The WTO’s Role in Resolving the Food Price Crisis: Relevant or Superfluous?
Executive Summary
I. A Broad-based Increase in Food Prices – But Still Below Historic Peaks
II. What Has Driven Recent Price Trends?
A. Consumption accelerates in India and China
B. Biofuels divert production away from food supply
C. Poor harvests have not helped
D. Oil/energy price hikes have put up farm and transport costs
E. Low yields remain a structural challenge
F. Speculation
III. What Are the Prospects?
IV. One Man’s Expensive Food is Another Man’s Improved Farm Revenue
V. The Short-Term Policy Responses
VI. What Place for Trade in Responding to the Food Crisis?
VII. Looking at the Crisis through the WTO / Doha Lens
A. Export bans and taxes
B. Market access
C. Domestic support
D. Export support
i. Export subsidies
ii. Export credits, guarantees and insurance programmes
iii. Exporting state trading enterprises (STEs)
iv. International food aid
v. Net-food importing developing countries (NFIDCs)
E. Trade Facilitation (TF)
F. New WTO accessions
Acronyms
Executive Summary
The current food “crisis” – essentially a situation of unusually high, and growing, demand met by inadequate supply, which has driven up global market prices sharply – has barely registered on the surface of the Doha negotiations. The Doha mandate was agreed in very different market circumstances. Does it matter; should delegations be reconsidering their WTO positions in the light of this change? The following Note seeks to provide some background and commentary that AITIC’s Participating Members may find useful in taking a view. Much is debatable and the significance of the “crisis” as well as the potential responses in capitals and in Geneva will depend on individual national circumstances – whether the priority is maximising exports, providing a basic food supply to local populations or developing indigenous agricultural production capacity.
The following are the headline points:
- The recent upward price trend in most agricultural commodities is sharp in comparison to trends over the past two decades but, in real terms, has not yet come close to the peaks reached in the early 1970s.
- Some correction is already taking place in the markets for some products. However, the expectations are for fluctuating but not significantly lower prices over the next decade.
- Price increases have been driven by a variety of causes, among them: large consumption increases in China, India and some other emerging markets; diversion of certain crops from food to biofuels production; poor harvests; oil and gas price hikes and continued low production yields in most non-OECD countries.
- The short-term policy responses have been significant and varied: lowered import tariffs and expanded tariff quotas; export bans, restrictions and taxes; price controls and food assistance; transfers from national stockpiles; and subsidies. There are initiatives by international agencies and regional financial institutions also.
- Trade continues to play a small but crucial part in global agricultural activity – some 20 per cent of global wheat production is exported, although the proportion is far less for rice and meat. Farm products accounted for only 6.4 per cent of total merchandise trade in 2004. Over 130 countries are now engaged in global food trade in varying degrees, but no more than half are consistently in the market.
- From the perspective of the WTO and the Doha mandate, there is little, if anything, on the table, at present that might impact on the immediate price “crisis”.
- Further down the road a Doha deal might have some longer-term relevance:
- A trade facilitation agreement would potentially have the broadest and most practical impact, particularly in terms of farm development and distribution in poor countries.
- Better disciplines on export bans, restrictions and taxes would provide greater food security for those WTO members reliant on imports.
- Market access impacts depend entirely on national circumstances with a balance to be drawn between retaining margins to raise and lower tariffs to meet specific supply situations and providing a stable investment environment to spur local agricultural development.
- The current draft Green Box provisions provide substantial scope for rural development and meeting national dietary needs. Aggregate Measurement of Support (AMS) reductions will open up export opportunities for those members in a position to compete on global markets and, hence, help increase the amount of agricultural products traded. Subsidies in the biofuels sector may well be reduced as public objections to them grow; otherwise they will be challenged through national trade defence instruments (such as antidumping, countervailing measures, safeguards, etc.) and WTO dispute cases.
- Given the low level of such expenditure currently, the elimination of export subsidies will have little impact on price or supply. Disciplines on export credits and state trading enterprises should have a modest effect in removing trade distortions and therefore encouraging local producers.
- The international food aid provisions of the draft modalities will likely have a very mixed impact. Uncertainties remain over the relevance of the “safe box” to extended periods of high and unaffordable prices to food-aid dependent countries. The US appears unable to continue to provide high levels of food aid if such aid cannot be in-kind. Certainly, in the present market environment, traditional food-aid levels are not going to be available and least-developed countries (LDCs) and net food-importing developing countries (NFIDCs) will need to go to commercial sources. Thus, financing assistance will be necessary.
- The most important foreseeable events in the WTO that may have an influence on medium-term food supply/price conditions will probably be the accessions of Russia, Ukraine and Kazakhstan. These countries together have a large, and potentially very large, share of the global cereals and energy markets.
I. A Broad-based Increase in Food Prices – But Still Below Historic Peaks
1. That global food prices have risen sharply over the past five years is hardly in dispute. FAO/OECD figures [note 1] show the price of wheat moving from an average of USD 152 per tonne in the period 2001/2002 – 2005/2006 [note 2] to some USD 204 per tonne in 2006/2007. In the first quarter of 2008 the export price was between USD 400 ( Argentina) and USD 500 ( US) per tonne [note 3], but the average has dropped back below USD 400 per tonne since. The international price of rice moved from USD 238 per tonne to USD 311 per tonne in the same period and has since pressed upwards to nearly USD 600 per tonne (Thai white). Among the more dramatically impacted dairy products has been skimmed milk powder, which advanced from USD 186 per 100kg to USD 235 per 100kg; now it is nearer USD 300 per 100kg. Average prices of vegetable oils on international markets rose from USD 520 per tonne to USD 591 per tonne (Malaysian palm oil export prices are currently over USD 1000 per tonne). On the other hand, most meats were traded at prices only mildly up from the earlier period, or essentially unchanged. (NB. In the past three years, the international price of cotton has increased by over 50 per cent.)
