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World Agricultural Trade Challenges to 2050 and
Requirements for Evolving Structure of New World Trade Rules Compatible with Food
Security for Developing Countries
Alexander SarrisDirector, Trade and Markets Division
Food and Agriculture Organization of the United Nations
Presentation at the Expert Meeting on “How to Fed the World in 2050, held at FAO in Rome, June 24-
26, 2009
Plan of Presentation• Long term agricultural commodity price developments
and factors affecting commodity market price volatility• Changing patterns of global agri-food trade • New factors that will affect global agricultural trade in the
medium and long term• The role and implications for trade and trade policy in
development and food security strategies of developing countries
• Implications for rules of the international trading system• New challenges for the international agricultural trading
system• Systems for assuring import needs in an unstable
international market
Is there an end of cheap food?
FAO real food price indicesFood Real Price Indices
0
1
2
3
4
5
6
7
8
9
10
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Food price Index (real)CEREALSOILSEEDOILSMEATDAIRYSugar
Is there an end of cheap food? Real prices of bulk food commodities have tended to
decrease but since mid 1980s tendency seems to have stopped
Real Prices: Bulk Commodities (1957-2008)
0
200
400
600
800
1000
1200
1400
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Wheat MaizeRice Soybeans
Real prices of vegetable oils have tended to decrease but since mid 1980s tendency seems to have stopped
Real Prices: Vegetable Oils (1957-2008)
0
500
1000
1500
2000
2500
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Palm Oil Rapeseed OilSoybean Oil
Real prices of livestock commodities have tended to decrease albeit at slowing pace since mid 1980s
Real Prices: Livestock Commodities (1957-2008)
0
50
100
150
200
250
300
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Butter BeefPigmeat Poultry
Real prices of sugar and beverages have tended to decrease but since mid 1980s tendency seems to have
stoppedReal Prices: Sugar & Beverages (1957-2008)
0
200
400
600
800
1000
1200
1400
1600
1800
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Coffee TeaSugar Cocoa
What determines long term commodity prices?
• Supply of agricultural commodities highly elastic at low wages
• Demand for agricultural commodities quite inelastic
• Opposite case for non-agriculture• Implication: Differential productivity gains
can alter terms of trade between agriculture and non-agriculture
How do productivity gains affect agriculture and non-agriculture?
• Productivity affects agriculture differently than non-agriculture
P
Q
p
c
p’
d
Q
P
S
S’
a
b
Panel A. Agricultural Commodity Sector Panel B. Non-agricultural sector
p
p’
a
S S’
b
D
D
Declining terms of trade for agricultural commodities has been due to faster rates of total factor productivity growth for agricultural than non-agricultural products
• Rate of growth of TFP has been faster in agriculture than in non-agriculture
• The rate of growth of TFP in agriculture seems to be higher than that of manufacturing.
• “Globalization” of agricultural research, has contributed to faster TFP growth in agriculture,
• Incidence of productivity advances largely on consumers (through lower prices) and little to producers.
• Has productivity growth slowed down?• Has productivity growth lagged in LDCs?
Agricultural productivity developments for the world Source: Fuglie (2008)
Average annual growth rate by period (%)
Output index Input index TFP index Output per worker Output per hectare Grain yield (t/ha)
1970–1989 2.24 1.36 0.87 1.25 1.96 2.29 1990–2006 2.06 0.50 1.56 1.51 1.95 1.35
Annual TFP growth in agriculture does not appear to have slowed down for the world.
Hence most likely reason for real price leveling must be lower inputs and faster demand growth
1970–1979 1980–1989 1990–1999 2000–2006
Developing countries
0.55 1.67 2.31 2.08
Developed countries
1.62 1.48 2.25 1.76
USSR & Eastern Europe
-0.46 0.27 1.59 2.10
World 0.60 0.94 1.60 1.55
Source: Fuglie, 2008
Primary agricultural product export trends in last 40 years.
