Agricultural Markets Instability

Revisiting the Recent Food Crises

Alberto Garrido, Bernhard Brümmer, Robert M'Barek, Miranda Meuwissen, Cristian Morales-Opazo, Miranda P. M. Meuwissen

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9781138937413
• eBook ISBN: 9781317384649
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Agronegocios

Since the financial and food price crises of 2007, market instability has been a topic of major concern to agricultural economists and policy professionals. This volume provides an overview of the key issues surrounding food prices volatility, focusing primarily on drivers, long-term implications of volatility and its impacts on food chains and consumers.

The book explores which factors and drivers are volatility-increasing and which others are price level-increasing, and whether these two distinctive effects can be identified and measured. It considers the extent to which increasing instability affects agents in the value chain, as well as the actual impacts on the most vulnerable households in the EU and in selected developing countries. It also analyses which policies are more effective to avert and mitigate the effects of instability.

Developed from the work of the European-based ULYSSES project, the book synthesises the most recent literature on the topic and presents the views of practitioners, businesses, NGOs and farmers' organizations. It draws policy responses and recommendations for policy makers at both European and on international levels.

1 Scope and objectives

Alberto Garrido, Robert M’Barek, Isabel Bardají, Miranda P. M. Meuwissen, Cristian Morales-Opazo and José María Sumpsi Viñas

1 The new policy and agricultural markets context

The spike in world food prices in 2007–2008 was the largest since the food crisis of 1973–1975. While there were price surges for the world’s three major cereals (rice, wheat and maize) in the years 2007 to 2008, the behaviour of world rice prices obeyed different factors than did wheat and maize prices, and it had different impacts, too. After the market turmoil of 2007–2008 and the 2011 rebound, at this writing, agricultural markets appear to be stable. According to the World Bank (2015), agricultural prices, which fell 3.4% in 2014, are projected to decline by 5% in 2015, following good harvest projections and stock-to-use ratios expected to increase for wheat and maize and most oilseeds, though decline for rice. This scenario is not conducive to export restrictions (as they were in 2008–2009), and the collapse in oil prices in 2015 (running at 50% of the highest in 2014) erodes one of the main support drivers for biofuel production in recent years. In view of the restoration of stock levels, the Organisation for Economic Co-operation and Development (OECD) also expects reduced risk of market volatility for the next years (OECD-FAO, 2014).

In 2007–2008, the phenomenon of soaring food prices surprised governments, experts and the international community. On all measures, it was a largely unanticipated series of shocks, both in the first spike in 2007 and the 2011 rebound. To find a similar episode of sudden, rapid and large increase of food prices, we have to go back to 1972–1973. The world food crisis of 1972–1973 was rooted in a severe weather shock to global grain production, although subsequent policy actions in the United States and the Soviet Union exacerbated the problem and triggered the price explosion (Falcon and Timmer, 1974). In contrast to the single-factorial and temporary 1972–1973 food crisis with its limited geographical scope, the crisis of 2007–2008 was a global, multi-factorial and sustained crisis (long-standing volatility, followed by recurrent food price spikes in 2010 and 2012).

While tensions in consumer food prices have subsided, domestic price movements have varied widely across countries, and the observed price variation in any particular country does not necessarily respond to changes in world market prices. For developing countries, world market prices are crucially important for import bills, foreign exchange earnings, poverty reduction and food security and as signals to guide resource allocation. But it is well known that changes in world market prices are not always transmitted into changes in domestic prices due to transport costs, government policies, changes in exchange rates and market failures, including imperfect information (Conforti, 2014; Rapsomanikis, 2011; Baquedano and Liefert, 2014; Dawe et al., 2015).

Prompted by the sudden food crisis of 2007, the G20 leaders approved in the 2011 Cannes Summit an ‘Action Plan on Food Price Volatility and Agriculture’. The plan had five goals: (a) improve agricultural production and productivity both in the short and long term in order to respond to a growing demand for agricultural commodities; (b) increase market information and transparency in order to better anchor expectations from governments and economic operators; (c) strengthen international policy coordination in order to enhance confidence in international markets and to prevent and respond to food market crises more efficiently; (d) improve and develop risk management tools for governments, firms and farmers in order to build capacity to manage and mitigate the risks associated with food price volatility, in particular in the poorest countries; and (e) improve the functioning of agricultural commodities’ derivatives market. This ambitious policy programme presents unequal records of implementation and delivery, as this book will review carefully in many of its chapters. But the fact is that this political initiative was followed up by numerous others from international and supranational organisations, national governments and private foundations. The food crisis shook the foundations of the global food system.