2. While these increases have had drastic effects in both developed as well as developing markets, it is worth keeping mind that current prices are, even now, not high by historic standards. In 2004, the Food and Agriculture Organization (FAO) was still despairing the long-term downward trend of most commodity prices. In fact, in the forty years ending in 2002, real prices for agricultural commodities had dropped by nearly 50 per cent on average even if some had enjoyed a spike in the mid-1970s that still towers above that seen recently.
3. A second point to remember is that comparatively high prices on international markets do not automatically translate into price hikes in the shops for consumers. For one thing, many consumers in countries whose currencies have appreciated against the US dollar in the past two years will have enjoyed some shelter from the impact of dollar-denominated export prices. Second, one estimate [note 4] for the United States suggests that on average 20 cents of each dollar spent on food is the share accruing to farmers – i.e. that representing the basic cost of the commodity. That proportion will vary but, nevertheless, where prices rise in the shops a range of other costs and profit margins may be in play. Not the least of these is now the price of oil and oil products – especially as they impact food transport costs and other inputs that help determine shelf prices. Much also depends on the level of competition at the wholesale and retail levels; not all cost increases are passed on to the consumer.
II. What Has Driven Recent Price Trends?
4. The factors that appear to have provoked the rise in global food prices are well rehearsed.
A. Consumption accelerates in India and China
5. The world’s two most populous countries along with other significant emerging economies have enjoyed a decade or more of rapid growth following sustained economic liberalisation. As incomes have risen so diets have improved (including towards more meat and dairy products) and demand for imported foodstuffs – above and beyond what can be produced by domestic agricultural capacities – has increased dramatically. In some instances, domestic demand has cut into production previously intended for export.
6. India and China, together with the EU, are the world’s largest wheat producers. China is the league leader (105 million tonnes in 2006) but is also becoming a large wheat importer (over 7 million tonnes in 2004). In the case of India, production is around 75 million tonnes a year while consumption is 70-72 million tonnes a year. It is not yet a large importer, but stocks and production are not expected to keep up with demand growth and India is reported to have entered, in recent weeks, into futures contracts to step up imports.
7. China is now importing around half as many oilseed products as it produces domestically (123 million tonnes in 2007, according to the FAO.) This figure has been rising rapidly over recent years. China’s imports of all meat products have also been increasing significantly reaching nearly 9 million tonnes in 2007, about 7 per cent of consumption. China also now imports dairy products equivalent to around 10 per cent of its production.
B. Biofuels divert production away from food supply
8. The remarkable boost in demand for food products in India and China was not foreseen when the WTO’s Doha negotiating mandate was agreed in 2001. The switch of much agricultural production from food supply to biofuels was even less noticeable on the radar screen. For a short period, that redirection of farm activity in the US and EU appeared to be a useful, eco-friendly means of both reducing dependence on Middle East crude oil supply and permitting the governments concerned to continue subsidising farmers who might otherwise go out of business in a more competitive environment for global trade in food products.
9. However, the economics of ethanol and bio-diesel production – at least those “first generation” biofuels based on wheat, maize and other food crops produced in developed countries – is increasingly challenged [note 5] in terms of the potential to replace a significant portion of fossil fuels, possibly negative climate change impact as well as the effects on food prices. The arguments for biofuel production in poorer countries are often seen as more favourable for community farming as well as for large scale industrial (and export-oriented) production based on sugar-cane ( Brazil) or “second generation” biomass technologies that are not yet developed.
10. Whatever the arguments for and against, there is no denying the rapid growth in biofuel production whether through farmers switching from food crops or bringing land back into production. Subsidies in OECD countries combined with targets for the use of biofuels in transport fuels or renewable energy have had a big impact on agricultural activity. In the US, for instance, ethanol production from maize doubled between 2003 and 2006 to 55 million tonnes and almost doubled again in 2007. The pattern in the EU has been different to that in the US with the emphasis on using oilseed (rapeseed) production for bio-diesel. Thus, oilseed production for biofuels has quadrupled since 2002 to over 10 million tonnes. Wheat for ethanol production is only now beginning to take off. Canada’s biofuel programme is relatively small. The International Energy Agency has reported that in 2005, the US, EU and Brazil accounted for 95 per cent of world biofuel production with China, India and Canada producing most of the remainder.
11. The OECD countries are directing many billions of dollars towards biofuel subsidies – probably at least USD 7 billion in the US and more than EUR 3.7 billion [note 6] in the EU – and protecting their markets with tariffs that add some 25 per cent to the cost of imports, according to the OECD itself. Thus, world trade in biofuels is limited to about 12 per cent of global production only.
C. Poor harvests have not helped
12. With much debate about new and special circumstances affecting food prices recently, it should never be forgotten that one season of bad weather and poor harvests in a single major producer/exporter can heavily impact the ensuing market value of a commodity. Thus, lack of rain and consequent low wheat harvests in Australia in 2006 – indeed, for much of this decade – depleted stocks further and helped support a continued upward trend in the global price in 2006/2007. Production has since recovered in Australia with one estimate [note 7] suggesting that 2008 production may be double that of 2007 while wheat planting in the US was expected by the United States Department of Agriculture (USDA) to be up 6 per cent this year. With heavy rain and flooding in parts of the US, this latter forecast may now in doubt. A peak in international wheat prices (Chicago Board of Trade) appeared to be reached at the end of March and the average price has fallen by as much as 40 per cent since.