Processed food export trends in last 40 years by country income group
The global trade pattern has changed considerably among country groups in last 40 years for primary agricultural exports.
(LIC = Low Income Countries MIC = Middle Income Countries
HIC = High Income Countries (WB definitions)
Average 1965-1967
LIC MIC HICTotal
Exports (Mill $)
LIC 1.8 16.3 81.9 608MIC 0.2 10.9 88.9 8149HIC 1.0 13.6 85.4 14247All Ctries 0.7 12.7 86.6 23004Average 2004-2006
LIC MIC HICTotal
Exports (Mill $)
LIC 9.5 42.8 47.7 22158MIC 3.7 30.1 66.3 84490HIC 2.5 23.9 73.6 137985All Ctries 3.5 27.7 68.7 244633
Export destination (Percent of exports of group in row to country group in column)
The global trade pattern has changed considerably among country groups in last 40 years for processed
food exports.
Average 1965-1967
LIC MIC HICTotal
Exports (Mill $)
LIC 8.7 1.7 89.6 38MIC 0.1 4.4 95.5 5242HIC 0.1 4.7 95.2 6235All Ctries 0.1 4.6 95.3 11515Average 2004-2006
LIC MIC HICTotal
Exports (Mill $)
LIC 2.8 31.8 65.4 111752MIC 0.4 24.0 75.6 429099HIC 0.8 19.8 79.3 469027All Ctries 0.9 23.0 76.2 1009878
Export destination (Percent of exports of group in row to country group in column)
The global trade pattern has changed considerably among country groups in last 40 years for primary
agricultural imports.Primary agricultural products
Average 1965-1967
LIC MIC HIC All Ctries
LIC 6.6 3.4 2.5 2.6MIC 9.0 30.3 36.4 35.4HIC 84.5 66.3 61.1 61.9Total imports (Mill $) 167 2923 19913 23004Average 2004-2006
LIC MIC HIC All Ctries
LIC 24.4 14.0 6.3 9.1MIC 36.0 37.4 33.3 34.5HIC 39.6 48.6 60.4 56.4Total imports (Mill $) 8616 67860 168157 244633
Import origin (Percent of imports of country group in column from group in row)
The global trade pattern has changed less dramatically among country groups in last 40 years for processed
food imports.Processed food products
Average 1965-1967
LIC MIC HIC All Ctries
LIC 27.8 0.1 0.3 0.3MIC 36.1 44.0 45.6 45.5HIC 36.1 55.9 54.1 54.1Total imports (Mill $) 12 527 10976 11515Average 2004-2006
LIC MIC HIC All Ctries
LIC 35.8 15.4 9.5 11.1MIC 18.1 44.5 42.2 42.5HIC 46.1 40.1 48.3 46.4Total imports (Mill $) 8635 231788 769454 1009878
Import origin (Percent of imports of country group in column from group in row)
Intra-Industry Trade (IIT) in agricultural products of high income reporting group of countries with OECD
Countries and the World
Intra-Industry Trade (IIT) in agricultural products of LDCs as reporting group of countries with OECD
Countries and the World
Intra-Industry Trade (IIT) in agricultural products of middle income SSA countries as reporting group of
countries with OECD Countries and the World
Intra-Industry Trade (IIT) in agricultural products of middle income South Asia countries as reporting
group of countries with OECD Countries and the World
Intra-Industry Trade (IIT) in agricultural products of middle income East Asia and Pacific countries as
reporting group of countries with OECD Countries and the World
Long term projected self sufficiency ratios of various types of agricultural and food products
by country income group
1990/91 2030 2050 1990/91 2030 2050 1990/91 2030 2050Cereals 1.00 0.93 0.91 0.97 0.95 0.96 1.12 1.16 1.17Other plant food 0.91 0.88 0.87 1.03 1.05 1.07 0.89 0.81 0.75
Basic food 1.00 0.95 0.94 0.98 0.96 0.97 1.10 1.14 1.14Nonfood 1.84 1.71 1.74 1.13 1.07 1.05 0.52 0.45 0.38Livestock products 0.97 0.97 0.98 0.99 1.00 1.00 1.05 1.03 1.02
Total food 0.95 0.92 0.92 1.00 1.01 1.02 1.01 0.98 0.95Source: FAO
Low Income Middle Income High Income
Main factors that will affect future agricultural commodity prices
