Food security and price volatility

The leaders of the G20 countries at their summit in November 2010 requested a report to ‘develop options for G20 consideration on how to mitigate and manage the risks associated with the price volatility of food and other agricultural commodities, without distorting market behaviour, ultimately to protect the most vulnerable’.

In response to this request, a number of international organisations including the FAO, IMF, OECD, WTO, World Bank, UNCTAD, etc., have jointly produced a report on price volatility in food and agriculture markets.

Reflecting the view that piece volatility and its effects on food security is a complex issue with many dimensions-agriculture and non agriculture, short and long term, with highly differentiated impacts on consumers and producers in developed and developing countries, the report discusses the ways in which price volatility affects countries, businesses, consumers and farmers. It offers suggestions for a systematic and internationally coordinated response, building on lessons learnt in the past.

Policy intervention to prevent or reduce price volatility and options to mitigate its consequences are discussed with possible action at individual, national, regional and international levels and explores mechanisms of international cooperation to implement the report’s recommendations and to monitor progress.

The growing population and incomes in emerging developing countries will add significantly to the demand for food in the coming decade. By 2050, the world population is expected to reach about nine billion and demand for food is expected to increase by between 70%-100%.

According to OECD/FAO projections, prices of crops and most livestock products will be higher this decade. Price volatility in this decade has been particularly high for rice and wheat as compared to the past decades.

If the rate of growth of agricultural production does not keep pace with actual demand, prices are expected to show an upward trend. According to FAO, the rate of growth in agriculture production is expected to fall in the future while population will continue to grow.

Investing in agricultural productivity growth is paramount to addressing food price volatility. The need for public investment in agriculture while encouraging private sector investment in order to reduce price volatility is explained.

Trade is an essential component of any food security strategy .International trade is a potentially powerful engine to even out supply fluctuations across the globe and reduce volatility. Stressing the importance of trade flowing smoothly between countries, the report stresses the need to reverse the recent trend of countries trying to insulate themselves from international markets. Market and transportation infrastructure, capacity to meet sanitary and phytosanitary requirements, particularly in developing countries need to be improved and the report recommends that initiatives such as Aid for Trade can contribute to improve these aspects. Recommending that export restricting measures should be time bound and used only in exceptional circumstances, it suggests that the G20 governments should develop an operational definition of a critical food shortage situation that might justify such a measure which should be used as a last resort and should take into account, in particular the food security needs of LDCs and net food importing countries. The need for G20 members to remove provisions of current national policies that subsidise bio fuel production, failing which they should develop contingency plans to adjust, at least temporarily, policies stimulating bio fuel production or consumption when global markets are under pressure and food supplies are endangered are also stressed. Food production and price shocks can negatively affect foreign currency reserves and balance of payments. For countries that are either food dependent or need to import if domestic production suffers a shock, market based mechanisms such as hedging instruments might provide an alternative to international policy solutions such as compensatory financing facilities.

Commenting on risk management and the use of financial tools such as hedging, the report analyses the need for developing countries to develop sufficient capacity to use these tools effectively. In the case of developing countries, technical expertise on the use of such instruments is lacking and there is a need to establish and train institutions at national level. Use of such instruments without sufficient knowledge can result in adverse effects.

The report in its totality is an important document to be studied by Sri Lankan policy makers. Although it is meant for the G20 countries, the recommendations can be adopted to suit local conditions. Managing price volatility with long term action plans instead of taking short term decisions when a crisis occurs is one such recommendation which fits us.

(Manel de Silva holds an Honours Degree in Political Science from the University of Ceylon, Peradeniya and has engaged in professional training in Commercial Diplomacy at ITC and GATT. She has served as a trade diplomat in several Sri Lankan Missions overseas and was the first female Head of the Department of Commerce as Director General of Commerce.)