On guard against steps to restrain grain prices
February 01, 2008
by Morton Sosland
Late last year, The Economist magazine put on its front cover, "The End of Cheap Food," illustrated by a slice of toast from which a corner had been torn. The thrust of both an editorial and article was that expanding demand for grain, created by rising incomes in countries like China and India, and by the use of large amounts of maize (corn) in making ethanol had caused a bullish imbalance in global supply-demand. The result is record-high prices for grains, highlighted by this statement: "Most economists conclude … that prices will stay high for as much as a decade." If that is the case, and there’s no attribution beyond "most economists," it will not only write finis to the era when food prices were declining. Such longevity would be radically different from the cyclicality of grain supply-demand and prices that have ruled for years and shaped the global grain industry.
An important part of the analysis undertaken by The Economist examined how countries have reacted to the surge in grain prices. The magazine’s goal was to understand how these moves may affect long-term trends in food production and the adequacy of food supplies. From the immediate viewpoint of the grain industry, though, these national reactions are important as foretellers of what may occur in the event this projection of no more low prices is realized. For the industry, the issue is the extent to which governments, particularly of exporting nations, respond to sharply rising domestic food prices by undertaking steps interfering with trade. After a long period in which the grain industry prospered in the wake of reduced governmental interference, is it possible that higher prices will spark this heavy hand’s return? How ironic this would be in light of the way that prior governmental intrusions stemmed from efforts to boost farmer returns.
In the first year of these soaring prices, reactions by governments have taken two paths. The most common has been placing ceilings on grain-based foods. Governments as different as Mexico, Russia and Egypt have used price caps. Because ceilings require subsidization along the supply chain, the level of governmental involvement has intensified. Economic history shows the ineffectiveness of price ceilings in helping lowincome consumers deal with climbing food prices. Much the more sensible way is by income assistance in order to avoid interference with the workings of supply-demand.
Even more important are the way price ceilings dampen the influence unrestrained prices have on production. If there is going to be any easing in price pressures, it will come about in response to sharp production increases, driven by markets like those of the past year. Price ceilings discourage farmers from responding, thus undermining what may be the quickest route to correction. And while demand for most grain-based foods is relatively inelastic, allowing prices to rise, rather than using artificial ceilings, moderates demand.
If price ceilings are counter-productive, steps meant to limit exports have awful consequences. Some exporting nations, like Argentina and Russia, have sought to limit foreign sales by imposing export taxes — the reverse of import tariffs. While few nations have imposed an absolute ban or even tried to limit exports, this approach has been discussed enough to send negative ripples through international markets. Export limits are little different from price ceilings for the punishment they impose on farmers. Such steps worryingly transfer the burden of supply-demand imbalances from one country to another. They have been found wanting in the past and will certainly be no different this time. Cutting off international buyers from supplies in order to hold down domestic prices is a policy that merits harsh criticism.
The grain industry has a tremendous stake in doing everything possible to warn against adopting such disastrous policies. Often embraced in response to political pressures, these moves offer little domestic price relief, while undermining the valuable dynamics of the global grain market.