D. Oil/energy price hikes have put up farm and transport costs
13. Even in less sophisticated farm enterprises, producing food usually depends heavily on energy inputs. The cost of fuelling tractors, farm machinery, processing plants, refrigeration and storage units has fallen victim to the explosion in oil prices. Other inputs, whether imported or produced locally, are equally dependent on the cost of hydrocarbon feedstock, notably chemical fertilisers. Prices of some fertiliser products [note 8] almost doubled in dollar terms between 2006 and 2007 and doubled again in just the first three months of 2008.
14. Higher fuel prices mean getting produce to the market – even a local market – is naturally more costly whether transport is road or rail. Where it needs to move into the global market, freight rates have been rising sharply. Measured by the Baltic Exchange Dry Index (covering bulk commodities like grains) shipping rates have been highly volatile over the past few years but from a trough in late 2005, the index rose by around 500 per cent until December 2007, fell by one-half in January 2008 and then almost regained its peak by mid-May.
15. In one way or another – and even if partially sheltered by the falling value of the dollar – most of these energy-related cost increases are handed on to consumers of basic or processed food products in the shops.
E. Low yields remain a structural challenge
16. In the sense that high prices reflect too much demand and insufficient supply then the underperformance of much of the developing world in terms of crop yield is an unavoidable element in the causal mix. The Asian Development Bank [note 9] says that if crop yields in major producing countries that are below the world average could be increased at least to the world average, global production of wheat would rise by about 17 per cent and rice by 23 per cent. FAO statistics on grain yields show major developing producers like Argentina, Brazil and India improving performance substantially between 1993 and 2005/2006 but remaining one-half as efficient as grain farmers in the EU and US. Most Sub-Saharan African countries have cereal yields at around 2 tonnes per hectare, a level roughly equivalent to that of India in 1993. Thus, the potential to improve global output of most agricultural commodities remains immense even if there are questions about the sustainability of the techniques used to achieve high yields in the OECD countries. For the developing countries one of the issues that cannot be avoided if yields are to improve is that of genetically-modified crops where the potential is probably large but the politics often times problematic.
F. Speculation
17. Market speculation is sometimes blamed for part of the explosive increase in food prices. There is regular criticism of the operation of futures and options markets where investors take a view about future price trends but do not take delivery of any physical commodity. Currently, Congressional committees in the US are investigating the operation of these markets – notably the Chicago Board of Trade – and their responsibility for price hikes in the shops.
18. This is not the first time that the commodities (and currency) markets have come under fire. Their activities and the linked investment instruments are often extremely complex. Very large amounts of money hang on the movement of particular commodity indexes – usually the prices that will be paid for deliveries in the future. However, the sophistication of the markets and the profits and losses that can be made from investing in them should not obscure the essential realities on which their movements are founded. Major trends identified by the most significant market-leaders, and the positions they take, are essentially based on rigorous analysis of supply and demand coloured by many other factors – political environments, new technologies, exchange rates, energy prices, etc.
19. In highly volatile markets – especially with prices broadly rising – there is often a “herd instinct”. That is usually reckoned to lead to an over-shoot – with prices going up rather more than is justified in a rising “bull” market and then dropping more than is justified as the “bear” market retreats. But it is difficult to conclude that it is pure speculation – i.e. investment on the basis that if prices are rising now then they will continue to do so (a self-fulfilling prophecy) – that fundamentally drives the markets. Indeed, it is worth remembering that the futures markets are used to provide predictability and security to the revenues that farmers will receive when they harvest; many producers in developing countries now benefit from them. While there may be some excesses in the system it would be dangerous to act on the basis that such excesses account for the underlying challenges.
III. What Are the Prospects?
20. Although they can have positive short-term effects on business confidence, multilateral trade negotiations are largely about mid- to long-term trading conditions. Thus, the extent to which the Doha negotiations – and the more regular aspects of the WTO’s work (Russian/Ukrainian accessions, for instance) – are relevant to the current price/supply crisis depends on whether or not high food prices are here to stay or merely a troubling, but short-term, phenomenon.
21. As noted above, recent trends for some cereals suggest that, in the short-term, prices may be peaking. The issue is whether farmers can expect any significant and sustained fall from current levels in the coming five to ten years. Most farmers are realistic enough not to assume that two or three good years are any indication of future prospects. Yet the broad expectations in the market do not suggest the world will go back to a much lower level of commodity prices any time soon.
22. Take the fundamental question of demand in the large emerging economies. The OECD/FAO study bases its projections on an expectation that GDP growth rates in these countries – principally China and India – will fall from recent peaks but remain substantially higher that the best OECD levels up to 2016 at least. World population will grow at around 1 per cent per annum in the 2006/2016 period and will bring average income growth of around 4 per cent a year in Asia, Africa and Latin America – roughly double the levels of income growth in the OECD countries. These figures do not suggest any alleviation in food demand in large emerging economies; quite the contrary. Apart from wheat and coarse grains, the OECD/FAO findings suggest that non-OECD countries will consume a significantly increased share of global production of food products.
23. The prospects for biofuels are less clear. Certainly, projections point to an upward trend for the next decade with large tonnages of cereals production transferring to ethanol and bio-diesel output in the US, EU and Canada. However, growth tends to slow within the next five years and the current political debate on the economic and climate-change value of existing programmes and targets has lead to a rethink of the subsidies being allocated to biofuel production. Only in Brazil, does sugar-cane based ethanol production appear to be on a relentlessly upward course towards nearly 550 billion litres a year by 2016 (around ten times the levels expected in the EU and US). However, the clearance of large swathes of Amazon rain-forest to make way for biofuels crops is a growing ecological and climate-change concern. By contrast, ethanol production in China, based largely on maize, is expected to be no more than 3.8 billion litres by the same year. Whether second-generation biofuels based on cellulose turn out to be economically viable remains an open question.