Since the 2011 G20 Summit, uneven progress has been made at global and national levels to put in place policies, measures and initiatives to respond to the challenges of the 2007–2008 global food crisis. Important progress has been made in improving market information and early warning systems. In particular, the Agricultural Market Information System (AMIS) was set up in 2012 and housed in the UN’s Food and Agriculture Organization (FAO), complementing its price information at local levels with Global Information and Early Warning System on Food and Agriculture (GIEWS), which dates back to 1975. Famine Early Warning Systems Network (FEWS NET) was launched by USAID. The Food Price Watch, run by the World Bank, was launched in 2010, later followed by the Food Price Crisis Observatory. Notably, AMIS and the Monitoring and Analysing Food and Agricultural Policies (MAFAP, also an FAO initiative) report also detailed policy information. Despite better and more insightful market and policy information systems, key questions still linger in the policy debate: How much can the market be relied upon to provide food security? When and how much should the government intervene on behalf of this objective?

Some progress was made in strengthening the global governance (Committee of Food Security, G20 and WTO), although more enforcement mechanisms and coordination are needed among these three global spheres. Some progress has also been made in reinforcing the regulating financial and commodity markets in the US and the EU, but this is a very difficult task from a technical and legal perspective (Massot, 2013). With hindsight, it appears that the role played by the entry of institutional investors, such as hedge funds, pension funds and investment banks, into food commodity derivatives markets may have been overstated. And yet, the UN Special Rapporteur on the Right to Food claimed that ‘Fundamental reform of the global financial sector is therefore required in order to avert another food price crisis’.¹

Less progress has been made in strengthening the coordination of global and national policies that influence food price volatility and food security, and even less in pushing international trade negotiations in spite of the Bali Agreement signed in December in 2013 (Doha Round of the World Trade Organization). This is perhaps one of the most commonly cited flaws of the international governance, because it goes against any national policy initiative to strike the right balance between food sovereignty, trade openness and domestic farms and consumers’ support.

Finally, unsatisfactory progress has been made in increasing public and private investment in agricultural development plans to raise food production in developing countries. Because there is now evidence that price volatility delays gains in productivity (Haile et al., 2015), and that increases in productivity reduce volatility (Alston et al., 2014), it is clear that promoting sustainable intensification is a fundamental goal to make world food systems more stable.

At the European level, just as the new Common Agricultural Policy (CAP) entered into force in the agricultural year 2014–2015, some voices have already been raised to begin considering more flexible support systems with embedded counter-cyclical features (MOMAGRI, 2015). This could be interpreted as a recognition that the new CAP for 2015–2020 was perhaps an evolutionary political outcome of the previous CAPs, but that it still lacks some flexibility, at least from the perspective of budget execution and the types of programmes the EU can implement in the event of systemic market crises.

The end of milk quotas and the upcoming end of the sugar quota have also brought about an intense debate about how these two and other markets should be managed, or whether they should be at all. The 2014 Russian veto tested the safety net mechanisms foreseen in the new CAP and, judged from the most recent assessments, it seems that its budget proved insufficient to compensate all negative impacts. Most agricultural subsectors have been deprived of specific policy mechanisms to address wide price swings. For most of the fundamental commodities in the EU, prices now fluctuate jointly with international prices, unless they drop to the intervention prices, which only apply to wheat and skimmed milk powder and are set at very low levels. It is somewhat understandable that in the EU, in parallel with the dismantling of the quotas in the dairy and sugar sectors, there is now a growing interest in using some untested mechanisms like mutual funds, revenue insurance and other more flexible farm support measures (Cordier, 2014; Bardají et al., 2011).

Perhaps recognizing that income-support and market management policies will always face limitations, not to mention efficiency losses and redistribution effects, a renewed focus has been placed in improving the functioning of the supply chain, both in high-income and low-income countries. Important measures focusing on contractual mechanisms are being enforced in the EU, including the obligation to sign detailed sale and delivery contracts between producers and processors. Most countries in the EU also created ‘Price Observatories’, not to mention the EU milk market observatory and other national observatories of the food supply chain, which collect prices at different stages of the chain, with a view to enhancing price formation transparency and detecting non-competitive behaviour. A very likely result of all this, as this book clearly shows, is the strengthening of the value chain and the emergence of innovative price risk management strategies.

