How the G-20 Can Prevent a Food Crisis
During the French presidency of the G-20, one of our top priorities is to tackle alarming price hikes in the commodity markets. Here's how we can get the job done.
As France assumes the presidency of the G-20 this year, trouble is brewing in the commodities markets. During our country’s leadership over the next nine months, we are determined to head off crisis before it strikes the world’s poor, as high food and oil prices did just three years ago.
In 2008, the explosion in the price of commodities prompted hunger riots in several African countries. Preoccupied by the financial crisis, we didn’t do anything to prevent such a situation from happening again. Two years of plentiful harvests in 2008 and 2009 were enough to conceal the problem. Today, however, the situation has once again become a cause for concern. Poor harvests last summer and an increase in climate variation have led to a significant increase in agricultural prices. Wheat, for example, increased from 140 euros per ton in July to more than 280 euros in February. The prices of barley and corn doubled. The Food Price Index established by the U.N. Food and Agriculture Organization (FAO) has reached its highest level since its creation in 1990. The same causes produce the same effects; we should expect a new food crisis to erupt if we don’t take extremely swift action, especially because the number of countries that depend on the import of agricultural commodities has been continuously increasing since 1990.
The impact of the increase in commodity prices is already being felt: 44 million additional people have been pushed below the poverty threshold over the last few months. In Bangladesh, the average household expenditure on food has increased 60 percent since 2008. In certain vulnerable places such as Afghanistan, Pakistan, sub-Saharan Africa, and Haiti, there is a real danger that food riots will take place. Quite simply, we’ve been warned; we know what to expect. No one would forgive us if there were food riots again given that the warning bells started to ring, one by one, several months ago. That would be an economic mistake and a moral offense. We must take urgent action given the risk of global food shortages.
France has assumed this responsibility by including agricultural price volatility on the agenda of its G-20 presidency. We realized that agriculture was a strategic issue. We realized that we couldn’t feed the world by allowing the continuance of a system in which price variations can reach 50 to 60 percent in a few months. Whether the trend is upward or downward, the increasing volatility of commodity prices is intolerable for producers everywhere in the world because they don’t have any visibility regarding their investments. When the trend is upward, volatility is intolerable for the consumers who have to pay more for their food. The importing countries that have the means to pay more for their commodities can take the hit; the others have to deal with shortages and famine. In every instance, it’s the poorest countries that are hardest hit: In developing economies, many people are both producers and consumers and thus suffer the effects of upward trends as well as downward trends in prices.
What causes this volatility?
First, the gap between supply and demand. Global agricultural production is now only increasing 1.5 percent per year, whereas it increased 3 percent per year between 1960 and 1990. Climate change has a direct impact on agricultural yields. As a result of the drought in Eastern Europe and the floods in Australia, global harvests have decreased, leading to panic on the markets. At the same time, global food demand is increasing. There will be 9 billion people in the world in 2050. To feed the world in that year, agricultural production will need to increase 70 percent. In view of the volatility of prices, can we demand that states and farmers make the necessary investments to achieve that?
Secondly, this physical reality is aggravated by increasing financial speculation with respect to agricultural commodities. Today, markets trade paper worth 15 times global cereal production. Eighty-five percent of those market positions are held by purely financial stakeholders whose activities have no real link to agriculture. This speculation is unacceptable. Everyone understands that agricultural prices can vary according to the basic principles and phenomena of climate. Yet it is incomprehensible that financial actors can speculate on global hunger in order to double prices in just a few months.
Given this twofold food and economic challenge, what are France’s proposals?
First, we propose that the G-20 prioritize a reinvestment in global agriculture, a move that will have an exponential effect in fighting poverty in developing countries. In this regard, official development assistance in agriculture plays a key role. Yet over the last two decades, the percentage of aid devoted to agriculture fell from 15 percent to less than 5 percent. We must reverse this trend and uphold commitments made by the international community at the 2009 L’Aquila summit: to promote the development of agricultural autonomy in the least advanced countries and share our research and technological advances in agriculture with them.
Our second proposal is to expand market regulation. Let’s be clear: Regulating the market in this area does not mean fighting the market. Regulating the market means improving the way it operates so that wealth is more fairly shared. It doesn’t mean returning to a managed economy; it means restoring order when the market becomes erratic.
Specifically, we recommend working on four areas:
First, we will push for improved market transparency. We must be more aware of production, consumption and agricultural stocks. Let’s not forgot that opacity and the lack of information are what create fertile ground for speculation.
Second, we need to improve international coordination. We must be able to respond more effectively to market crises. Responding effectively means responding together, not everyone in their own corner. This is the best way to face emergencies and avoiding market overreactions.
Next, we propose regulating the commodity derivatives market using the model of the Dodd-Franck Act adopted in the United States. Instruments exist, such as setting position limits, recording and standardizing contacts, and punishing market abuses. Why not put them in place for all global agricultural markets?
Finally, our fellow G-20 countries should commit to providing support for the most vulnerable countries with respect to commodity price volatility. Together with the U.N. World Food Program, we want to establish pre-positioned emergency stocks in the areas that need them most. We also want to define risk coverage instruments for the most vulnerable countries. And finally, we propose doing away with export restrictions when they apply to emergency food aid for poor countries.
The solutions we propose are both ambitious and achievable. They are ambitious because they provide answers that are on a par with the challenges, and they are realistic because they provide the international action with concrete means to swiftly remedy the situation.
The forum for all these proposals to resolve the issue of volatility in agricultural prices will be the G-20 summit held in November. Meanwhile, the G-20’s development working group will also work on implementing the development plan agreed upon in Seoul last year. For my part, I will bring together all the G-20 agricultural ministers for the very first time on June 22 and 23. France wanted to deal with this topic during its G-20 presidency because agriculture has once again become a strategic issue for the entire planet.
Yet though the G-20 will provide political momentum at the highest level, it cannot take the place of the work and expertise of other existing international organizations when it comes to food issues. That’s why the G-20 will work closely with the main actors in this area: the United Nations, the FAO, the World Bank, the OECD, and the World Food Program.
President Nicolas Sarkozy also wants us to work with all countries on building an international consensus. Efforts must therefore extend beyond the G-20 and into other actors in the international community.
We had an economic responsibility to master the financial markets in 2008. We have a moral responsibility to ensure global food security in 2011. We drew lessons from the financial crisis to avoid a global collapse of the financial system. In this same spirit of responsibility, we must act today to save ourselves from urgently having to manage a food crisis with uncontrollable geopolitical consequences. We know what the problems are, and solutions are available. We can’t say we didn’t know.