24. The oil price factor appears more predictable, although historical experience suggests that today’s received wisdom can be turned upside down in a few months by unexpected events. When, in 2006, oil analysts predicted a USD 100 per barrel price the idea was greeted with scepticism. Current forecasts of a price double that level in the not too distant future are taken more seriously. As for food, energy demand in China and India, particularly, is not going to drop. Yet the drastic rise in crude oil prices is not based on any shortage of reserves. Oil in the ground is still found in vast quantities, the problem is investment in production – notably in Russia – which has fallen way behind growth in demand. That may change slowly, and so will the viability of other energy sources. For the moment, however, it would be foolish to plan on a return to the oil price levels a few years back.
25. Pushing up agricultural yields is clearly an element in the mix of determining future commodity prices. Whether, or the extent to which, it happens will depend on government policies in the poorer countries, on financing (a priority for the World Bank among other agencies) and on the future shape of international trade policies and subsidies in the developed countries. A key element will also be the extent to which more-productive genetically-modified crops are planted in the future.
26. It is difficult to justify arguments for a low-price scenario in the food sector for the coming decade at least. However, there will be plenty of volatility in prices even if they do not fall substantially or in any sustained manner. An additional area of volatility lies in exchange rates – especially the US dollar – and another lies in the historically low levels of stocks at present. The FAO makes the following observation [note 10]:
“However, what makes recent episodes differ from the past is that inventories are being kept at low (almost pipeline) levels, which makes prices particularly sensitive to unexpected changes. In other words, agricultural markets, and food crops in particular, may be going through a period whereby stocks, especially those in major exporting countries, no longer play their traditional role as a buffer against sudden fluctuations in production and demand. This change has come about because of reduced government interventions associated with a general policy shift towards liberalizing agricultural commodity markets.”
IV. One Man’s Expensive Food is Another Man’s Improved Farm Revenue
27. The “food crisis” is, of course, not a single, generally-applicable, phenomenon. Many countries, consumers, farmers and traders experience the “crisis” in very different ways. It is not an unreservedly negative situation. After all, as already noted, prices are not even close to the all-time highs in real terms. WTO negotiations have long been founded on the need to reverse the long-term downward trend in global commodity prices. That is the essential aim of eliminating export subsidies, reducing domestic support for farmers in developed countries and opening markets. Stop rich countries dumping farm products on world markets, went the argument, and help farmers in poorer economies meet their local market demand and start exporting.
28. Naturally, it is not that simple and the complications have been recognised, at least in part. The Marrakech decision on the LDCs and NFIDCs [note 11] is the most obvious example of such recognition even if – at least for some observers – it has never been fully or convincingly applied. The Uruguay Round Agreement on Agriculture contained other elements that were, in effect, escape routes from the potential impact of constraining subsidies and opening markets. The following paragraphs seek to illustrate how disparate are the impacts of the current “crisis”.
29. The FAO observes the situation in 82 “low-income food-deficit countries” (LIFDCs) which outnumber WTO membership in the LDCs and NFIDC groups [note 12] and includes both China and India. The April 2008 assessment by the FAO suggests a 1 per cent increase in cereals output (to 906.6 million tonnes) for the LIFDCs between 2007 and 2008. At 82.5 million tonnes, cereals import requirements for the group are estimated marginally lower in the 2007/2008 seasons than for 2006/2007, with food aid accounting for 4.6 million tonnes of that total. Evidently, only a small proportion of import requirements are met through food aid; for the most part procurement must take place on the commercial market. Thus, viewed from the point of view of import bills, the situation is dramatic: the cost of imported food to these countries as a whole was reckoned to rise from just under USD 25 billion to almost USD 39 billion. Some, but by no means all, NFIDCs benefit from the depreciating dollar against their own currencies.
30. What about the impact on poor people in the LDCs? Do high global food prices help or hinder local farmers in establishing market viability and, if they help, does that outweigh the broader impact of increased food prices in the shops? One recent attempt to clarify these questions is to be found in a World Bank research paper [note 13]. The authors looked at nine low-income countries. Unsurprisingly perhaps, they found that the increases in urban poverty stemming from higher food prices were generally larger than those in rural areas. The same applied to poverty gaps. But in almost every case, poverty increased in all areas and national poverty rates were raised. (An increase of 10 per cent in the rice price raises Cambodia’s poverty rate (USD 1 per day) by 0.5 percentage points; a similar increase in import prices of the considered food products in Madagascar raises the poverty rate there by 1.8 percentage points and 2.1 percentage points in Nicaragua.) Bringing the calculations up to date (end-March 2008), the authors “guesstimate” an average increase of 4.5 percentage points in the poverty levels in the nine-country sample. Such a result could be translated into a global increase of 105 million people (out of 2.3 billion) falling below the poverty line as a result of higher global food prices. Of course, this result would likely be substantially offset by the increased wealth of farming communities elsewhere – especially those engaged in exporting. But that would not be any compensation for the poorest.
31. The situation for other countries highly dependent on imported inputs for agricultural production is evidently worrisome. More expensive fuels, fertilisers, seeds and other agricultural chemicals all add to production costs and rebound back on local consumers or in export prices.
32. News reports also suggest difficulties in countries whose agricultural sectors are geared almost entirely to meeting export demand. Often producers are locked into long-term supply contracts with European, Asian or US traders, wholesalers and retail groups. Such contracts are profitable and farmers will naturally seek to avoid putting them at risk by failing to deliver. Governments – for instance, Argentina, Egypt (a large rice exporter as well as a NFIDC), Ukraine, Kazakhstan and Indonesia among others – are being pressed to ensure supplies on their domestic markets and have resorted to export bans and taxes in addition to price controls (see below).