One final, but by no means unimportant, focus is food demand and the consumption of food and how food prices affect consumption habits. Research shows that the primary influences on people’s consumption habits are price, affordability and taste, with trustworthiness and convenience also having an impact. Food prices offer a double-edged perspective: from the health perspective, there are proponents of food taxes to reduce obesity and malnutrition, but the results supporting this recommendation are inconclusive. From another perspective, even in developed countries poor households can be severely hit by rises of food prices. The health effects of variations in food prices have not been established clearly in the literature, but the negative welfare effects of price rises are beyond dispute. How food price volatility affects consumers is still a field of debate in both high- and low-income countries.

2 A growing body of literature that is shaping new research consensus and also sharpening the debates

In the course of the last five to six years, renewed efforts, updated data and new research projects² addressing the drivers and the impacts of markets’ instability have shaped a corpus of knowledge of significant value for policy makers. To review in full this literature and draw its main conclusions within the length of a typical journal article would leave out too much valuable information. This is one of the main motivations of putting together this collection of essays.

The factors that caused the 2007–2008 global food crisis were not just market fundamentals, but also macroeconomic (rate of exchange and interest rates) and exogenous (increase of oil prices, decrease of real estate prices and the financial crisis) shifters, multiplied by financial and commodity markets’ activity, some policy decisions (export restrictions instituted by some important net exporter countries) and climate shocks (see Chapter 2). As a consequence of all these factors, the phenomenon gained such complexity that dealing with this new era of price and market development will be from then on considered a daunting task to be tackled by the international community, with few options for individual countries or regional initiatives to pursue any other policy than merely reinforcing their coping capacity.

At the core of any intellectual endeavour of drawing policy lessons from a past crisis, it stands that regardless of the quality of data, models and inference, there is still the problem of anticipation. Chavas et al. (2014) rightly frames the problem as follows:

[…] if price changes are not anticipated … the econometrician needs to distinguish between what is known versus what is not known to market participants. The changes in what is not known is captured by changes in the distribution of price volatility… . This raises the issue of empirically evaluating both changes in market conditions and changes in the information available to market participants … how much of the 2008 food crisis was due to poor information … about food stocks?

(p. 9)

[…] if [a market] shock is not anticipated, the economic implications are quite different. First, the welfare and distributional effects can be stronger. Second, the adjustments must be contingent on the particular shock, implying state-contingent decisions that are in the realm of insurance and risk markets. But insurance and risk markets are known to be incomplete … [since] insurance markets do not develop easily … the welfare costs of volatility are not large enough to justify paying the full costs of insurance… . Is it possible to improve on the welfare outcome-associated current food price volatility? What is the role of markets? What is the role of government policies?

(p. 10)

With these questions in mind and drawing on lessons learned from the global food crisis initiated in 2007–2008, these ten points seem to gather some support from recent studies:

1 Only extreme price movements should be a source of concern. Price changes along a well-established trend reflecting market fundamentals and with known cyclical patterns are less a matter of concern. From the policy perspective, food price volatility matters because it creates uncertainty, namely ex-ante unpredictability, and not because it results from ex-post variability. Risk is determined by exposure to uncertainty or unpredictability. Unanticipated shocks, as opposed to anticipated price movements, should attract most of the attention of policy makers (Munier, 2012; Chavas et al., 2014), because these shape the toughest policy dilemmas and courses of actions in times of market turmoil.

2 There is a need to develop forward-looking risk measures that are able to detect volatile periods (or potentially volatile periods) as early as possible and that contain useful information for the construction of early warning systems. Nevertheless, it is not enough to rely on a single volatility measure, even if it is forward-looking. Instead, we need several risk measures that are linked to the economic consequences of increased volatility (Brümmer et al., 2014). I...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of contributors
• Preface
• Acronyms and abbreviations
• 1 Scope and objectives
• Part 1 Literature reviews and new findings
• Part 2 The views of some stakeholders
• Part 3 Policy discussion and conclusions
• Index