• Developments in total incomes and consumption• Stocks and stock replenishment rates• Petroleum prices• Biofuel policies and technology prospects• Developments in exchange rates• Developments in financial markets and speculative fund
positions• New investments in agricultural production• Overall: considerable uncertainty• Implications for agri-food trade. International markets
may become less reliable sources of food, but may offer new opportunities for growth exports of developing countries
Longer term factors
Population and income growth, as well as intensifying urbanisation
Climate change impact on agricultural yields in different parts of the globe
Land and water resource constraints that determine the nature of supply response
Ability to increase yields of agricultural products through more effective use of existing technologies and/or adoption of new technologies
Grain price volatility does not seem to have increased over time for cereals
Nominal Annualised Historic Volatility: Cereal Commodities (1957-2009*)
*Jan-May Av.
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Wheat Maize Rice
Grain price volatility does not seem to have increased over time
Wheat Maize RiceAverage 1957-69 10.4% 8.8% 15.4%Average 1970-79 20.8% 19.4% 18.3%Average 1980-89 12.3% 18.5% 15.7%Average 1990-99 9.6% 8.9% 12.1%Average 2000-09 11.2% 13.5% 11.6%
Historic annualized volatility of international grain prices
Main factors that will affect future agricultural price volatility (new factors in blue)
• Shocks to production• Developments in global stocks • Government short term trade related policies• Petroleum price changes• Developments in USD exchange rates• Developments in financial markets and
speculative fund positions• Sudden changes in demand• Overall: new factors are likely to dominate.
Considerable uncertainty and likely volatility
Production does not seem to have become more variable for wheat and maize
P ro d . C o e f. V a r. W h e a t
0 .0 0 0
0 .0 5 0
0 .1 0 0
0 .1 5 0
0 .2 0 0
0 .2 5 0
0 .3 0 0
0 .3 5 0
0 .4 0 0
1 9 6 1 -6 9 1 9 7 0 -7 9 1 9 8 0 -8 9 1 9 9 0 -9 9 2 0 0 0 -0 6
A frica A m e rica A sia Eu ro p e O ce a n ia W o rld
P ro d . C o e f. V a r. M a iz e
0 .0 0 0
0 .0 5 0
0 .1 0 0
0 .1 5 0
0 .2 0 0
0 .2 5 0
1 9 6 1 -6 9 1 9 7 0 -7 9 1 9 8 0 -8 9 1 9 9 0 -9 9 2 0 0 0 -0 6
A fr i c a A m e r ic a A sia E u ro p e O c e a n ia W o r ld
Production does not seem to have become more variable for rice and soybeans
P ro d . C o e f. V a r . R ic e
0 .0 0 0
0 .1 0 0
0 .2 0 0
0 .3 0 0
0 .4 0 0
0 .5 0 0
0 .6 0 0
0 .7 0 0
0 .8 0 0
1 9 6 1 -6 9 1 9 7 0 -7 9 1 9 8 0 -8 9 1 9 9 0 -9 9 2 0 0 0 -0 6
A fr ic a A m e ric a A sia E u ro p e O c e a n ia W o rld
P ro d . C o e ff. V a r. S o y b e a n s
0 .0 0 0
0 .1 0 0
0 .2 0 0
0 .3 0 0
0 .4 0 0
0 .5 0 0
0 .6 0 0
0 .7 0 0
1 9 6 1 -6 9 1 9 7 0 -7 9 1 9 8 0 -8 9 1 9 9 0 -9 9 2 0 0 0 -0 6
A fr ic a A m e ric a A sia Eu ro p e O c e a n ia W o rld
Global ending stocks of wheat and stock to utilization ratios for the whole world and for the world without
China do not appear to have a long term negative trendWheat stocks and ratios
0
50
100
150
200
250
300
1979
/8019
81/82
1983
/8419
85/86
1987
/8819
89/90
1991
/9219
93/94
1995
/9619
97/98
1999
/0020
01/02
2003
/0420
05/06
2007
/08
mill
ion
tonn
es
0
5
10
15
20
25
30
35
40
45
perc
ent
Total closing stocks Clos.stocks excl. China s-t-u-r for World s-t-u-r for World exc. China
Global ending stocks of rice and stock to utilization ratios for the whole world and for the world without
China
Rice stocks and ratios
0
20
40
60
80
100
120
140
160
180
1979
/8019
81/82