33. Naturally, it is not only developing countries that feel the impact of high food prices. OECD economies may broadly enjoy food security but consumers are frustrated, even outraged, at the prices they now pay for bread, pasta, rice and other basics, which reflect global supply constraints. As noted below, that has led some governments to temporarily reduce import tariffs, in the process transferring price/supply strains elsewhere. Unfortunately for the WTO, the frustration of developed country consumers does not translate into demands for agricultural policy reforms, especially when it comes to domestic support for farmers.
34. Further, the negotiating positions of some advanced import-dependent WTO members – like Japan, Switzerland and Korea – are still partially founded on concerns about food security in the long-term; the need to protect non-competitive farming and keep farmers on the land. Japan, in particular, has experience of winding back levels of agricultural self-sufficiency only to be hit by serious breaks in supply of basic foodstuffs. In 1973, the US banned exports of soya beans, seriously damaging the soya processing industry and consumers in Japan. The following year, a report to the Trilateral Commission [note 14] commented:
“For years the United States has been trying to increase its farm markets in Europe and Japan to help balance its payments and the soya bean has been among products spearheading the campaign. But sudden shortage in the United States in 1973 produced an export ban, to increase supplies and damp down prices in America, so increasing the problems of shortage and inflationary pressures in countries that import soya and shifting the burden onto them. This kind of autarkic reaction could become increasingly prominent, now that the problems of scarcity are being added to those of abundance.”
V. The Short-Term Policy Responses
35. Governments have reacted in traditional ways to the shortages and price hikes of the past two years and the more acute situation in the early months of 2008. For a start, import tariffs have come down and quotas have been expanded or removed in a bid to secure supplies and reduce prices in the shops (e.g. Bolivia, Brazil, Cote d’Ivoire, Ecuador, Egypt, El Salvador, EU, Guatemala, Honduras, Indonesia, Mexico, Mongolia, Morocco, Nicaragua Nigeria, Peru, Russia, Saudi Arabia, Senegal, South Korea, Tanzania and Turkey).
36. Second, export bans, restrictions and taxes have been used by producers to allocate more domestic production to domestic consumption (e.g. Argentina, Cambodia, China, Egypt, Ethiopia, Guinea, India, Indonesia, Kazakhstan, Malawi, Pakistan, Russia, Serbia, Tanzania, Ukraine, Vietnam and Zambia).
37. Third, direct price controls have been imposed on bread, flour, rice and other basic foodstuffs; in some cases additional food assistance has been provided to poor consumers (e.g. Benin, China, Egypt, Ethiopia, Indonesia, Liberia, Malaysia, Mexico, Pakistan, Peru, Russia, Senegal, South Africa, Ukraine and the US).
38. Fourth, national stockpiles are being sold at subsidised prices on to local markets (e.g. Cambodia, China, Philippines, Russia and Thailand). Some governments have taken measures to rebuild stocks (e.g. India, Malaysia and Pakistan).
39. Fifth, additional subsidies are being offered to provide a boost to domestic food production (e.g. Argentina, China, Malawi, Mexico and Zambia).
40. The international responses are naturally divided between the need for emergency measures (notably through the World Food Program (WFP) if it can afford to secure the supplies necessary) and longer-term initiatives to be achieved partly through financing operations by multilateral and regional institutions. The World Bank is pursuing a “New Deal for Global Food Policy”, including donor funding of USD 755 million for the immediate needs of the WFP and focus on agricultural development measures. The IMF has stated that it is prepared to provide financial support for countries facing shocks in food prices and import bills. The FAO is developing a multi-pronged effort to build food security including the availability of affordable seeds, fertilisers and animal feed in poor countries.
VI. What Place for Trade in Responding to the Food Crisis?
41. Trade plays a relatively small part in global agricultural business. As a proportion of total merchandise trade its share has been falling consistently – from 11.5 per cent in 1985 to 6.4 per cent in 2004 [note 15]. According to US Department of Agriculture statistics only one sixth of global production (and consumption) of wheat was exported, in 2006. That is a relatively high proportion compared to other commodities. For instance, in the same year, only 28 million tonnes of rice was traded internationally to meet total global consumption of 413 million tonnes – i.e. less than 7 per cent. Exports of beef and pork accounted for just 8 per cent of consumption while 20 per cent of oilseed production was traded. The OECD countries still dominate trade in farm products but G-20 nations like Brazil [note 16], China and Mexico are creeping up the rankings.
42. More countries are now engaged in international trade in food products – over 130 compared with less than 90 in 1985. However, little more than half these suppliers have been consistently present on the market for a sustained period. It is also worth noting that in the period 1985-2004 the importance of bulk agricultural commodities in global trade has fallen with respect to flows of horticultural products, semi-processed and processed products. Indeed, trade (by value) in processed products has easily outstripped unprocessed and semi-processed products.
43. These figures suggest that most countries – with some notable exceptions – still rely on their own farmers to feed their populations, at least with respect to basic foodstuffs. On the other hand, as global wealth appreciates, more nations can afford to buy in from abroad additional processed, semi-processed and seasonal products. The issue in trade policy terms is whether the emphasis remains on meeting basic food requirements locally – supplemented by marginal imports – or whether the trading system can provide the confidence and security of supply for more countries to put their faith in open markets and reduced domestic farm subsidies. That is the essential question raised by the Doha negotiations and the one heightened in importance by the food crisis.
VII. Looking at the Crisis through the WTO / Doha Lens
44. Even the WTO Director-General, Mr Pascal Lamy, has conceded in public statements that the Doha negotiations offer no short-term answer to the current food crisis. No concession or rule change will make much difference, especially given the lengthy period before implementation even begins – say, 18 months at best. But does Doha, or the WTO as it stands, provide the potential for a multilateral trade policy response? Mr Lamy and other heads of international agencies – not to speak of several key trade ministers – believe they do. The issue is germane since few bilateral and regional trade deals have substantial provisions on agricultural trade; either on market access or domestic support.
