Why lack of data affects food prices

One of the outcomes of the G20 food summit last week was an agreement to create a global database in an effort to better measure the level of supply, consumption and inventories of staple foods.

There is a justifiable view that insufficient information is contributing to volatilty in food markets. A price spike in 2007-8 was triggered by a fears of a shortage leading to bans on overseas sales and the hoarding of supplies. However, when better data became available, it was evident that fears of a shortage were misplace.

Outside the US little is known about the true state of supply, demand and inventories of staples. China, Russia and India are unwilling to share information with others about stocks in particular because they fear they could lose control over prices. Indeed, in China, such information is regarded as a state secret.

An earlier G8 initiative on oil markets is still struggling ten years after it was initiated. The agriculture market information system (Amis) has insufficient resources with the project based at the cash-strapped Food and Agriculture Organisation of the UN.

It's a good idea which should enable markets to work better but whether it can be really effective remains to be seen.

Sarko's regulation crusade makes modest progress

President Sarkozy of France has been on a crusade to regulate agricultural commodity markets and he made modest progress at a two-day G20 conference in Paris last week. France made food security and commodity regulation a centrepiece of its G20 presidency after the 2007-8 food crisis and the rise of more than a third in global food prices over the last year.

France was able to secure a diluted deal to recommend that G20 finance ministers tackle the regulation of financial commodities markets. The communiqué agreed at the end of the Paris summit echoes an earlier deal by finance ministers to study limiting the number of contracts speculators can hold.

However, some argue that commodity markets bring a much needed liquidity to the farm sector. Last week the World Bank took the rare step of encouraging developing countries to buy insurance in the derivatives market against sudden changes in food prices with a deal that would allow the nations to hedge some $4bn worth of commodities.

The World Bank has struck a deal with investment bank JPMorgan who would offer simplified hedging instruments to the private sectors of developing nations, including farming co-operatives and food processing companies. The World Bank would underwrte $200m in credit risks while JPMorgan will take on a similar amount. It is anticipated that other banks will join later. Some critics would, of course, just see this as evidence that the World Bank is hand in glove with global capitalism.

The real problem with the G20 summit is that it backed away from action on biofuels and export bans. The subsidised encouragement of biofuels has boosted food prices. Marie Brill of ActionAid said it was a shame that the G20 had ignored a clear recommendation in a commissioned report from international groups to remove subsidies and mandates for biofuels. There are, of course, powerful interests in the US in particular linked to biofuels which are seen as a means of underpinning American energy security.

On exports, a report from the World Bank and the UN's Food and Agriculture Organisation said that 'export subsidies by major food exporters had strong destabilising effects on international markets' and recommended that the G20 use them as a last resort.

Threat to biodiversity funds

The RSPB and Defra are concerned about a potential threat to funds paid under Pillar 2 of the CAP to support biodiversity and wildlife schemes: Biodiversity

It would be very unfortunate to say the least if savings in the CAP budget were made by capping payments that compensate for the provision of positive externalities for which there is the strongest case for public subsidy.

The bulk of any reductions should come from the SFP, although the concern here is that an attempt will be made to penalise efficient and competitive farms by capping payments. MEPs have been urged to vote against these proposals: Capping

A risk management toolkit?

Farming as an activity is highly exposed to risk, in large part because of natural factors such as variable and unpredictable weather which are beyond the control of farmers even with modern agronomy and technology and a more knowledge intensive agriculture

As part of CAP reform the Commission has suggested the creation of a 'risk management toolkit' as part of the Rural Development Measures under Pollar 2. National governments of the member states might be given the option of choosing from a menu of options and receive co-financing from Brussels subject to an upper limit. One proposal is some kind of income safety net constructed in a way that is WTO compatible.

Stefan Tangermann is a highly respected agricultural economist who served as head of the agriculture and food division at OECD. He has produced an analytical paper on the subject of risk management and the future of the CAP: Risk management

Justifying farm subsidies

There's been an interesting debate in the pages of the New York Times Book Review about the work of Freidrich Hayek.

Peter Dreier, a political science professor in Los Angeles, wrote in to justify some forms of government intervention. However, even he had a few problems when he came to farm subsidies.

He argues that 'during the Depression, federal agricultural subsidies saved family farms and rural jobs.' Anyone taking a social market position would accept that you have to take exceptional measures in a recession. The problem is that temporary crisis subsidies become permanent and create a set of clients who are prepared to use time and resources to lobby in their defence.

Drier admits, 'Today, a vast majority of farm subsidies go to large agribusiness conglomerates that don't need them, rather than to small family farmers.' It's an interesting question whether marginal businesses should receive some general subsidy as distinct from rewards for positive externalities such as environmental goods.

He goes on to say, 'food stamps, an indirect subsidy to farmers, clearly improve the general welfare.' However, that is the trick. By wrapping up subsidies to the poor in the farm budget, the agricultural lobby is able to win the support of Democratic urban congress members who otherwise would have no interest in maintaining farm subsidies.

It looks like there is an appetite in the House of Representatives to cut them against the background of an out-of-control federal budget deficit but it will be interesting to see what the eventual outcome is.

By the way, if you haven't seen it already, I would recommend the 'Keynes and Hayek rap': Rap . There is also a Round 2 in which JMK and 'Freddie' go toe-to-toe on the current recession.

France uses E.coli scare to boost CAP

France's agriculture minister Bruno Le Maire has used the E.Coli outbreak in Germany to defend spending on the CAP. Pointing out that 17 people had died, he commented, 'I too would like us to be able to cut the budget [Really?], but we will have to explain to consumers that we will also have to cut back the sanitary controls that are partly paid for the common agricultural policy ... at a time when we are facing a big sanitary crisis.'

Mr Le Maire, who may become finance minister of Christine Lagarde goes to the IMF, called on member states to make a 'courageous and responsible decision' in negotiations over the budget for the CAP after 2013. In other words, minimal cuts.

This really is a presposterous and obnoxious piece of shroud waving. It would be perfectly possible to decide to maintain sanitary and phytosanitary spending whilst reducing the SFP.

Who compensates farmers and to what extent for the economic consequences of the E.coli scare remains to be seen. The amount available from the CAP has been topped up, but the question is how much cash strapped member state governments can afford, not least in Spain.

The German agriculture minister does not come out of this well. First, Germany went in to 'Club Med' mode, blaming it all on poor Spanish hygiene. Subsequently they have been unable to definitively identify the source of the outbreak.