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Trade Can Ease Food Price Pressures

Posted by Charlotte Hebebrand on February 20th, 2008

There are a number of factors behind the drastic food and feed price increases - ranging from population and income growth in emerging economies to the biofuels boom. Sudden and significant rises in food costs impact in particular the poor in developing and least developed countries, who spend a great deal more of their income in percentage terms on food. Although most forecasters do see a substantially long period of high prices before us, it is difficult to predict whether or not we are witnessing a permanent shift in demand, and if so, whether supply will be able to catch up to meet this demand.

Assuming that higher prices are here to stay for some time, what are the implications of higher food prices from a policy perspective? IPC members have worked tirelessly over the last twenty years to promote a more open and equitable global food system. In a nutshell, IPC has advocated for removing distortions in global food and agricultural trade, whether these take the forms of export subsidies, trade-distorting domestic support, or high tariffs. Moreover, IPC members stress the importance of agricultural production and trade to development and poverty alleviation and have always called for greater investment in the agricultural sector both by developing countries and by donors and multilateral development banks. Another core belief of IPC is that research and sound and safe technological innovations are hugely important to enable the agricultural sector to meet what is expected to be a doubling of global food demand by 2050.

IPC’s key messages remain utterly if not more valid in this new environment of high prices. We wholeheartedly endorse IFPRI’s recommendation in its recently released The World Food Situation: New Driving Forces and Required Actions. "A world confronted with more scarcity of food needs to trade more - not less - to spread opportunities fairly." Equally, investment in the agricultural sector and investment in agricultural science and technology become even greater priorities so as to ensure a significant production response to the increased demand and high prices.

One could speak of some positive implications of higher food prices, but this risks minimizing the hardship that rising food prices pose to the poor, particularly when they are across the board and sudden. If government measures are targeted at providing the poor with means to attain food security in this environment of steep and sudden price increases, it may not be disrespectful to point to two obvious positive implications:

  • Farmers are benefiting from higher prices. The major complaint of the last decades has been that global prices are too low due to overproduction in subsidizing OECD countries, which causes distortions in the market and prevents developing country producers from benefiting from their comparative advantage. Higher prices mean new export opportunities and higher incomes for farmers, also in developing countries.
  • Importantly, high food prices present a big opportunity to agree on a reform-minded Doha Agenda: with prices significantly higher than they were at the beginning of the negotiations, arguments in favor of border protection and market prices support are no longer valid. The US should have no difficulty whatsoever in meeting the domestic support cuts suggested in the modalities text released by Crawford Falconer on February 8. The EU commitment to phasing out export subsidies is also quite painless in this environment of high prices. Countries with high bound tariffs on agricultural goods, such as India, have already significantly lowered their applied tariffs in an effort to increase imports and decrease prices, and making further commitments at the level of bound tariffs should not prove overly controversial.

Given that the increase in biofuel production from agricultural feedstock is contributing to the rapid rise in prices, thought should also be given to the very ambitious mandates and tax incentives that are being put into place in many countries. Groups such as IPC have called for the elimination or substantial reduction of trade-distorting agricultural support in the past so as to increase commodity prices. We may need to consider whether to call for an elimination or substantial reduction in biofuels incentives (and tariffs) so as to decrease commodity prices.

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