A. Export bans and taxes
45. During the current crisis the key trade policy tool – with the broadest impact on importing countries and consumers – has probably been the use of export bans, restrictions and taxes. This is very much WTO territory and a backwater (until now) of the Doha negotiations. Article 12 of the Agreement on Agriculture (AoA) builds on Article XI.2(a) which permits:
“Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party.”
46. The AoA required that members instituting such measures give “due consideration” to their effects on importing members’ food security and provide written notice (“as far as is practicable”) to the Committee on Agriculture. Unless they are net-food exporters, the provision does not apply to developing members. In any event, the requirements do not mean much and are not generally observed.
47. Japan and Switzerland recently tabled a proposal within the Doha process [note 17] that would put some teeth into the existing provisions. Any new measure would “be limited to the extent strictly necessary”; advance notification would be a requirement as would consultation with other WTO members having a “substantial interest” as importers. In the event that consultations do not secure a settlement within 60 days a standing committee of experts would render a binding judgment on the measure, which would not be implemented pending both consultations and the expert judgment.
48. A previous proposal from the G-20 is the basis for the provisions contained in the February/May draft modalities texts [note 18] from the Agriculture chair. This requires notification, but only within 90 days of the measure taking effect. It also places time limitations on such measures remaining in place. Evidently, this is a substantially weaker proposition than that of Switzerland and Japan which are major food importers with big food security concerns.
49. Achieving a significant Doha result in this area would seem a valuable contribution to potential crises in the future. Three of the world’s most important food (and energy) exporters – Ukraine, Russia and Kazakhstan – have acceded, or should shortly accede, to the WTO. They all have a propensity for export measures that can have serious implications for food/energy supplies and security in other WTO members.
B. Market access
50. While market access may be at the centre of the Doha negotiations and, indeed, of the WTO itself, it is the least clear policy area in any consideration of the current food crisis. Bland insistence that opening markets leads inevitably to greater supply and lower world prices is unhelpful for individual WTO members that find themselves in widely varying supply/production/trade situations. It is no more useful for US trade negotiators to insist that lowering tariffs is the answer than for European politicians [note 19] to assert that developing countries would do well by adopting the principles of the EU’s Common Agricultural Policy (CAP). This is simply self-serving. Further, suggestions that the best interests of indigenous farming in developing countries are served by maintaining customs duties at the highest possible bound levels – in order to maintain “policy space” for the future – will likely promote only continuing inefficient output, high prices for local consumers, supply insecurity and, where there are export ambitions, untenable low competitiveness in global markets.
51. As noted above, many poor nations have temporarily reduced import tariffs to secure supplies and ensure lower domestic prices in the current crisis. These “emergency” responses may become more permanent if, as expected, commodity prices remain at or near current levels. At the same time, it means lost revenues for governments with tight budgets and even more difficulty in allocating resources to developing local agricultural capacity. Private sector investment in farming is also likely to stall without some assurance of future tariff protection (even if that protection does not approach pre-crisis levels). Aid flows may, of course, be stepped up to assist agricultural development but these cannot alone secure sustained commercial viability.
52. Thus, developing countries will need to search anew for the appropriate balance in tariff policies for food commodities and for those industrial products, like fertilisers and machinery, that serve as inputs in agricultural production. For those developing nations to which they apply, this makes the Doha negotiations on special and sensitive products and the special safeguard mechanism particularly relevant. However, it may also argue that rather more consideration of the impact of these provisions is needed in the light of the new supply/price environment. On NAMA products – i.e. most agricultural inputs – WTO members can reduce tariffs autonomously as they consider appropriate or use the Doha process to make commitments that will provide investment confidence in their farming sectors. As with the agricultural dossier, the current NAMA negotiations were founded on an economic environment present several years back which is no longer the reality, nor likely to be in the foreseeable future. These considerations might be seen as militating in favour of a delayed, not rushed, Doha conclusion.
53. Any Doha market access deal – admittedly unlikely in the present circumstances – could impact the agricultural commodities crisis in other important ways. Will, for instance, the EU and US make concessions to reduce their tariff protection for domestic biofuel producers? Given the high levels of subsidies these two big players have allocated to domestic ethanol and bio-diesel development and production, it would appear unlikely. In any event, the situation even here is not straightforward given the differentiated and complicated classification of biofuels in the Harmonised System (HS) [note 20]. Ethanol is clearly classified as an agricultural product in HS Chapter 22 while bio-diesel is an industrial product within Chapter 38. There is not much logic to this now given that both products serve the same purpose and ethanol is normally mixed with gasoline – clearly an industrial product – to be usable as a fuel. Nevertheless, ethanol continues to be under the agricultural negotiations and producers could be sheltered by sensitive product treatment and relatively modest cuts. Bio-diesel tariffs, particularly high in some OECD countries would normally be covered by the NAMA dossier. In principle, both products might be included in any deal on environmental goods although those negotiations are not sufficiently advanced to know how – if ever – they will mesh with agriculture and NAMA. Brazil, the biggest demandeur for reduced ethanol duties, is therefore unlikely to be satisfied through any Doha agreement currently foreseeable.
C. Domestic support
54. As for market access, the impact of winding back domestic support for farmers in developed countries on the price and availability of food globally is not at all clear; or, at least, there is no single assessment that will cover all WTO members, all developing country agricultural exporters or even all net-food importers. Further, even where a WTO member is likely to benefit overall from Doha commitments in this area, the impact on individual products sectors could vary significantly. The simple notion that less domestic farm subsidies generally in OECD countries will generally serve to stimulate indigenous farming in the developing world is questionable, at the very least. (The case of export support is considered below.) That is not to say that export opportunities for competitive developing countries will not be stimulated; it is merely to observe that the capacity of local farmers to produce the basic dietary needs of a local population in a resource-poor or agriculturally less developed nation is unlikely to be significantly and negatively influenced by government support for farm incomes in the industrialised economies.
