have to be accommodated; they probably cannot be reversed.

* Energy prices. Higher fuel prices are also likely to further complicate the market's ability to meet the food needs for both consumers and producers. It requires about 41.5 gallons of oil (in the form of fertilizer, gasoline for transport, etc.) to produce 1 ton of corn in the United States. As the cost of a barrel of oil has skyrocketed, so too has the price of grain. Economic models suggest that for every $1 rise in the price of a barrel of oil, U.S. grain prices, which determine world prices, could rise by 20 cents a bushel.

The rising cost of energy imports has also forced some developing nations to choose between importing oil or grain. For the farmer, higher energy prices have driven up the price of fertilizer (which can account for a third of soybean production costs in Brazil), electricity for irrigation pumps, and the costs of transporting produce to market. Most damaging is the high cost of gasoline that has increased U.S. planting of corn for ethanol.

Whatever gains are made in food production, they risk being overwhelmed if energy costs continue to spiral out of control.

* Soil erosion. Worldwide, croplands the size of Indiana disappear every year, according to studies by David Pimentel, a professor emeritus of ecology at Cornell University. "Erosion is a slow and insidious process," he said. "It nickels and dimes you to death. Yet the problem, which is growing ever more critical, is being ignored because who gets excited about dirt?"

The cost is already apparent in South Asia and sub-Saharan Africa, where a combination of population growth and poor land management has led to a 40 percent decline in arable cropland per capita since 1960.

Better land-use practices require agriculture extension services. Yet such services are nonexistent in many parts of the world because their cost and complexity exceed government capabilities and because they have not been in commercial farmers' short-term interests. Moreover, the inexorable pressure to increase production may overwhelm even the most-well-meaning soil conservation programs.

* Water shortages. Irrigation accounts for about 40 percent of the value of agricultural production worldwide. But that production is often being bought with overdrafts at the water bank. In China, farmers take about 25 percent more water from underground aquifers than the rains replenish. In parts of northwest India, the overdraft rate is 56 percent. No wonder the irrigated area per person around the world is shrinking by 1 percent per year. More-efficient irrigation methods do exist and are slowly being adopted. But farmers will also need expensive new varieties of staple crops that use less water.

* Climate change. This may be the gravest and most imponderable long-term challenge the food system faces. If temperatures increase moderately over the next half-century, agricultural production losses in tropical developing countries may be partially offset by production gains in temperate zones. But if temperatures rise by more than 3 degrees Celsius, an increasingly likely prospect scientists say, harvests could be severely affected everywhere, falling by a fifth in South Asia alone. The cost of adapting the food system to climate change could be tens of billions of dollars in developing countries alone, far exceeding available resources.

Long-Term, Not Stopgap

The current food crisis is a product of bad weather, higher energy costs, commodities speculation, and policy shifts that have had unintended consequences, notably U.S. ethanol subsidies and widespread export bans. It is also a harbinger of more-serious food challenges rooted in the inability of the food system to deal with market breakdowns, such as investment shortfalls in research and development and infrastructure, and with externalities, such as rising affluence and climate change.

Some of today's problems may eventually self-correct through a cyclical upturn in production and a downturn in prices. Tomorrow's food issues are more challenging.

"Food security will deteriorate further," Brown predicted, "unless leading countries can collectively mobilize to stabilize population, restrict the use of grain to produce automotive fuel, stabilize climate, stabilize water tables and aquifers, protect cropland, and conserve soils."

To accommodate this change, global institutions may need to be restructured to cope better with inevitable future agricultural market volatility.

"The IMF needs additional authority to provide bridge financing for countries faced with sharply rising food import bills," said Gus Schumacher, a former U.S. undersecretary of Agriculture. "It needs power to oversee hedge funds spiking commodity prices and to discourage food embargoes by wheat and rice exporters. And there needs to be some insurance facility to protect importing and exporting countries when drought and storms disrupt food supplies."

World leaders will review the food situation at the G-8 summit in July and at a United Nations food conference in September. The danger is that food prices may be receding by then and leaders, distracted by some new crisis, will be tempted to pursue stopgap measures instead of long-term solutions.

This article appears in the June 14, 2008 edition of National Journal Magazine.

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