Competition and Efficiency in International Food Supply Chains

Improving Food Security

John Williams

• Publisher: Routledge
• Year: 2012
• eBook ISBN: 9781136332340
• Edition: 1
• Topic: Economics
• Subtopic: Sustainable Development
• Index: Economics

Why have food crises seemingly become more frequent in recent years, compared to the last few decades? This book examines an array of different issues and distortions that are causing food supply chain dysfunction in many countries, particularly for staple non-perishable foods such as grains, oilseeds, pulses and sugar. It outlines the underlying changes that are currently occurring, which will have an influence on the direction of future food supply chains, and provides some solutions to current food security problems. Based on an analysis of total regulation in the 1950s-60s through to deregulation during the 1980-90s, as well as post-deregulation, it focuses on liberal trade and deregulation as a more successful solution to creating efficiencies in food supply chains and distribution. The author highlights a common thread of either farmers using government for vested-interest intervention, or autocratic governments seeking market and supply-chain power.

The book examines the role of government after 70 years of food supply chain intervention. It discusses the role of commercial 'trade' markets and cluster industries and how these can quickly disintegrate when price distortions occur. The author studies both food importing and exporting countries and concludes that comingled commoditization of food has led to increased hoarding, corruption, and dependence on food aid. He argues that a competitive food supply chain that has minimum intervention is more likely to provide future food security. In conclusion the book emphasizes that adequate rewards, competition, and striving for supply chain efficiencies are the essences of sustainable food security.

1
COMMODITY SUPPLY SHOCKS

On the assumption that Continental Europe, the Asian Subcontinent, China and Indo-China, and the USA are so important in feeding most of the global population, it might be expected that food prices would be largely determined by these regions. However, the irony is that global storable food prices are more often supply driven by the marginal producing and exporting countries such as Brazil, Argentina, and Australia in the Southern Hemisphere, and Canada and Western Asia in the Northern Hemisphere. Seasonal weather conditions in these marginal countries frequently determine global prices for storable food.

Although global food demand is increasing due to population increases and income–consumption pattern shifts, demand remains generally far more stable relative to food supply. Therefore, the supply of storable food is often more significant to price movement than food demand, although the latter remains vital.

There are relatively few major exporting countries of storable food. Thailand, India, Vietnam, the USA, and Pakistan are the major exporters of rice. The USA, Canada, Australia, Ukraine, Russia, Kazakhstan, and Argentina are the major exporters of wheat. Brazil is the dominant exporter of sugar followed by Thailand. The main exporters of vegetable oilseeds are the USA, Brazil, and Canada, whereas India, Canada, and Turkey are the biggest exporters of lentils. Thirteen countries are therefore responsible for the majority of global exports of storable food.

Alternatively, African and Middle Eastern countries, as well as Japan, are major global net food importers that are largely dependent on food supply from marginal producing and exporting countries such as South America, Western Asia, Canada, and Australia. These exporting countries are relatively isolated from the main importing countries, thus making them vulnerable to high freight rate variability via crude oil price volatility and currency exchange movement. Freight costs and currency exchange movement are therefore important indirect factors influencing global food supply.

A drought in a marginal producing and exporting country such as eastern Australia could have a disproportionate impact on global wheat prices, as it did in 2006–07, yet Australia exports approximately only 2 per cent of global wheat production and only half of that was affected by the 2006–07 drought. This minute variation in weather-driven production having a short-term divergent impact on global wheat prices is analogous to Lorenz’s non-periodic weather theory, whereby a small change could result in a large disturbance before returning to normal.¹ This chaotic price impact is accentuated either through hoarding² or government export embargoes in producing countries.³

Primary factors driving food prices

Major factors influencing storable food prices include product alignment, weather cycles, other commodities, fund speculation, bio-fuel hoarding, freight costs, and currency movement.

The debate over whether global food surpluses or shortages actually exist and their likely causes generally ignores supply chain alignment. It is frequently assumed that what is agriculturally produced is actually what is being demanded in the food supply chain by food manufacturers, end users and consumers. However, the biggest problem with global storable food production is the surplus of unwanted product, and a shortage of needed product. What is produced may not have any value relevancy within the supply chain either because of product attributes or quality.

Assuming that there is product alignment, another issue is geographical location differences. What may be in surplus in one region may not be aligned to a shortage region either because of inadequate supply chain signals due to price distortions, or because of logistic difficulties and transport costs. Merely aggregating production and consumption data may not accurately reflect regional differences in the specified product availability and logistical capabilities, both of which can drive prices. A country may be incurring food shortages, yet laden ships could be idle offshore.

Weather is a major short-to-medium-term driver of food prices. It can affect agricultural production and prices through drought, floods, temperature extremes, humidity, pests, diseases, and tempest. Often it is a buyer’s psychological perception⁴ rather than reality that mostly drives food prices. A drought in the Southern Hemisphere might be officially pronounced after three months of dryness, whereas a three-week dry period in a Northern Hemisphere food bowl region has often been referred to as a ‘drought’.

The fundamentals of supply offer little guidance as to the relative importance of different global events to food prices, especially those that relate to adverse weather conditions. Floods in the Asian Subcontinent and Indo-China are likely to move international food prices more than a drought in Africa, simply because of the geographic concentration of human population. The fear-driven demand response to a possible food supply shortage is far greater in the four global food bowl regions than it is in the non-food bowl countries that are accustomed to food production marginality.

Many Northern Hemisphere spring crops are planted in late autumn, which then become dormant under snow cover during winter. This never occurs in the Southern Hemisphere. Snow thawing usually provides additional sub-soil moisture in the Northern Hemisphere, whereas the more marginal Southern Hemisphere has to rely totally on natural rainfall for crop production. The agronomic characteristics are therefore entirely different between the two hemispheres, which partially explains the differences in supply importance relativities and the historical human population disparities.

