Trade disruption interferes with market signals

by World Grain Staff
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Most participants in international gatherings devoted to finding ways to provide global "food security" agree on the need to step up investing in infrastructure and research to assure that crop production is adequate to the needs of the expected mid-century population of 9 billion. Focus has been on finding ways to boost outturns that are not dependent on expanding cultivated land or on increased use of water since both are rare resources being utilized to their realistic maximums. Governmental expenditures on the order of $20 billion and more have been suggested as the minimum needed to undertake studies of how to achieve the 70% expansion of crop production required not just to maintain current consumption for an expanding population but to meet growth in per capita intakes as incomes improve.

Expansion in agricultural research funding, as important as it may be, must also be seen as just one part of the effort to expand food production. Omitted all too often in discussions devoted to "food security" issues is another matter meriting equal attention. That is allowing markets to operate with minimal governmental interference. The aim is to be sure that markets provide realistic signals to farmers as to what is required. As simple and as logical as this part of the "food security" equation is, it is often missing when concerns arise over malnutrition.

One of the most disappointing aspects of the explosion in world grain prices in 2008 was the way this episode triggered multiple intrusions by governments into how markets work. These missteps occurred in both exporting countries that sought to protect domestic supplies and thus cut off signals to their growers as to global needs, and among importing countries that sought to restrain consumption as well as to maintain tight trade controls. Much attention has been directed to nations with sufficient resources that have moved to acquire land for growing crops in countries with favorable climates. In too many cases, self-sufficiency was proclaimed as a newfound domestic goal in countries where growing conditions make such an approach foolishly expensive and unproductive.

Because rice is often the primary food in developing nations, in contrast with how wheat competes with many foods for its role in the diet, some of the most destructive market interference has occurred in those nations where rice is central to the food supply. In the wake of recent wide swings in global rice prices, it seems right to blame this volatility on unpredictable government policies. Thailand, which normally is a leading exporter of rice, has seen its government engage in massive purchases, cutting supplies available for sale and releasing stocks in sporadic fashion. India’s government has changed its rice export policies numerous times ahead of imposing an outright ban on exports. Vietnam sharply limited exports in 2008 and then aggressively encouraged shipments in the past year. Egypt’s export controls have been described as "ever changing," while Burma and Cambodia have moved in and out of aggressive marketing. All of this results in the nonfragrant rice trade being described as "quite confusing." Demand on the part of importers has been consistent in reaction to these moves, but importers do express great frustration.

Rice provides a strong case for not interfering with markets. It is likely that the export limits imposed to restrain domestic prices have in the end prompted much of the strength in recent months. This is so even though the share of global consumption accounted for by trade is lower for rice, at 6%, than for other grains. By comparison, 10% to 12% of coarse grain consumption moves in world trade and wheat’s share from trade is 19% to 22%.

Recent experience emphasizes why interference with exports and imports, and thus with functioning markets, may have undesirable consequences, including the disruption of signals to producers. This is so even when trade appears to account for a minimal share of consumption.