Bill Totten's Weblog

Thursday, May 28, 2009

The 21st century's bleak harvest

by Asif Mehdi, development practitioner

Al Jazeera (May 19 2009)

As the world staggers from one economic crisis to another, it seems easy to forget the global food crisis that occupied centre stage in 2008.

World prices for essential grains more than doubled between 2006 and 2008.

Rice, the staple food of most of Asia, doubled in price in just seven months. And, despite their commitments to trade liberalisation, a few significant grain-exporting developing countries rushed to protect domestic grain stocks by banning exports.

The poor, who typically spend between fifty and seventy per cent of their meagre incomes on food, were most affected by the crisis.

According to the United Nations Food and Agriculture Organisation, the food crisis raised the number of undernourished people from 923 million to more than one billion by this year.

In late 2007 and 2008, the crisis caused food riots in at least fifteen countries across the world, from Brazil to Bangladesh, and international media and forums spoke of little else.

Then, as suddenly as it struck, declining prices relegated the food crisis to collective global amnesia.

Causes not addressed

However, while prices for grains and foods have declined in 2009, they are still higher than pre-crisis levels and the fundamental causes of their volatility have not disappeared.

The international economic system has witnessed a dramatic disbanding of trade and investment barriers.

However, the international market for agricultural commodities, the nature of industrial agriculture, changing consumption patterns and international finance all threaten to make food price volatility and food insecurity a recurrent feature of the early 21st century.

Agriculture offers a textbook case of international market distortion. And in this case, the market distortion is created by precisely the developed countries that extol the virtues of free markets.

Double standards

The developed world protects its domestic agriculture with any number of subsidies and technical barriers to trade.

In 2006, for example, the Organisation for Economic Co-operation and Development (OECD) estimated that agricultural subsidies in OECD member countries were about $230 billion.

In contrast to the magnitude of those subsidies, Official Development Assistance from OECD member states amounted to $120 billion (the US alone had a military budget of $600 billion in 2007).

The agricultural subsidies cover a host of measures - from domestic price support, to compensation to farmers for maintaining fallow land, to export price subsidies to dumping, some of which is disguised as food aid.

Paradoxically, international trade negotiations and, more importantly, International Monetary Fund (IMF) lending conditions expect developing countries to remove agricultural subsidies and liberalise domestic markets to imported foods.

While these measures allow for the increased availability of food, they have also eroded domestic agriculture and impoverished the rural economy, often in the most economically fragile states.

It was not surprising that the most impoverished countries were unable to meet the international price surge with increased domestic production, or the release of buffer stocks of staple food commodities.

In fact, those countries became ever more aid dependent as governments struggled to find the resources to pay the bills for imported food (and fuel), in the face of sharpened threats of hunger and undernourishment.

Industry domination

The opening of developing country markets does not benefit the average farmer in the developed world.

The international agricultural industry is dominated by a few grain, seed, chemicals and oil companies.

Such is their market power that three companies control the global grain trade and one company controls sixty per cent of seed production.

The grain trading conglomerates have unchecked market power to hoard and influence world prices.

Seed companies have employed breakthroughs in biotechnology to produce seeds that are compatible only with certain brands of pesticide or supply patented terminator seeds which germinate just once, and therefore the seed from a harvest cannot be used to grow a second crop.

This last feature of the seed business ensures a seed serfdom for the farmer, who cannot set aside part of the harvest for replanting.

It is no wonder, then, that the profits of the grain traders soared to astronomical heights in 2007, in one case up by sixty per cent over the previous year.

And it is no wonder that small farmers are bankrupted by one crop failure because of their inability to afford to buy or finance the procurement of seed for a new crop.

Industrialised agriculture

The other facet of industrialised agriculture is its energy intensity and reliance on hydrocarbon resources, whether as fertiliser or as fuel.

During the heyday of the Green Revolution, one study noted that between 1945 and 1994 US energy input for agriculture increased four-fold while crop yields only increased three-fold.

Since then, energy input has continued to increase without a corresponding increase in crop yield.

Barring a breakthrough in seed technology, industrial agriculture has reached a point of diminishing marginal returns from energy usage.

In addition, the fact that oil resource availability has peaked suggests that oil prices will be on a long-term increase, thereby increasing the costs of food production.

Given the nature of the financial crisis in developed countries, it is highly doubtful that governments will have the fiscal resources to increase subsidies to the agricultural sector, in order to contain the increase in prices.

For the developing world, fiscal constraints on governments and the likely drying up of development assistance will have the same impact.

Food to fuel

The recent movement in the developed world to produce bio-fuels is yet another factor propelling the price of grains.

A World Bank study, prepared in April 2008, pointed out that a third of US corn production goes to produce ethanol and half the vegetable oils produced in the EU to the production of biodiesel.

This diversion from food to fuel is subsidised extensively, while imports from Brazil (which has had the longest standing and most extensive bio ethanol production) are subjected to tariff barriers that effectively prohibit imports of Brazilian ethanol into these markets.

Commodity speculators, seeing the potential from increased demand for grains in these subsidised programmes, drove up futures commodity prices which in turn raised current prices in grain markets.

The same World Bank study contends that 75 per cent of the food price increase was due to bio-fuels, a figure hotly contested by the Bush administration at the time.

An International Food Policy Research Institute study asserts that the effect was somewhat less, at thirty per cent of the food price increase.

Ideology of the rich

The financial crisis in itself was a cause for the food price hike.

While prices rose steadily through 2006 and 2007, the latter half of 2008 saw a sharp increase in prices, in a so-called price spike.

However, little had changed in the fundamental conditions of supply or demand to cause such dramatic market adjustments.

By now it is clearly evident that as the unregulated and complex financial sector of the US was facing the unfolding effects of the real estate bubble, trillions of dollars moved across sectors and spaces and invested in food and primary commodities, causing another price bubble, this time of an altogether more serious consequence.

The simultaneous inflation of oil and food futures caused cost increases in the production of food while inflating its trading prices at the same time.

It seems that finance had run out of opportunities for profit, so it turned to the earth as a means of generating speculative profit, whether through real estate or primary commodities and food.

As the more recent financial crisis has shown, there is no regulatory capacity to stop such profiteering from reoccurring.

These are the difficult prospects and consequences of a world run by the ideology of the rich and powerful.

Development lessons

There are development lessons to be learned here.

First, food security is an issue requiring long-term international effort and food security demands that local agriculture be able to supply domestic needs wherever possible and that reserve stocks are garnered for difficult times.

Second, the developing nations are justified in holding out in the Doha Round of trade negotiations until real and tangible concessions are made with regard to trade in agricultural products.

Third, national development efforts need to be replenished with such 'old fashioned' endeavours as investing in rural production, water availability and the empowerment of the small farmer.

Economic history shows us that industrialisation was preceded by agricultural transformations, with the state playing a heavy role.

And economic history is a better guide to policy than the theorising of free marketers serving powerful corporate interests.


Asif Mehdi works in international development with an international intergovernmental organisation and has worked extensively in Asia and Africa during his 29-year career as a development practitioner.

The views expressed by the author are not necessarily those of Al Jazeera.

Bill Totten


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