Some southern agricultural regions of the Northern Hemisphere such as the Asian Subcontinent, eastern half of the Middle East, Southeast Asia, East Asia, and Central America rely almost entirely on the annual occurrence of summer–autumn monsoonal rains. Any delays in receiving this monsoonal rain can be devastating to these regions either because of their high population densities or due to their total dependence on its occurrence, such as the Arabian Peninsula.

A confluence of adverse weather conditions can drive prices much more than singular weather events. The 2008 price spikes for grains and oilseeds occurred after the confluence of the 2006/07 drought in eastern Australia, low monsoon rainfall on the Asian Subcontinent and Indo-China during 2007/08, winter thawing and dormancy-breaking problems in Russia and the Ukraine during early 2008, and wet boggy conditions in the US Corn Belt causing critical planting delays to corn and soybeans in April/May 2008. It was a combination of droughts, floods, rain, and snow that contributed to the 2008 price spikes.

Ironically, there was a huge global commodity food surplus in 2006, with doubts from the United Nations even as late as October 2006 that agricultural management could be effectual in restricting sufficient production to cause agricultural commodity prices to increase to alleviate much global farmer poverty.⁵ After the perception of global food shortages in early 2008, international food surpluses reoccurred as early as August 2008, which provides some evidence that there may be a very quick response by farmers to prices in deregulated supply chains.

The rise in food prices in 2007–08 was also influenced by the fall in the USD Index, because much of the international food trade is transacted in US dollars. Other influences included the combined impact of rising crude oil prices and bio-fuel demand,⁶ whilst US fund managers switched to buying commodity futures in 2007–08 due to the falling equity markets.⁷

Whereas gold may be an inverse barometer to economic expectations, crude oil can be a general direct barometer for major commodity trends, irrespective of the bio-fuel substitute factor. As crude oil prices increased during the 1970s and again in the 2000s, many food prices either rose or became more volatile. When crude oil prices fell in August 2008, the price declines were shared by many food and non-food commodities.

Trade theory suggests that those countries that have trade surpluses have higher domestic consumption, which drives inflation that ultimately erodes the international competitive advantage of the exporting country. This largely was the experience during the 1980s in Japan, which was forced to reduce domestic interest rates to zero to encourage surplus capital outflow from the country.⁸ As well, some trade surpluses in China were shifted into the US until 2008.

Much of this Chinese and Japanese capital inflow was destined to fund some of the US government debt through Treasury bond purchases,⁹ as well as providing foreign direct capital to offset US trade deficits in the balance of payments. It also dampened US interest rates. However, because of the need to provide higher investment returns, some of this capital inflow was also invested speculatively after 2003, first on equities and then in commodity markets.¹⁰

Futures exchanges made special provision for these speculative capital funds by classifying them as being ‘hedged’, thereby allowing them greater volume exposure than the normal speculative trader. A capital fund that had a speculative exposure on the equity market could not be ‘hedged’ simply by speculating on commodity markets,¹¹ because the equity and commodity markets were not offsetting, which became only too apparent during 2008.¹² With crude oil rising after November 2001 until July 2008, the spill-over effect on storable food prices was inevitable,¹³ particularly when combined with both hoarding and food export bans.

The unique forward contract characteristic of the futures market meant that this speculative commodity bubble was not sustainable for any length of time. Nearby forward contracts that were held by the US funds needed to be exited or rolled over in the short term. It was this exiting of futures market positions from mid-2008 onwards that led to sharp declines in all the major commodities. Crude oil fell from US$146 a barrel in July 2008 to US$36 a barrel in December 2008, while the storable food price spikes were all very short lived.

There is still much debate over the role of bio-fuels in causing the food price spikes of 2008.¹⁴ If global capital fund speculation and hoarding are ignored, then the bio-fuel industry might be perceived to have influenced the food price spikes of 2008, as it did in 1980 when raw sugar prices reached US$0.44 a pound in October 1980. However, there were many prerequisites already in place for corn to spike in 2008, such as wet weather at US planting time, rising bio-fuel and energy prices that were worsened by 2007 hurricanes affecting Gulf of Mexico oil rigs, and promises of increased agricultural subsidies during the 2008 US presidential elections.

High corn prices were unsustainable when the corn-to-ethanol price ratio seriously reduced US manufacturing profit margins in 2007–08. Manufacturing financial losses resulted in much bankruptcy and less demand for corn, with many manufacturers only surviving through government subsidies,¹⁵ import tariff protection, and mandated fuel mixes.¹⁶ Without this protection, the US corn based ethanol industry would have required low corn prices for survival, but this would then require large farm subsidies to prevent farmers going bankrupt. Both the government and taxpayers are caught in a continual debt trap.

Currency movements impact on international food prices but there are trade-offs. In theory, when the domestic currency rises against another currency, domestic imports become cheaper while exports become dearer. Alternatively, when the domestic currency falls against another currency, domestic imports become dearer while exports become cheaper. However, many international food transactions are still p...

Table of contents

• Cover
• Title
• Copyright
• CONTENTS
• Preface
• List of acronyms
• List of figures and tables
• Introduction
• 1 Commodity supply shocks
• 2 Supply chain distortions: intervention, subsidies, protection
• 3 Role of the private sector, price, competition, and government
• 4 Government intervention by importing countries
• 5 The rise and fall of commingled commodity handling
• 6 Government intervention failures in exporting countries
• 7 Hoarding
• 8 Corruption in the food chain
• 9 Food aid problems
• 10 Importance of ‘trade’ markets and merchants
• 11 Post-deregulation issues
• 12 Food supply chain efficiency
• Glossary of terms
• Index