1983
/8419
85/86
1987
/8819
89/90
1991
/9219
93/94
1995
/9619
97/98
1999
/0020
01/02
2003
/0420
05/06
2007
/08
mill
ion
tonn
es
0
5
10
15
20
25
30
35
40
perc
ent
Total closing stocks Clos.stocks excl. China s-t-u-r for World s-t-u-r for World exc. China
Global ending stocks of maize and stock to utilization ratios for the whole world and for the world without
China do not appear to have a long term trend
Maize stocks and ratios
0
20
40
60
80
100
120
140
160
180
200
1979
/80
1981
/82
1983
/84
1985
/86
1987
/88
1989
/90
1991
/92
1993
/94
1995
/96
1997
/98
1999
/00
2001
/02
2003
/04
2005
/06
2007
/08
mill
ion
tonn
es
0
5
10
15
20
25
30
35
40
45
perc
ent
Total closing stocks Clos.stocks excl. China s-t-u-r for World s-t-u-r for World exc. China
Climate Change and political instability may create more food market instability
No. of Countries facing food emergencies, 1986-2007
0
5
10
15
20
25
30
35
40
45
50
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Africa Asia Total Countries EE&CIS Linear (Total Countries)
Trends in causes for food emergencies, 1986-2007
0
10
20
30
40
50
60
7019
86
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
(Num
ber o
f Em
erge
ncie
s)
Man-Made Disasters Natural Disasters Total Linear (Total)
Protection in primary agricultural products is high in several developed and developing
countries (ad valorem tariff equivalent of country in column for
agricultural products imported from country in row in 2004)
USA BRAZIL EU25 CHI-IND ROECD LDCs ODCs ROW
USA 0.0 7.2 8.8 8.4 26.2 12.8 9.3 10.2BRAZIL 3.1 0.0 7.7 9.6 77.2 17.0 16.3 16.7EU25 3.6 6.8 0.0 10.7 26.1 10.9 11.7 15.5CHI-IND 3.1 9.2 12.7 14.7 42.6 16.0 8.9 12.7ROECD 0.8 7.1 4.7 7.6 23.8 13.4 8.7 13.4LDCs 2.6 6.6 2.4 17.2 17.8 14.3 7.5 11.3ODCs 1.2 1.0 9.2 12.9 19.3 15.4 7.5 13.5ROW 1.0 1.1 12.1 11.3 10.2 19.1 9.9 7.7
Protection in processed food products is higher than protection of primary agriculture in both developed and developing countries
(ad-valorem tariff equivalent of country in column for processed food products imported from country in
row in 2004)
USA BRAZIL EU25 CHI-IND ROECD LDCs ODCs ROW
USA 0.0 13.9 15.7 19.5 16.9 22.9 18.2 36.6BRAZIL 11.2 0.0 35.5 39.7 36.6 20.4 11.4 22.5EU25 4.7 15.7 0.0 23.9 32.2 27.9 16.6 21.4CHI-IND 6.3 13.3 18.9 17.3 35.3 20.5 13.7 19.6ROECD 5.4 14.1 23.2 17.6 28.8 23.2 18.9 29.0LDCs 4.4 11.2 8.9 20.6 21.4 11.4 11.5 17.5ODCs 7.6 2.6 19.6 28.8 30.2 18.9 14.2 27.5ROW 6.8 7.0 7.2 20.6 33.6 23.5 13.4 10.0
Developments in global food and agricultural sectors
that will condition future trade policies• Uneven growth in the global economy • Growth in agricultural output and investment, especially
foreign direct investment• Continued reform towards decoupled support in
developed countries • Continued policy reform in developing countries • Global volatility of prices and concerns about access to
supplies and food security • Continued concern for environmental impacts of
agriculture • Continued concentration and value chain development in
the food system • Consumer-driven food attributes and the rise of private
standards • The proliferation of regional and bilateral agreements • Growing water scarcity and increased food emergencies
due to climatic shocks
Dynamic comparative advantage in agriculture and industry
• Agriculture generally characterized (at least at early phases) by constant internal economies of scale but perhaps large external scale economies (a large productive sector facilitates cost reducing infrastructure, market development and other investments).
• At early phases of agric development emphasis on research, infrastructure, education. Less on markets, but need to avoid catastrophic price declines
• At intermediate stages of agricultural development emphasis on market development. Policies to deal with market failures.
• As agriculture develops further policy emphasis shifts to value addition, risk management, quality, etc.
Stages of Development and Support to Agriculture
Issues relevant to trade policy and food security at the meso and micro levels
• Because households differ in terms of their net production/consumption status, for productivity enhancing investment decisions the “average” annual price level is not the only major decision variable, but also greater intra-seasonal price stability.
• Asset “rich” households respond positively to an increase in price, as do other households that have means of covering consumption requirements through borrowing and/or remittances
• By contrast, poor male and poor female headed households reduce their production of staples as the staple prices increase
• A narrower band of import and export parity prices may be conducive to increased investments in staple foods. Can trade policy, play a role in reducing the band within which prices fluctuate? (variable border levies?)
• Staple food market promotion depends on decisions of local traders to expand their catchment areas to more remote areas and this will be contingent upon the risks associated with ability to procure product at reasonable cost. Smart subsidies (Malawi) may enhance such market development. Trade policy may need to reflect needs to build internal staple food markets
Major challenges to reversing the productivity gap in African agriculture and enhancing trade
• Need much faster African agricultural productivity growth to deal with growing food dependence and stagnating overall growth
• Need to reflect on and implement new institutional ways to interlink credit and output-labour markets (producer associations, contracting, etc).
• In the short term, must emphasize more efficient use of existing technologies rather than expensive investments in new technologies. African agricultural productivity can improve considerably by better applications of existing technologies
• Need to invest so as to lower marketing margins and thus enhance producer returns
• Need to increase the use of insurance mechanisms for producers and rural safety nets, to release private productive capital.
• May need time bound infant industry type of protection or other support for selected agro-industrial sectors, perhaps on a regional basis, until infrastructure improves and marketing margins decline
Determinants of appropriate interventions• The food price dilemma occurs when there is
simultaneous pressure on governments to improve producer incentives and to maintain low consumer prices
• Can smallholders respond to changes in price incentives, or complementary investments in public goods are first needed to allow a significant supply response?
• Many rural economies are often trapped in low level equilibria. Low market volumes result in underinvestments by actors at different levels in the chain and low level equilibria.
• The vacuum left as a result of the “withdrawal” of the state from the support of market and non market institutions for both the provision of inputs and for ensuring output opportunities, a major contributing factor to the poor production and trade performance of the staple food sectors in many African countries
• Can changes in trade or price policy stimulate a supply response, with or without an increase in participation in more developed supply chains?
Issues relevant to trade policy and food security at the national level
• The introduction of more liberal policies and rapid state withdrawal have been introduced at too early a stage in the process of agricultural commercialization in many poorer economies. Does this extend to the introduction of a more liberal trade policy stance?
• How can trade policy affect relative production incentives?
• How can trade policy affect incentives facing actors further up the marketing chain?
Trade policies to facilitate agricultural development in the context of faster growth
• At early stages of agricultural development agriculture generally taxed, directly and/or indirectly. Agricultural trade policy relatively liberal.
• At intermediate stages of agricultural development trade policy may need to support domestic policies of developing markets. Second best and flexible trade policies maybe necessary in face of domestic market failures. (Most relevant for Africa)
• At later stages of agricultural development restructuring towards more labour and capital intensive products, may necessitate intermediate levels of protection, but need to alleviate concerns for food security and import surges (safeguards).
• At later stages of agricultural development trade policy may need to be selective and target non-trade concerns. Special and sensitive products?
• Need trade policy flexibility at all stages.• At early stages of agricultural development such as that of most
African countries more emphasis on tariff policy because of market failures. At later stages of agricultural development more emphasis on direct domestic support policies. Important to keep options open at both stages.
Post 1980 developments. Despite liberalization and structural adjustment
programmes, production structure has not changed much in commodity dependent
developing economies (mostly LDCs)
1980-82 1989-91 2001-03 1980-82 1989-91 2001-03Africa (24 ctries) 23.1 22.1 21.8 24.7 25.7 25.0Latin Am. Carib (11 ctries 48.1 52.8 48.0 45.0 43.8 41.8Oceania (3 ctries) 45.8 39.3 37.1 8.4 9.5 12.6
Ratio of the value of production of exportables to the total value of agricultural production (percent)
Ratio of the value of production of importables to the total value of agricultural production (percent)
Considerable opportunities exist for both domestic and intra- regional trade in food products among LDCs in Africa.
Intra-African trade in food products, 2002-2004 averageAfrica's net
imports fromWorld Africa Intra-trade World
Products (%) (million $)
Cereals 3678 166 5 3431Live animals 87 13 14 11Meats 366 15 4 252
Dairy products 941 30 3 833Sugar and confect. 704 142 20 -54
Oils and fats 1480 101 7 1026Oilseeds 311 44 14 119Beverages 290 48 16 -475Vegetables (incl rts tbrs) 1020 124 12 526Fruits and nuts 232 61 26 -1201Other foods 948 227 24 -387Total 10057 970 10 4080
Africa's imports from:
(million $ )
Regional Economic Agreements (REAs) have not increased the share of Intra-African trade in agriculture (shares of exports/imports of group
with Africa)
Sequencing and stages of development
• Many arguments for, or against, further trade liberalization come down to the issue of sequencing.
• The long term objective of a more liberal agricultural trade policy regime is not questioned.
• In the absence of well functioning markets, and in conjunction with other targeted state interventions, a less than liberal trade policy regime may have a role to play in countries with underdeveloped agriculture sectors
• When markets function adequately, it may then be appropriate to liberalize agricultural trade policy to release further agricultural growth potential.
Two key roles for trade policy1. Providing a more stable and remunerative investment
environment for import competing commodity sectors which could contract in the face of greater import competition, but which are critical to agricultural and wider rural growth, and could become competitive in the medium run. A case for a moderate level of protection (for example, through special product provisions) while such improvements in productivity are made.
2. Preventing short term disruption to domestic sectors which may otherwise be competitive, but which by virtue of susceptibility to risk in conjunction with limited access to risk management instruments and safety nets, couldsuffer from exposure to low-cost, often subsidized, imports and associated price instability. A case for a variable level of border protection (if access to a Special Safeguard Mechanism is not available or easy to implement).
3. National trade policy must be consistent and/or derivative of domestic policy objectives and measures, and not be conditioned by WTO commitments. Must make WTO rules flexible to allow the exercise of domestic policy.
How can WTO rules on agriculture be more relevant to developing countries and development
• Special and Differential Treatment. Special and differential treatment provisions should target problems and situations not countries
• Preferences. Erosion could be dealt with by expansion of TRQs, as well as adjustment packages. Bind preferences along with graduation criteria?
• Flexibility. Not only in tariffs by difference between applied and bound, but also with respect to domestic support
• Special Safeguards. Triggers must be simple and quick to apply• Special Products. Food security and growth considerations are key issues in
developing countries, where agriculture has potential to be major growth sector.
• Access to food in periods of food price spikes. Marrakesh decision of UR has not yet been implemented.
• Commodity relevant rules could involve aid and adjustment packages to boost domestic productivity, diversification and value addition, apart from any liberalization commitments
• Predominantly agrarian food insecure developing countries should not only be exempted from reduction commitments under the AoA but encouraged and assisted to increase support to agriculture. Moreover, unlike agriculturally developed countries, any support to agriculture in food insecure developing countries may have to be in the form of coupled support, in particular, input subsidies, to achieve rapid increases in output without adversely affecting poor consumers. Hence this type of support should be given room in the WTO for such coutnries
New challenges for the international agricultural trading system
• Recent food crisis created mistrust of the international trading system and moves to promote food self sufficiency
• Many middle and high income NFIDCs started thinking about investments in food production in other countries with contractual commitments to buy back products. This is likely to change world trade patterns for agricultural products.
• There will be a growing need for medium and long term supply arrangements with main exporters
• To promote developments along agricultural comparative advantage, need to create system to assure net food importing countries (both developing and higher income) that their physical import supplies can be guaranteed through imports
• Will need to create system to manage increased price volatilities• Will need system to ensure low income food deficit countries appropriate
finance to import in times of high food prices • Freer trade has increased concentration. Need to define competition rules
for international agrifood trade • Lower protection has seen increase in application of standards (especially
private ones). Will need system to regulate the proliferation of such standards
Problems of access to grain imports may become more accute
• High grain prices induced speculative purchasing and hoarding by many agents, including importing countries.
• Many middle and high income regular net food importing countries, apart from higher food import bills, faced risks of lack of adequate supplies
• Many of these countries have low capacity for domestic production albeit capacity to finance imports
• Low income countries faced both rationing out of global supplies by richer countries as well as higher costs
• To achieve global and equitable food security need system to assure supplies to both types of countries
Assuring adequate grain supplies for world markets
• Promote “production reserves” instead of commodity reserves
• In several OECD countries policies have been instituted to set-aside land.
• Such policies are largely “decoupled”, namely non-trade distorting, hence acceptable from a WTO perspective.
• Relevant policies, could include apart from support for land set asides, support for technology and farm human capital skills, incentives to maintain set-aside land in in environmentally sustainable condition, etc.
• Productive land set-aside could be brought into physical production in high income countries within 6-10 months (the recent supply response is evidence to that)
Appropriate policies for assuring grain market access by middle and high
income net grain importing countries
• Investments in food production in other countries with commitments to buy back products
• Medium and long term arrangements with main exporters
• Managing import risks through derivative instruments reinsured in international reinsurance market
A system to assure bilateral and multilateral grain contracts
• Many middle and high income Net Grain Importing countries are interested in medium and long term supply contracts to assure domestic grain supplies
• How can such contracts be enforced? • Some countries have turned to land investment deals, to
assure supplies, but even these face sovereign types of risks
• Basic missing institution is an international clearing house type of arrangement similar to the clearing houses that are integral parts of the organized commodity exchanges, which ensure that all contracts are executed
• Can an international clearing type of mechanism be envisioned to ensure the performance of these long term contracts?
Components of a possible International Grain Clearing Arrangement (IGCA) (1)
• Basic objective: To guarantee performance of medium and long term grain trade contracts between countries or private entities
• Basic idea: Both contracting parties (buyer and seller) would post a “good faith margin” amount to the IGCA for the duration of the contract and for a small share of the envisioned annual cost
• The amount posted as margins, if not procured by the countries or private agents themselves, could be borrowed from international banks or other multilateral financial institutions, which could be the Trustees and owners of the IGCA
• The IGCA, in order to guarantee that physical supplies are available to execute the contracts, would invest its financial reserves in grain commodity reserves, in the form of either stocks of grain in given locations of excess supplies, or in the form of futures contracts in relevant organized exchanges.
• The commitments in futures of the IGCA would be liquidated once the actual deliveries of the relevant contract would be executed.
Components of a possible International Grain Clearing Arrangement (IGCA) (2)
• The IGCA would guarantee the execution of contracts by pooling several such medium term and long term contracts and hence ensuring that there would be liquidity as well as physical reserves to honor individual contracts in case of non-performance by a participant
• The financial institutions that would be Trustees of the IGCA could provide additional sovereign insurance to the parties involved
• The IGCA could spread the risk of non-performance by holding its commodity reserves in several geographic locations, as well as several organized exchanges.
A proposal to ensure food imports in low income countries net grain
importing countries through a dedicated Food Import Financing
Facility
The major problem faced by LDCs and NFIDCs during periods of food import needs in excess of normal
commercial imports, is import financing for both private as well as
parastatal entities
Basic rationale and concept of a FIFF
• Purpose: To allow LDCs and NFIDCs to finance commercial food imports in periods of excess import bills
• Problem to be dealt with: Credit and financing exposure ceilings from developed country financing institutions to LDCs and NFIDCs
• Concept: Provide additional finance for commercial food imports in excess of normal commercial food imports. In other words increase risk bearing capacity of financial institutions financing food imports
• How: By inducing increases in credit ceilings and country exposures under specific conditions, via a credible mechanism of intermediation
The basic structure of the Food Import Financing Facility (FIFF)
• Ex-ante (i.e. before onset of marketing year) availability of extra finance, based on estimates of excess food import bills
• Financing, or guarantees for finance above normal credit line ceilings, availed at normal commercial terms. No subsidies, no conditionalities
• Excess finance made available to financial institutions of eligible LDCs and NFIDCs (not directly to governments or traders). Domestic financial institutions will deal with local food import traders.
• FIFF would interpose itself between financial institutions in food exporting countries and financial institutions in eligible food importing countries.
• FIFF will supplement and augment the existing export financing mechanisms in developed food exporting countries.
Trigger conditions• High international food prices• Domestic production shortfalls• Excess food import finance possibility made
known and available on basis of estimates of excess food import bills, in advance of marketing year
• Estimates of excess food import bills will be based on estimates of international prices, domestic production, and imports, by reliable credible institutions.
Advantages of FIFF• No need for new international institution. Facility can operate as
part of existing IFI• Ex-ante mechanism, not ex-post• No conditionalities for finance• Low interest rates, due to lower cost of intermediation• Risk pooling of food import risks across many LDCs and NFIDCs• Specialized knowledge of food import finance and relevant risk
management• Low interest rates of excess food import finance• Considerable leveraging of funds (with small yearly costs total
finance extended can be many times that)• Multilateral export credit guarantee mechanism for food exports.• Low risks due to sophisticated risk management, hence low cost (a
small share of total financing extended)• Could be adapted and extended to serve more purposes, such as a
special concessionary window
Synergies between an IGCA and a FIFF
• Both are financial mechanisms hence no reason they could not be combined under one institutional arrangement
• Both deal with existing real international grain and other basic food market failure problems and do not change market fundamentals, as most commodity reserve schemes aim at.
• They both do not disturb the efficiencies of private sector trade
• Opportunity to make them part of a new international regulatory regime for basic food commodities in light of the recent food market surge and the current financial crisis
THANK YOU