55. The most practical real-world issue in this part of the Doha negotiations with respect to building agricultural capacity in poor countries is the Green Box. Here, the negotiations on an amended Annex 2 [note 21] of the AoA look like providing comprehensive coverage of most, if not all, the measures likely to be utilised to develop indigenous farming. The most recent draft modalities text adds to the original Uruguay Round terms provisions for developing countries concerning: general government services for rural development, land reform, infrastructure etc; public stockholding for food security; disaster relief; crop insurance schemes and regional assistance programmes.
56. Again, the potential impact of the current domestic support draft modalities on biofuels is problematic, in part because of the classification issue and political interests in the major developed economies. That the level of domestic support, notably in the EU and US, is very high is indisputable (see above); the recently enacted US Farm Bill is particularly generous in providing the means for farmers to meet ambitious fuel blend targets. The EU has based much of its CAP reform on incentives to move farmers out of food production towards crops for biofuels; this has served, among other things, to reduce food stocks and accommodate the farm production of new member states. Brazil’s own ethanol industry was established through a major programme of subsidisation. However, this is history and its ethanol industry is now highly competitive and has ceased to receive the high subsidies of the past.
57. As noted above, the economics of EU/US biofuel production is now seriously in question. However, a more coherent and disciplined approach is unlikely to be inspired by the WTO, at least in the short-term. The classification issue between agricultural and NAMA products will likely fudge the applicability of AMS reduction commitments through Doha. The acceptability or “actionability” of some of these programmes under the WTO Subsidies Agreement has yet to be tested as has their appropriateness to Green Box cover. Members are hovering around the launching of antidumping and countervailing duty investigations, or even full-scale WTO dispute settlement challenges, on biofuels subsidies. For now, at least, the idea that biofuels access and support issues could be negotiated specifically within the Doha process appears unlikely.
D. Export support
i. Export subsidies
58. The elimination of export subsidies will mainly apply to the EU. However, with the exception of sugar, the use of export subsidies by Brussels has fallen over the past decade and significantly so in the past two years as high world prices have made them unnecessary. In mid-2007, the EU Commission revoked all export subsidies on dairy products.
59. Projections for prices in the coming years suggest that the need for export subsidies is unlikely to grow much in the period before their elimination in the WTO. This change in the trading landscape should support the development of indigenous farming in many developing countries that have, in the past, seen highly subsidised (“dumped”) imports undermining the competitive position of local producers. Naturally, it may pose problems for NFIDCs (see below) although they will already have assimilated the major impact.
ii. Export credits, guarantees and insurance programmes
60. The basic objective of the Doha mandate is to put these operations on a commercial financial basis and thus eliminate their distortive effect on international trade. To the extent that they will remove “subsidised” agricultural products from international markets, these provisions should impede the undermining of the competitive position of local farmers and encourage domestic production in importing developing countries. Where LDCs and NFIDCs themselves finance necessary basic food imports through such schemes, they will be provided special terms. Thus, Paragraph 5 of Annex J of the draft agricultural modalities [note 22] allows for a repayment period between 360 and 540 days - rather than the 180 days that would apply after a three-year implementation of the general provisions for developing countries. In “very exceptional circumstances which preclude financing normal levels of commercial imports of basic foodstuffs” or in accessing loans from financial institutions, a further extension of the timeframe could be provided to meet humanitarian needs for basic foodstuffs.
iii. Exporting state trading enterprises (STEs)
61. Annex K of the draft modalities seeks to push the activities of STEs towards purely commercial operations including – although this remains a point of controversy – the elimination of their monopoly powers by 2013. While it would be wrong to exaggerate the potential impact on global prices, removing financing privileges and the underwriting of losses by governments in favour of STEs should, in a modest way, assist the competitive position of local farmers in some importing countries.
iv. International food aid
62. For the countries most seriously affected by the food crisis, the proposed disciplines on food aid in the Doha negotiations are, in principle at least, probably the key elements within the export support pillar. Since global prices are related to the relationship between supply and demand, and with demand currently outstripping supply, the implication must be that with or without WTO disciplines, far less food is available to be given or purchased as aid than before. This is born out by the figures. According to the WFP [note 23], g lobal food aid deliveries declined by 15 per cent in 2007 to 5.9 million tonnes, the lowest level since 1961 – the year when reasonably reliable food aid statistics started. Deliveries have decreased almost continuously since 1999, when they amounted to 15 million tonnes.
63. Will new WTO rules help or hinder? As with the other elements of the export support pillar of the Doha negotiations, the objective is to discipline food aid practices to ensure they do not generally distort international trade. Thus, Annex L of the draft modalities sets out tough conditions that are, in large part, targeted on the US tradition of sending in-kind food aid from its own producers who are paid for their crops by federal government funds. Most other suppliers of food aid – notably the EU – now deliver it in cash grant or loan form with food being purchased within or near the countries towards which the aid is directed. The new disciplines seek to ensure that the provision of food aid takes account of local market conditions for similar products (Paragraph 3) and that it does not cause damage to local or regional producers.
64. Paragraphs 6 to 10 of the food aid modalities text allow for some overriding of the general disciplines in the event of “emergency situations”. The “safe box” would be available – subject to assessments and declarations by international authorities and institutions – for 3 months, during which dispute settlement proceedings would not be allowable. Where a further needs assessment justifies it, an extension to the basic period would be possible. However, it is not at all clear where long-term emergencies generated by sustained commodity price hikes and shortages would fit.
