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Agricultural price spikes are inevitable – like earthquakes

27 July 2011

ICTSD has published a paper by the influential economist Professor Stefan Tangermann, in which he sets out in detail the evidence and reasoning underpinning the G20 inter-agency report on food price volatility. The broad findings are similar to those of the Inter-Agency Task Force in the G20 report. The paper reviews the experience during the 2006–08 price spike, the policy responses that were attempted in developed and developing countries, and the lessons that can be learned from them. It also includes a more cursory look at the rise in food prices in 2010.

Professor Tangermann rejects a single-cause explanation of the 2006–08 price rises, arguing instead that ‘a complex web of factors’ was the cause, making it ‘impossible to attribute precise quantitative weights’ to any one of the interacting factors. Rising energy prices and a depreciation of the US dollar set the stage for the rapid increase in prices, but cannot explain it. He considers but does not accept the case that financial speculation on futures markets was a major contribution. Rather, a decisive factor was the low stock-to-use ratios for major cereals, which ‘created the conditions under which prices could explode’. This caused panic, which led in turn to the last stage of a bubble as some countries restricted exports.

In responding to the crisis, the paper notes that developed countries mainly used social safety nets to cushion vulnerable consumers. Developing countries, however, used ‘all conceivable measures, from interventions in trade and domestic markets, through run-down of stocks, to social safety nets’, but with limited success. In many cases, ‘the market interventions did not have the intended effects’.

The paper found that most of the measures to cushion price rises that have been suggested during the crisis and since, did not work when tried in the past. This belief that spikes are inevitable and cannot effectively be cushioned leads to a conclusion that is ‘as disappointing as it is important’: ‘There is no effective way of doing much about price behaviour on world markets for agricultural commodities.’ It is something with which developing countries just have to live – hence the analogy with coping with earthquakes in seismically active areas. The paper underlines the importance of trying to ‘minimize the negative implications of volatility’ and trying to ‘mitigate [the] most detrimental negative impacts’, notably by cost minimisation through appropriate precautions and planning. In addition, while social safety nets ‘can effectively shield poor consumers’, they must of course be established when there is no crisis and must be supported by adequate contingency plans (which could include emergency food stocks as ‘protection against the extreme cases where product is no longer available at the international market’). The paper notes that ‘the international donor community can do much to support these efforts’.

Editorial comment

The ICTSD paper provides much of the supporting evidence and analysis underpinning the statements – necessarily brief and bald – in the Inter-Agency Report dealing with a wider range of issues. Like the Inter-Agency report, Professor Tangermann’s paper provides an authoritative, but more detailed, statement of the consensus view held by many trade economists and trade and finance agencies. As such, it should be obligatory reading for those concerned with mitigating the adverse effects on developing countries of the next price spike which, like earthquakes, is inevitable.

At the same time, others will dispute its conclusions on the frequency of spikes, the role of financial markets, the scope for dampening cyclical market movements, and the effectiveness of the alternative remedies actually available to developing countries. Such debates will never be ended conclusively, given that clear, ranked lines of causality cannot be proven, and that the failure of an approach in the past does not prove absolutely that an adaptation of it will fail in the changed circumstances of the future. But, even if the author’s limited number of preferred remedies are not accepted by all, at least the analysis of how underlying ‘problems’ can get turned into crises and of the shortcomings of many past interventions could help to improve the effectiveness of responses next time around.

These are critical issues for ACP governments, given the net food-importing status of most ACP countries and the impact which high global food prices and domestic shortfalls are having on efforts to promote regional trade integration. The ongoing debates and exchanges around the cereals trade in the East African Community, with export bans on intra-regional trade being imposed and challenged, are a case in point (see Agritrade article, ‘ Maize trade-policy decisions highlight need for closer regional policy h...’, July 2011).

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