Food and economics 101

Food and economics 101
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First Published: Tue, Jun 03 2008. 10 21 PM IST
Updated: Tue, Jun 03 2008. 10 21 PM IST
The steep rise in global oil prices has perhaps distracted us so much that not enough attention has been given to what has been happening to food prices.
Wheat is trading at a nine-month low in the international markets. Rice has become cheaper in recent weeks. There is no reason as yet to declare that the global food crisis is over. But the drop in food prices shows that trusting the basic laws of economics and sensible international cooperation can help the poor far more than panic moves to control prices and ban exports ever will.
The fall in the price of rice can be traced back to a congressional testimony by an Indian economist — Arvind Subramanian, a fellow at the Centre for Global Development (CGD) and the Peterson Institute, two think tanks in the US. Subramanian told US legislators in the middle of May that Japan was sitting on 1.5 million tonnes (mt) of rice that it had imported from the US. “Releasing this rice to global markets would prick a speculative bubble and bring rice prices down fast, while also encouraging China and Thailand to release their surplus stocks,” noted a CGD policy note released a few days before the congressional testimony.
That is indeed what happened. The Japanese government agreed to send some of its food stock into the global market by selling 250,000 tonnes of the cereal to the Philippines. Much of this was rice that Japan had earlier imported from the US. The latter could have used global trade rules to prevent the re-export of “its” rice. The US did not press charges. Rice prices dropped.
Countries such as Cambodia have been emboldened to ease export curbs on rice. Other rice exporting nations may follow, especially as some of them are expecting better production this year. The modest fall in global rice prices—which are still at gut-wrenching heights for the poor — has been the result of enlightened international cooperation. And it also illustrates that protecting national food mountains at any cost will push up food prices further. Some element of food security is fine. But blanket bans on the export of food will eventually starve the global markets and harm consumers.
India has a lot to learn from this episode. Its own mercantilism has been uninspiring. Here’s what the CGD blog says in a recent posting: “India, which set off the current rice crisis, is a prime candidate for…diplomatic initiative. Unusually large wheat imports in 2006-2007 following weather-related damage to the wheat crop set off a firestorm of criticism, from farm interests and the political opposition. With a view towards upcoming state elections in November, the ruling coalition decided to pursue a ‘starve thy neighbour policy’ — curtailing wheat imports and boosting staple stock by banning exports of non-basmati rice. This triggered rice export bans and hoarding elsewhere in Asia.
“Now, however, India is facing record rice and wheat crops, which are expected to shatter last year’s record food production by 10mt! The Indian government has also rebuilt its food grain stocks to very comfortable levels. The time has come for Delhi to reverse course and once again allow buyers in Bangladesh, Sri Lanka, and the Middle East to buy India’s excess stocks.
“The food ministry is supportive of a proposal to resume exports to ‘strategic neighbours’ and the government reportedly is considering a proposal to allow 1.3mt to (select) African markets. The trade ministry, however, apparently is opposed, while the agriculture ministry appears to be neutral. With India sitting on food grain stocks that exceed its targets, Delhi should do its bit to help alleviate the crushing world rice prices which are hammering the global poor.”
Shanta Devarajan of the Asian Development Bank (ADB) has shown how rice prices in Dhaka spiked each time the Indian government chose to either impose an export curb or raise the export price. Of course, dealing with a country such as Bangladesh, which hasn’t exactly been friendly towards India in recent years, should also involve geopolitical calculations. But the general point stands—smart international cooperation and a belief in markets will help ease food prices.
The Food and Agriculture Organization (FAO) is currently hosting a food summit in Rome. This is one indication that the genie of high food prices is still out of the bottle. FAO says in its new Agricultural Outlook that food prices in the next 10 years are likely to be higher than their average over the past decade.
Meanwhile, there are signs that high prices have (not surprisingly) acted as incentives for farmers to produce more food. A BBC report says that farmers in Afghanistan “are turning from opium to wheat because it pays more at current rates”.
Letting markets work, keeping borders open for trade and sensible cooperation usually works in most circumstances. There is no reason to believe the food crisis is any different.
Your comments are welcome at cafeeconomics@livemint.com
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First Published: Tue, Jun 03 2008. 10 21 PM IST