65. On the other hand, if there is very little food aid available – because of the diversion of production to biofuels; bad harvests in major producers; or strapped budgets in main donor countries, for instance – then the WTO disciplines cease to have much relevance. The Rome World Food Security Summit, in June, called for adequate resources for international agencies and commitments by donors to respond to requests for assistance from countries affected by the current crisis. Whether or not this will bring forth new – as distinct from better-organised – resources, remains to be seen. It is notable, for instance, that earlier this year President Bush proposed to the US Congress to purchase up to nearly 25 per cent of food assistance directly from farmers in the developing world, thereby reversing the US practice of delivering almost exclusively in-kind aid. This would have been a move in the direction of the proposed Doha modalities. In the event, the initiative was refused by Congress.
66. It might be argued that the draft food aid rules were founded on market concerns in a different era to that we now face. They will be of value if such a market environment returns. In the meantime – and especially if, as seems likely, there is a protracted delay in concluding the Doha negotiations – it might be well for delegations to review their interests in this dossier.
v. Net-food importing developing countries (NFIDCs)
67. Among those groups with the keenest interests will naturally be the NFIDCs. The Uruguay Round Decision on the possible negative effects of AoA reforms and commitments on LDCs and NFIDCs sought to provide a safety net in the event that these countries faced financing difficulties and food aid shortages. Such difficulties did not truly arise in the decade following the end of the Round. The stark reductions in food aid now have been provoked not by Uruguay Round reforms but by quite different influences. Nevertheless, the Decision provides a basis for a response.
68. International institutions – among them the World Bank, IMF and FAO – recognise that financing basic food imports and developing farming capacity are the two central prongs of a response to the present crisis. This is the focus of the Rome Declaration; in particular, balance-of-payments and/or budget support to food importing, low income countries to facilitate their adjustment to higher food prices. Aid for Trade is recognised as a “valuable complement” to the Doha negotiations in building trading capacity of developing countries. Nevertheless, some observers continue to believe that a financing facility specific to the terms of the Uruguay Round Decision is needed; especially since, in the prolonged absence of adequate supplies of food aid, poorer countries have no option than to go to the commercial market. One proposal, that stemmed from work undertaken in collaboration between the FAO and UNCTAD, was for a Food Import Financing Facility (FIFF) [note 24] that would provide credit guarantees – on ostensibly commercial-market terms – to agents/traders in LDCs and NFIDCs to cover the cost of excessively high food import costs.
E. Trade Facilitation (TF)
69. Such a measure could indeed have value irrespective of whether or not high food prices continue. However, as the Rome Declaration makes clear, the first and best solution is to ensure that more food is produced locally and more efficiently. That will take time, especially in countries with under-developed and poor-performing farming sectors. In such countries, input costs, poor infrastructure and administrative burdens are normally a heavy burden on competitiveness – for exports and, especially in the presence of cheap imports, in supplying the local market.
70. Viewed from this perspective, it is difficult to avoid the conclusion that the most important, long-term response to the food crisis available within the Doha mandate is trade facilitation (TF). While the emphasis may always have been placed on the value of a TF agreement for developing export capacity, the practical reality is that the provisions envisaged in the current framework are equally valid for farmers seeking merely to meet local market demand on as competitive a basis as possible. For instance, the ability to gain access to imported fertilisers, seeds, machinery and spare parts without delay and with a minimum of artificially or unnecessarily inflated administrative costs can make a significant difference in meeting that demand. The potential to use TF-related assistance and Aid for Trade funding to improve basic transport infrastructure could boost the efforts of farmers to get crops and livestock to market quickly and efficiently. Whether such improvements lead on to opening up export prospects may be a secondary consideration in the present circumstances.
71. The WTO TF agreement [note 25] would provide a remarkable opportunity for governments to make the commitments necessary to improve key aspects of national agricultural competitiveness and output; to do so across the full breadth of administrative, infrastructural, technological and human resources requirements; and to have access to significant technical assistance and funding support.
F. New WTO accessions
72. It is worth keeping in mind that two of the countries currently negotiating their WTO accessions, along with Ukraine that has just acceded, are among the world’s largest producers and exporters of cereals. Russia and Kazakhstan are major sources of wheat (among the top five global exporters in 2004) while Ukraine exports both wheat and barley (3 rd ranking in 2004) [note 26]. In each case, their potential to increase production and exports is vast. At the same time, Russia is the world’s largest supplier of natural gas and, after Saudi Arabia, the most important oil producer and exporter – with the potential to dominate the global oil sector. (Russia also contains the world’s most extensive coal reserves) [note 27].
73. Thus, between them, these three prospective new members will have the capacity to control key elements of the food price/supply equation. This explains the care with which final negotiations are taking place with Russia and the nervousness of some existing members with respect to security of supply in the energy sector.
Acronyms
AMS |
Aggregate Measurement of Support |
AoA |
Agreement on Agriculture |
CAP |
Common Agricultural Policy |
FAO |
Food and Agriculture Organization |
FIFF |
Food Import Financing Facility |
GDP |
gross domestic product |
HS |
Harmonised System |
IMF |
International Monetary Fund |
LDCs |
least-developed countries |
LIFDCs |
low-income food-deficit countries |
NAMA |
Non Agricultural Market Access |
NFIDCs |
net food-importing developing countries |
OECD |
Organisation for Economic Co-operation and Development |
STEs |
State trading enterprises |
TF |
trade facilitation |
UNCTAD |
United Nations Conference on Trade and Development |
USDA |
United States Department of Agriculture |
WFP |
World Food Program |
WTO |
World Trade Organization |
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