Fight Against Food Shortages and Surpluses, The

Perspectives of a Practitioner

John McClintock

• Publisher: CAB International
• Year: 2020
• ISBN:
  9781786394866
• Topic: Tecnologia e ingegneria
• Subtopic: Agricoltura sostenibile

The price of food commodities - such as wheat, corn and rice - is unstable. It can suddenly shoot up, making food unaffordable for millions of people around the world, bringing hunger and famine. A shortage may be due to bad weather or to a human pandemic which disrupts the food system. The other side of the volatility coin is a grain surplus - too much grain on the market. A grain surplus can cause food prices to rapidly fall, wiping out the profits of farming families and jeopardising their livelihoods. The whole world would be better off if commodity prices were more stable. The challenge is for governments to manage food and farming so that there are neither food shortages nor food surpluses. This book explores how governments can do this and uses theory and evidence to address major ideologies and global problems anew by: - Exploring the causes, consequence and potential for moderation of food price volatility.- Evaluating the various policy tools that have been proposed to eliminate hunger and reduce volatility.- Concluding with a practical strategy to moderate volatility - grain buffer stocks.In so doing the book addresses a core question: how can prices be managed for the benefit of consumers and farmers without impairing the efficiency of the market? Authored by an agricultural economist with thirty years of practical experience in farm policy, this book will assist governments in the design of their food and agricultural policies. Requiring no prior knowledge of economics, it is essential reading for students, researchers and policy makers in the areas of economics, international and sustainable development, agriculture, and food security.

1 Introduction

1.1 What Is this Book About?

This book is about two of the most fundamental challenges in the world: how to keep the price of food at a level that people all over the world can afford and how to prevent, in both rich and poor countries, slumps in the price of agricultural commodities, which can threaten the livelihoods of farming families. These are both real, live issues. For instance, in 2007/8, there were food riots in 30 countries of the world, in which people were killed. During the last ten years, in many countries, farmers have been plagued by unpredictable and volatile prices for their products.

This book discusses and explores the stabilization of food commodity prices in order to avoid, on the one hand, sudden increases in the price of food and, on the other, slumps in the price at which farmers sell their products.

Trade helps to avoid food shortages and surpluses. Adam Smith (1723– 1790), the Scottish classical economist and philosopher, noted this in his magisterial book An Inquiry into the Nature and Causes of the Wealth of Nations. He wrote:

Were all nations to follow the liberal system of free exportation and free importation, the different states into which a great continent was divided would so far resemble the different provinces of a great empire. As among the different provinces of a great empire the freedom of the inland trade appears, both from reason and experience, not only the best palliative of a dearth but the most effectual preventative of a famine.

(Smith, 2007–348)

Over the last 30 years, the world has taken big steps towards freer trade in agricultural commodities.¹ Adam Smith would have given his approval. But free trade cannot magic up commodities from thin air when there is a global shortage; nor can free trade spirit commodities away when there is a global glut and oversupply.

This book explores what governments and regional organizations can do to keep the price of agricultural commodities stable on their own national markets if the world price becomes too high or too low. It focuses on one group of agricultural commodities – the food grains. They keep humanity alive. They include wheat, rice, maize and many other staple foods. The conclusions of the book apply, however, to all agricultural commodities.²

1.2 Buffer Stocks Can Stabilize Grain Prices – so Why Are They Controversial?

The argument of this book is that a grain reserve used as a buffer stock is a plausible way of bringing greater stability to the price of grain. Some countries, such as China and India, already have a buffer stock. But many countries do not, including the United States and most of the countries of the European Union. Some people believe that a buffer stock is too much interference with the market. Others fear that it will end up as unwanted ‘food mountains’. Other people fear that a buffer stock would cost too much. Lastly, some rich governments appear content to buy themselves out of the problem of price volatility by subsidizing imports and exports.

This book refutes these points of view. A buffer stock does not prevent the market from operating efficiently. Prices are allowed to vary according to supply and demand but the variation is kept within limits. As for the fear of ‘food mountains’ – these arose in the 1970s and 1980s not because the governments were controlling the volatility of grain prices but because they had permanently raised the prices of farm commodities above their long-term equilibrium level. A buffer stock does not raise the price of grain, it simply moderates its volatility. Regarding costs, the main cost is the initial set-up cost. A buffer stock can be, in principle, financially self-sustaining. Finally, when governments extricate themselves from a price problem with subsidies or taxes on imports and exports, they make the situation worse for everybody else in the world. Governments need to act in a manner that is ‘globally friendly’ not in a way that complicates the lives of others.

