Worrisome trends in food prices By Biswajit Dhar

Source: The Mint, Tue, Jun 21 2011. 1:15 AM IST)

An agreement among countries to establish emergency food reserves is crucial to rein in excessive price volatility

Agriculture ministers from the Group of Twenty (G-20) countries are meeting this week against the backdrop of increasing evidence that the high prices of food witnessed over the past year are here to stay. The Organisation for Economic Co-operation and Development (OECD)- Food and Agricultural Organization(FAO) agricultural outlook for 2011-20 has observed that the average level of prices for the current decade will be at least 20-30% higher than those in the previous decade for cereals and meat. With the past decade registering substantially higher levels of price increases compared with two immediately preceding decades, the OECD-FAO prognosis should be a major source of concern.
Tomohiro Ohsumi/BloombergBut more worrisome are the recent trends in prices. In February this year, the FAO food price index had reached its highest level ever, topping the peak registered in May 2008 when cereal prices reached historical highs. Since then, prices of most food products have been climbing with dairy products and maize recording the steepest increase.
This recent episode of food price rise has already led to a worsening of global poverty and hunger. World Bank estimates have shown that since June 2010, when the food prices started pushing northward, an additional 44 million people have fallen below the poverty line of $1.25 per day. Bank estimates have also shown that a further 10% increase in the food prices could lead to 10 million people falling into poverty, and a 30% increase could increase this number by 34 million. Realization of the poverty reduction targets under the Millennium Development Goals thus seems very distant.
There can hardly be any debate that the present woes in agricultural markets have been caused by a systematic neglect of the sector. The solutions lie in overcoming the supply bottlenecks and to get the agricultural markets to behave in an orderly fashion is quite obvious. What is not quite so obvious is whether the sovereign states, both collectively and individually, have the political will to address the crying needs of the poor.
This lack of political will has been displayed aplenty in the recent past. In the aftermath of the 2007-08 price surges, Group of Eight (G-8) countries had launched the L’Aquila Food Security Initiative (AFSI) in 2009 that pledged to mobilize more than $20 billion over three years, and to address the food insecurity challenge in a sustainable manner. However, a G-8 assessment of the delivery on the pledges made by these countries on food security and health, the Deauville Accountability Report, unveiled on the eve of their recently held summit showed that less than a quarter of the amount pledged had been disbursed even after the conclusion of two-thirds of the commitment period. The report shows that major G-8 countries have shown little interest in supporting the AFSI. While the European Union, Germany and Japan have not even begun implementation of their commitments, France had disbursed 45% of its commitments and the US, a mere 5%.
France has made a strong pitch for addressing the issues of food security and volatility of agricultural commodity prices in the G-20 summit which it will host later this year. The priorities underlined by the French G-20 presidency have two key components. First, they have emphasized the need to promote investment in global agriculture. Secondly, they have argued for the regulation of the agricultural markets to ensure that they behave in a more orderly manner.
In the statements that the French have made to address the problems facing the agricultural sector, one can hear familiar rhetoric: rich countries need to help the poor countries get self-reliant in agriculture by providing official development assistance.
The case for regulation of agricultural markets that the French have made is important, particularly their point about reining in speculators. While opinion has been divided on the influence of commodity speculation on the prices of agricultural commodities, the major economies have already taken steps to introduce appropriate legislation to curb speculative activities. For instance, the commodity futures trading commission of the US is engaged in the task of setting guidelines that would prevent excessive speculation in commodities. Japan has also strengthened its oversight regulatory structure aimed at reining in commodity speculation through amendments to the Financial Instruments and Exchange Act.
While the impact of curbing commodity speculation may not be felt over the next several months, the step that could have a considerable impact on dampening excessive price volatility would be an agreement among countries to establish emergency food reserves. The strong arguments in support of this mechanism made by the French have brought the focus back on the concept of regional food banks. South Asia has been engaged in developing the Saarc Food Bank since 2008, but despite an agreement to increase the size of the food bank, it has not been fully functional. With four least developed countries as its members, South Asian Association for Regional Cooperation (Saarc) needs to take urgent steps to make the food bank functional, a step that would help in mitigating the problem of chronic hunger in the region.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi