Introduction: Context and Motivation Economics of Food Markets Lecture 1 Alan Matthews

Lecture objectives To introduce some of the issues dealt with in the course To give a sense of the very extensive government intervention in and regulation of agricultural and food markets. Course focuses on the evaluation of these interventions. To describe course requirements and expectations of your involvement

A new era for food markets – agflation? Historical experience has been steady downward trend in real price of food, food has never been cheaper Current dramatic food price increases Explanations? –Demand growth in emerging economies –Competition from biofuels –Droughts and climate change –Constraints on supply capacity

Taken from Von Braun, IFPRI, 2005

Wheat prices (US No 2 Hard Red Winter)

Further reform of Europe’s agricultural policy No real reforms for 30 years, now three major reforms since 1992 and discussions starting on a fourth Explanations? –Declining economic importance and greater differentiation in farm structures has weakened power of the farm lobby –Environmentalist critique of the productivist model of agriculture –Consumer concerns not with prices but with food safety and market power –Development groups concern about impact of the CAP on developing countries –Anti-globalisation food security critique

Further reform of Europe’s agricultural policy The reform agenda –2008 CAP Health Check –2009 EU Budget Review – Negotiation of next Financial Perspective –Implications of successful conclusion of Doha Round –Implications of further EU enlargement (Western Balkans, Turkey)

Reviewing international trade rules Agriculture a stumbling block in the current Doha Development Round of trade talks Absence of international trade disciplines on agricultural policies until the Uruguay Round 1994 What type of trade rules are appropriate to allow legitimate policy space to developed and developing country governments while avoiding negative spillovers on third countries?

Agricultural exceptionalism Is agriculture different? Plenty of evidence that it is treated differently –Very significant trade protection and support –International trade rules different for agriculture –Very prominent role in EU budget –Different mechanisms for EU decision-making

Agricultural exceptionalism Reasons for different treatment –Economic characteristics of food markets –Political and social importance of farm communities –Food security concerns –Agriculture as a provider of public goods Importance in land management, watershed management Agriculture as a driver of rural development

EU budget expenditure by heading (commitment expenditures, EUR million) Source: Commission Financial Report 2006

Source: Commission Budget Review Consultation Paper September 2007

Paradigms in agricultural policy- making The ‘dependent agriculture’ or ‘state assistance’ paradigm The ‘competitive agriculture’ paradigm The ‘European Model of Agriculture’ of multifunctional agriculture The ‘food fundamentalist’ paradigm Paradigms frame the objectives which guide agricultural policy-making

Source: Department of Agriculture and Food, Annual Review and Outlook Agriculture in the Irish economy

Source: Department of Agriculture and Food, Annual Review and Outlook Agriculture in the Irish economy

Food Markets Factor markets Input markets Farm product markets Retail markets FarmersProcessorsDistributors and retailers Wholesale markets International trade Consumers

A ‘corporate view’ of the global agri-food business chain Source: Von Braun, J. The World Food Situation: An Overview, IFPRI, 2005

Characteristics of food markets Primary commodity markets –Competitive markets characterised by volatility, declining terms of trade and weak bargaining power of producers Factor markets –Missing markets (environment, agricultural research), regulation of competing uses (land) Input and food wholesale markets –Concentrated markets, concerns about market power Food retail markets –Changing consumer behaviour, asymmetry of information, food safety, advertising International trade markets –Level playing field?, fair trade, global supply chains

The policy analysis perspective Food markets are heavily regulated for all kinds of reasons –What objectives? –What instruments? –Is the intervention efficient? –Is the intervention equitable? Tools of welfare/cost benefit analysis

The Food Markets course Examines policy issues arising from the operation of food and agricultural markets Emphasises blend of institutional knowledge and application of economic principles Uses simple graphical analysis of markets as the principal methodology Addresses topical issues, e.g. WTO trade talks, biofuels, CAP reform

Food Markets outline Introduction and motivation Agricultural policy objectives – why support farming? EU agricultural policy Economics of price support policies Rural development and biofuels policies Managing agriculture’s impact on the environment Regulating agricultural trade and WTO rules Impacts of agricultural trade liberalisation Market power in the food chain Food law and food safety

Food Markets assessment Examination ( 70%) –Eight questions, answer four Two assessments (15% each) Tutorial classes –Active learning, student presentations Contact and office hours –Tuesdays 4-5 pm, Wednesdays 3-4 pm

Food markets reading Wide reading expected Core readings for each topic Supplementary readings for those who intend to specialise in the topic

Hope you enjoy the course!