Almost as important as food security is energy security. In the 1970s, many rich countries, including the United States and the countries of the European Union decided to increase their energy security. They did it by setting up strategic petroleum reserves to guard against disruptions of the supply of oil. These reserves moderate the volatility of oil prices on a country’s market. Just as a strategic petroleum reserve can moderate the volatility of oil prices, so grain buffer stocks can moderate the volatility of food prices.

1.3 Stable Prices at the National Level or at the World Level?

Governments have long wanted commodity prices to be stable. Almost 100 years ago, governments set up the International Wheat Agreement with the express purpose of moderating the volatility of world prices. In the 1950s and 1960s, the United Nations set up schemes to stabilize the world prices of five other commodities – tin, sugar, coffee, cocoa and rubber. These were international agreements between governments. In principle, the agreements were designed to improve the situation for all countries, irrespective of whether they were producers, consumers, importers or exporters.

Some of these agreements were successful, but only for a limited period of time. Sooner or later, they collapsed or lapsed. The world now has no schemes in place to moderate the volatility of commodity prices. The agreements did not take root because governments did not co-operate sufficiently. It proved very difficult to find a way whereby the costs and benefits of stabilization were shared fairly between countries. For instance, in the case of the International Wheat Agreement, Canada and the USA felt that they were shouldering more than their fair share of the cost and received too little of the benefit. This caused them to withdraw from the agreement, which subsequently lapsed.

In any international endeavour, it is a big challenge for governments to agree on how to share the costs and benefits between themselves in a manner that is deemed to be fair. This is one reason why so many international endeavours struggle to survive or fail to reach their ambitions. To be truly successful, countries need to be prepared to share, on a limited basis, some of their national sovereignty. This has been achieved in the EU but not elsewhere. The success of the EU demonstrates that countries can co-operate successfully together if they are prepared to share elements of their national sovereignty.

Commodity prices can be stabilized either at the national level or at the world level. To succeed at the world level, governments would have to be prepared to share some elements of national sovereignty at the level of the world. In the short term this seems unlikely, although sharing sovereignty at the regional level seems a possibility.

Price stabilization is, therefore, more likely to succeed if it starts at the level of the individual country (or regional organization) rather than at the level of the world as a whole. It is far easier to reach agreement – on such issues as price bands and how to run a buffer stock – within a single country than it is within the UN with its 200 countries. Thus the focus of this book is on what individual governments can do to moderate price volatility on their own national markets. Of course, once a country has established its own buffer stock, there is no reason why it should not combine it with those of other countries to create a regional buffer stock. The merging of regional buffer stocks could, eventually, lead to a world buffer stock and the stabilization of world prices, as was the aspiration of the UN in the 1960s and 1970s. But the process is more likely to succeed if it starts with individual governments and national (or regional) buffer stocks.

1.4 The Importance of Getting Prices Right

Having control over the price of grain means more than being able to avert food shortages and food surpluses; it means the government has its hand on a crucial lever in the process of national development. All countries start the process of economic development with most of their population growing their own food on smallholder family farms. For a country to develop, the farm sector, consisting of these smallholder family farms, needs to (i) shed labour to the newly emerging industries in the growing towns and cities; (ii) increase the labour productivity of those farmers who remain in the sector so that one farmer can feed a growing number of non-farmers; and (iii) earn enough money to constitute the market for the products produced by the newly emerging industries.

The farm sector has, therefore, a trinity of tasks: to provide the food, the labour and the market for economic development. It can only fulfil these three roles if grain prices are reasonably stable. If they are not stable, farmers find it impossible to plan ahead. They will be reluctant to invest in their farms, to modernize their systems of production and to increase their labour productivity. Unstable grain prices are, therefore, inimical to the balanced and natural development of a country.

