Tuesday, April 8, 2014

Global Food Crisis Fast Approaching Perfect Storm

In an exclusive interview to the ECSSR website, Dr. Eckart Woertz (Visiting Fellow, Princeton Environmental Institute) expressed concerns over alarming indicators that point to “structurally higher food prices” in the future and called on the GCC states to work toward strengthening
Dr. Eckart Woertz
global food markets to arrest a ‘paradigm shift’ in prices of essential food commodities. The interview was conducted during the Center’s 17th Annual Conference entitled: “Water and Food Security in the Arabian Gulf.” Following is the transcript of the interview:
Q Do you see signs of a new global food crisis in the making? Do scientific data and statistical projections point to any developing trend in this regard?Ans: Well, food prices are already very high. After prices fell following their alarming rise in the second half of 2008, the sense of urgency had disappeared. However, the problem has returned with a vengeance since 2010. In fact, some of the food items are now even more expensive than they were in 2008. However, the situation is not as critical this time as it was in 2008 when it comes to storage. Even on the supply side we don’t have the wave of export restrictions we had in 2008. Recently, we had export restrictions announced by Russia, but this is an exception. But still prices are as high, in some cases higher, than they were in 2008. Thus, there is strong indication that some kind of paradigm shift in commodities prices is taking place and that food prices will be structurally higher in the future than in the preceding two decades.
Q Could you elaborate on what you mean by “structurally higher food prices”?Ans: Just as in oil, where we have experienced structurally higher prices than before, we have structurally higher food prices today. There are certain underpinnings to this trend. First, productivity growth in developed and agriculturally rich countries has declined, so we do not have this strong addition of productivity growth rates as we had in the past. In some countries, that had bypassed the green revolution as in Africa, there may be some room for increased productivity. However, since the 1990s we find productivity growth rates have receded. There is still going to be growth but not to the same extent. At the same time agriculture is facing constraints partly of its own making in the form of erosion, water pollution, climate change. It is estimated that agriculture is contributing to about 15 percent of global climate change, for example through methane emissions caused by livestock, nitrous oxide emissions through fertilizers. Another 11 percent is caused by deforestation, which is often undertaken to clear land for agriculture. On the demand side we have seen an increase in bio-fuel production. OPEC estimates that 30 percent of rising price of grains by 2020 will be attributable to demand for bio-fuels. Then we have the shift toward more meat-based dietary trends in the emerging markets, of course meat needs so much more water and land than cereals, so we have a kind of perfect storm brewing.
Q. There is also the much debated issue of speculation and the way it often adversely affects food prices. So, are you heartened by remarks of international investors as they are adding agriculture to their scope of activities or do you fear that speculative trade will cause food prices fluctuations?Ans: Financial speculators cannot create a market out of thin air. There are fundamental and structural reasons for the rise in food price and we should not always blame everything on speculation. I think politicians often use speculation as a cheap excuse. But we have to see whether recent financial speculation has contributed to rising food prices. As far as the entry of commodities investors are concerned, if a speculator goes into commodities and jacks up the price it is undoubtedly a bad thing. However there is some beneficial speculation that is tied to the physical producers and provides hedging services to farmers and actual producers, but these services should be provided by regulated brokers like they were provided before the year 2000 (i.e. before commodity markets in the US were deregulated). Thus, most of the financial players that we see in the market now like hedge funds or pension funds should in principle be out of it. They were not there before the market was deregulated in 2000, and I don’t see a need for such speculation. The unfortunate thing is that despite a lot of debate effective regulatory reforms have not taken place. As commodities are one of the last sectors where banks still make money one imagines they are fighting tooth and nail to cling to this cash cow. Thus, financial speculation can be good if it offers liquidity and hedging services to markets but only if it is tied to physical production vis-à-vis trading.
Q. What are your views on investments being made in agriculture by countries with huge financial reserves, like GCC states, say in underdeveloped countries in Africa and Asia?Ans: There can be beneficial investments in agriculture. There has to be rehabilitation in irrigation infrastructure in places like the Gezira schemes in Sudan or the Punjab in Pakistan and so on. However, it has to be said that some of the agricultural investments that have been announced are controversial because they are large-scale and have been announced in some countries where land tenures are insecure, where land rights are not clear, or there are a lot of customary land rights by small-scale farmers and pastoralists. Thus, there needs to be a debate and I think there is room for sustainable intensification in agriculture in developing countries and there can be a beneficial impact of some countries, like Gulf countries. But if these investments are made in the wrong fashion, i.e. in a top-down approach or a capital-intensive large-scale approach is adopted that leaves the local population aside I see a lot of problems there. Moreover, we see a lot of these investments as just announcements. Sometimes grandiose announcements are made but when you go to the African country you do not even know where the land lease is, not to mention the first signs of the implementation of a project. Agriculture is a long-term business and it takes years and decades to know how it all turns out.
Q. You have been emphasizing the need for strengthening international food markets and regulations as being more important to GCC food security than the search for exclusive bilateral access to food production. However, how could a bloc or a country unilaterally strengthen international food markets and depend on such efforts to provide it security in food?Ans: You cannot do this single-handedly but you can do so in cooperation with others. The UAE can play a role alongside Saudi Arabia, which is a member of the G20. It can support France which has raised the issue of curbing commodity speculation so why not work together with France and why not participate in debates in the UN on say the development of an international food reserve.
Q. But what should a country or a bloc do in times of a major food crisis?Ans: You see, even now the GCC gets almost all its food from the world market and is largely food secure. In a crisis situation, it is understandable to seek privileged bilateral access to food production, but why do you seek this in countries like Sudan, Pakistan and Ethiopia —one of the largest recipients of food aid in the world—who are not a natural partner in a crisis situation? A natural partner in a crisis situation should be a net food exporter with an established track record to deliver, transport facilities and possibly some military power to ensure supply lines. The GCC has good relations with such food exporting countries, like the US, Canada, Australia and European states. Historically, Gulf politicians have been very adept at forging political alliances that ensure food supplies. I don’t see that the most important partners for this kind of privileged access to food production will be developing countries where agro-investments have been announced because they are food insecure. Having said that these investments might have a beneficial role if they are undertaken in the right fashion, but this idea that an African country becomes the bread basket of the Arab world and delivers privileged food to the Gulf, I don’t really see that happening.
Q. But isn’t there a concern that in the wake of the global economic crisis protectionist tendencies could cause a possible man-made food crisis?Ans: Well, we have seen protectionist tendencies to protect industries. But when food export restrictions were announced in the past they were not out of fear of competitiveness but rather out of fear of domestic food price rises. So there is a need to make global food markets more transparent, we may probably need to have the equivalent to the International Energy Agency (IEA) for the exchange of market intelligence about food. In the same way we can have some coordination on national food reserves or maybe an international food reserve, etc. because the export restrictions of 2008 were not necessary in the first place.

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