1 Summer Programme on the WTO, International Trade and Development The Price of Food Patrick Low Graduate Institute Thursday, 24 July 2008

The Price of Food  The Facts  The Consequences  The Causes  Policy Responses

3 The Facts  The FAO Food Price Index Increase of 57 per cent in the year to March 2008  Prices rises from Maize 80% Wheat 70% Rice 25% Powdered Milk 90%  Prices of many other foods also higher, including palm oil, cassava, poultry, meat  Prices of most foodstuffs projected to stay high through to 2015, well above 2005 levels

4 The Consequences  Effects on price levels and macroeconomic feed-through  For many developing countries, threats to food security, livelihood, rural development and nutrition  10-20% of income spent on food in rich countries, but 60-80% in developing countries, so strong poverty implications  Estimated that 20% increase in prices puts another 100 million below poverty line ($/day)

5 The Consequences (cont.)  Civil disturbances (Burkina Faso, Cameroon, Egypt, Guinea, Haiti, Mauritania, Mexico, Morocco, Nepal, Senegal, Uzbekistan)  According to FAO, 37 countries face a food crisis  Policy responses (emergency response, trade and trade-related policies, longer-term development policies)  WFP needs an extra $700 million just to stand still

6 The Consequences (cont.)  Not all downside – agricultural share in output/net food exporters  But opportunities potentially blunted by obstacles to price transmission: Policies (e.g. export restrictions) Infrastructural bottlenecks Remoteness  To the extent these challenges not addressed, truncated supply responses

7 The Causes  High oil prices ($100+ per barrel) Raising agricultural input prices (effects on mechanical working, transport, fertilizers, chemicals – maybe 15% of explanation) Stimulating bio-fuels production (sugar, cassava, wheat, maize, palm oil, soy) Effects on land use and land prices

8 The Causes (cont.)  Consumption mandates and production subsidies diverting considerable agricultural output away from traditional uses  Incentives for biofuel production partly responsible for: 30% US maize output to ethanol in 2008, 20% in % Brazilian sugarcane production for biofuels in % EU vegetable oils output (plus imports) for biofuels

9 The Causes (cont.)  A secular shift in demand  Economic growth in key developing countries, in particular China and India  Increased food demand in oil-exporting countries  Increased demand accounted for 20% of food price rises in 2007  Changes in taste, with shift from cereals to meat (several kilos of grain to produce one kilo of meat)

10 The Causes (cont.)  Weather patterns reducing supply (climate change?) Australian drought since 2002 Floods in West Africa and Mozambique Cyclones in Bangladesh Poor harvests in EU and Ukraine in 2006/7

11 Causes (cont.)  Low stocks, especially cereals Global stocks of food have dropped by 3.4% per annum since 1995 Use of buffer stocks for supply management and as a response to export controls in other countries The challenges of stock replenishment against a background of food shortages and rising prices

12 Causes (cont.)  Role of speculation Does forward buying and selling of food on futures markets  Independently raise prices  Provoke price instability Standard economic theory suggests possible short-term price effect (assuming elastic supply) and price-smoothing rather than volatility-generating effects

13 Causes (cont.)  The effects of subsidies in rich countries on world production Price-reducing Inhibition of efficient production in developing countries Low productivity through low investment Reduced R&D  What of the argument that subsidies should continue in order to relieve current prices and shortages?

14 Policy Responses  Export restrictions Lowers domestic prices and reduces export volumes, so inhibits supply beyond the short-term Effect on world prices depends on terms- of-trade effects (a large country could gain welfare from an export tax, a small country cannot) Deadweight costs of a trade tax But emergencies?

15 WTO Rules on Export Restrictions  Export taxes are permitted, and could be negotiated down in the same way as tariffs  Quantitative export restrictions are illegal unless (among other reasons) they seek to relieve temporarily critical shortages (Art. XI:2(a)). But due consideration for net food importers, plus developed countries have to pre-notify details and consult upon request. Developing countries exempted from notification and consultation obligations except in the case of net food importer

16 Policy Responses (cont.)  Price controls Reduces returns to farmers, which comparable consequences to those of an export or output tax Costs of administrative interventions Ultimately, costly and counter-productive, but a short-term argument?

17 Policy Responses (cont.)  Consumer subsidies/rationing Consumption subsidy more efficient than production taxes, but still a send-best redistributive mechanism Potential production-distorting effects Affordability?  Consumption subsidies used in Middle East and North Africa on continuing basis (wheat, bread)  Rationing of subsidized food in order to target consumer groups (e.g. Pakistan on wheat), but administrative costs

18 Policy Responses (cont.)  Reduced trade taxes Lower import duties and reduced VAT Efficiency gains and lower prices Budgetary impact Implications for WTO negotiations

19 The Role of Trade Policy and the Doha Negotiations  Tariffs, subsidies (production and export) and export taxes  The different effects of agricultural trade liberalization – removing subsidies may raise prices, but probably only in the short-term, and removing tariffs should lower them.  Both actions will better balance underlying supply and demand, stabilize prices and boost production in many developing countries