This has been made clear by the economic historian Peter Timmer, of Harvard University. He has examined which countries have developed successfully and which have not (Galtier, 2013, p. 11). Regarding the first country to industrialize – England – Timmer has pointed out that during the era of the Corn Laws from the late 1600s to the early 1800s, England protected its farmers from cheaper imports of wheat, barley and other grains from foreign countries. The Corn Laws protected English farmers from low prices. They also stabilized grain prices within England. The Corn Laws moderated the natural volatility of grain prices. The result was, arguably, to stimulate the world’s first agricultural revolution and to provide the food, labour and market for manufactures, which were necessary for the first industrial revolution to happen.³

The Corn Laws worked by keeping out cheap grain. This benefitted English landowners and farmers. They received higher prices than would have been the case had England pursued a policy of free trade. However, the corollary was that the price of bread for the people was higher than it would have been under free trade. Eventually, bread became too expensive for ordinary people. As a result, the Corn Laws were repealed in 1846. Thereafter, Britain adopted a policy of free trade in agriculture and began to import cheaper grain from North America, Australia and the European continent. The cost of bread came down for British citizens.

The repeal of the Corn Laws is perhaps the first example of a government decision being influenced by analysis put forward by an agricultural economist (David Ricardo and the theory of rent). In this book, we shall talk a lot about maximum consumer prices and how important it is for governments to avoid the price of food becoming too expensive for consumers. The Corn Laws stimulated farming in Britain and provided the wherewithal for an industrial revolution. After the Industrial Revolution had taken root, the Corn Laws were rescinded. This sequence of events encapsulates the argument of this book: that it is vital for governments to get grain prices right if their countries are to make economic progress.

During the 18th century, when England was rapidly developing, France fell behind in terms of both rural and urban productivity. The country only began to catch up with England in the latter half of the 19th century. This is when it abandoned its long-time strategy of ‘provisioning Paris’ as cheaply as possible with food grains from the countryside. The failure of this provisioning policy had been a trigger of the French Revolution in 1789. From the 1850s, the French government began to provide policy and investment support to the smallholder farmers who dominated French farming. The government protected its farmers from cheap imports and low prices.

As for Germany, it developed rapidly under Chancellor Otto von Bismarck (1815–1898). The Chancellor forged a pact between ‘steel and rye’ – in other words between the newly emerging industrial sectors and smallholder farmers. As part of this pact, the smallholders were protected from low grain prices.

On the other hand, Russia’s economy has not developed smoothly and naturally. Its farmers were not given reasonable grain prices, which would have induced them to produce a surplus for sale. Instead, its peasant farmers were forced to deliver their grain surpluses to the state. The purpose was to provide sufficient food to feed the country’s strategy of forced and rapid industrialization. The failure to gradually develop a modern agricultural system by stimulating the farmers with attractive prices was one major factor in the ultimate collapse of the Soviet Union in the 1990s.

The importance of getting the grain price right is also shown in the experiences of Asian countries. Here there have been both successes and failures. In Japan, early investments in raising productivity on small farms paid high dividends in feeding a growing population in the towns and cities. The higher productivity of the small farms meant that they could shed people who then moved into the newly emerging factories and workshops where the manufacturing sector was in the process of being born. The government’s rice policy provided stable prices to rice farmers and protected them from price slumps. The government’s policy regarding agricultural and food prices helped to bring economic development.

In contrast, Thailand, after 1880, fell systematically behind Japan in terms of per capita income. This was partly because the government taxed its farmers. It did not encourage farmers to develop and invest. It did not provide them with good prices for their products. Instead, the government exposed farmers to the full force of volatile prices of rice on the world market.

England, France, Germany and Japan are examples of countries that exercised control over their grain prices. Their farmers could make a profit. This enabled the farmers to improve their farms and to take up new farming methods. Some of the farmers left the countryside for the emerging towns and cities. They produced the new goods which they sold back to the countryside, which could afford to buy them. It could afford to buy them because the farmers were making a reasonable profit from farming. Farming was the engine of economic development. In contrast, Russia and Thailand did not look after their farmers in terms of providing them with attractive and stable prices. Development in these countries was delayed.

It is thus important to get grain prices right and to keep them right. This is not only so that farmers can remain in business and the people can afford to eat; but also so that the farm sector can grow. This is one of the preconditions for national economic development.

1.5 What Is Different about this Book?

This book differs from much of the conventional wisdom on food shortages and hunger in the following ways: It regards hunger as an economic problem. It does not regard hunger as physical problem – as a lack of physical food.

Hunger arises because people cannot afford to pay the price of food. In this respect the book belongs to the school pioneered by Amartya Sen in the early 1980s. He argued against the simplistic ‘food availability decline’ explanation of h...