Climate change report emphasises food supply effects

The latest UN report on climate change emphasises food supply effects: Climate change.

The report argues that climate change has negatively affected wheat and maize yields both regionally and on a global basis. The effects of climate change on two other important food crops, rice and soya beans, have been smaller in the most important producing countries. There may be some positive effects on crops in cooler climates in future. However, the overall outlook for wheat, rice and maize production in tropical and temperate regions is expected to be more negative than positive.

The last assessment by the UN's Intergovernmental Panel on Climate Change in 2007 was more sanguine about how climate change was impacting on food production. Unfortunately, the suggestion that the CAP might incorporate a climate change pillar was rapidly dropped in the last set of reform negotiations.

The politics of grains

Few commodities are more politicised than grains. They were the first products to be covered by the Common Agricultural Policy. The US has run export subsidy schemes for them in the past. International trading houses like Cargill are involved.

Fear has gripped the wheat market with prices soaring as investors buy against the backdrop of the crisis in Ukraine. Concern about freezing weather in major growing areas in the US has also helped to push up prices by about 20 per cent since the end of February. Ultimately this could boost inflation by affecting prices of goods in the shops.

The so-called Black Sea grain region of Russia, the Ukraine and Kazakhstan accounts for a fifth of world exports. Exports from this area are particularly important in North Africa and the Middle East.

In the longer run, production in Ukraine could be affected by higher prices for inputs because of the weakness of the hryvania and difficulties for farmers in accessing finance. If Russian tanks actually came charging across the steppes of eastern Ukraine, even more disruption would occur. On the more positive side, exports of Ukranian wheat to Europe could increase.

In Britain, 'Nimbys' are using food security arguments to reinforce their case against building on 'green belt' farmland. However, it is important not to panic. Global production forecasts are of 700m tonnes, only slightly down from 709m in 2013/14.

Good objective, wrong means

Choosing the right policy instrument to achieve your policy goal is of central importance in designing and implementing an effective agricultural policy as I argued in an article in West European Politics in 2010:
Policy instruments

I am very much of the view that environmental policy needs to be embedded in the CAP, but one has to do this in a way that achieves ecological objectives without unnecessarily undermining production.

The Commission's notion of a 'balanced' rotation seems sensible on the surface. After all, farmers rotate their crops for agronomic reasons that have been understood for centuries, at least in principle.

Monocultures of wheat and oilseed rape (canola) crops have been becoming more extensive in Europe and they can have a landscape impact, although personally I quite like the yellow of oilseed rape.

Part of the Commission's motivation seems to be an idea that rotation would cut the pesticide bill, but there are other ways of doing that. It could also disproportionately hit farmers on heavy soil who rely on wheat/wheat/rape rotations.

The proposals require farmers to grow at least three different crops, with none exceeding 70 per cent of the total farm area and the third not less than 5 per cent.

Not only is this meddling in business decisions, it also could hit small farms very hard as only those below 3 hectares are excluded. Member states with many small arable farms may have something to say about this.

In the meantime the Commission really needs to send this proposal back to its Daft Ideas Department and return to the drawing board.

UK can compete - so does it need subsidies?

Russia and Romania may be two of the cheapest places in the world to produce wheat, byt the UK is only a little way behind. Releasing the result of its Global Cost of Production Challenge, Bidwells Agriculture head of research Carl Atkin, said that despite the higher unit price of inputs in the UK, cost of production per tonne is only marginally higher than in eastern Europe. 'This is because of the considerable yield advantage the UK has, based on first-class soils and a maritime climate.'

Western Europe's temperate maritime climate produces one of the longest and most suitable growing seasons in the world for wheat, Mr Atkin explained. While the soils in eastern Europe and the former Soviet Union are often of equal or better quality, climatic and weather constraints temper output. In addition, there is considerable yield volatility in other parts of the world, where occasional crop failures need to be factored in. This is partly why UK what production costs per tonne are lower in Australia, Brazil and Canada.

Moreover, post-farmgate costs needed to be factored in. These can be substantial if infrastructure is poor and costs-to-market are high, as is generally the case in Russia. Costs are rsing in places such as Russia and Romania faster tham in, say Australia and Canada, as land and labour costs escalate.

If UK wheat can compete on world markets, do large-scale arable operations in East Anglia really need subsidies to be viable? Of course, re-directing CAP payments elsewhere could simply subsidise efficiency. Introducing a measure such as a cap on payments to large farmers would disadvantage the UK relative to other member states. But this analysis does raise questions about whether blanket subsidies are still required.

Grain supply deficit by 2009-10

Grain stocks are projected to rise by 39 per cent this year to 160m tonnes after Russian and the Ukraine planted large crops in response to rising global prices. But, according to Societé Generale, the global wheat crop could shrink to around 642 million tonnes in 2009-10.

This still a bumper harvest by historical standards but significantly lower than last year. With consumption expected to increase to 657m tonnes, the market could see a supply deficit by the end of 2009-10. This could contribute to what is expected to be an era of volatile prices.

An important factor in the situation is the disapperarance of Argentina as a reliable exporter. Farmers there are due to start planting the 2009-10 crop in less than a month and there could be a fall of some 30 per cent on the 2008-9 season and the lowest since 1902-03 when Argentina was starting to earn a reputation as the bread basket of the world.

The decline stems from three years of misguided government intervention in wheat trading in which farmers are periodically banned from selling overseas; a 23 per cent tariff on exports; and a serious drought that has slashed exports. A long-running conflict between the government and soyabean farmers will slash export income this year. Lower wheat planting levels will lead to a bigger shift to soya, though, which is Argentina's biggest cash crop.

El Tejar, one of Argentina's leading agricultural groups, has frozen investments at home and is looking elsewhere in the region, such as neighbouring Uruguay and Brazil, where the regulatory hurdles that plague Argentina are absent.

The whole history of Argentina over the last hundred years is an object lesson in how political meddling can undermine a country's propserity. As far as farm trade is concerned, export taxes are just as much a distorting mechanism as import barriers.