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› Agricultural Markets Volatility: A Threat to Global Food Security Drawing the lessons of the financial crisis for agriculture Just like standard financial models, the World Bank’s or the IFPRI’s models used in WTO international negotiations for agriculture present limitations, whose consequences are underestimated. Renowned economists1 all agree: up to now, agricultural risks were never conceptualized in a satisfactory manner. The latest simulations obtained by the momagri economic model – the only model that fits the specific nature of agricultural markets – are now conclusive proof. Unfettered liberalization of international agricultural trade, as defined by the WTO, would bring about two major unforeseen consequences: •The volatility of agricultural commodity prices would not be reduced but quite the contrary they would be increased! • Most farmers worldwide would be on the losing end: only wealthiest farmers in exporting emerging nations (Brazil for instance) would be the winners. On the basis of these results, momagri conducted a prospective analysis that underlines the risks of farm disappearance, farmland disuse and, as a last consequence, global food insecurity. This is the reason why, just as energy and water, agriculture and food will be sources of conflicts and power struggles in the coming years. A new vision for agriculture momagri is a Paris-based think tank that advocates a global organization of agriculture and promotes a new vision for agriculture. Its research on the volatility of agricultural prices and proposals for international governance are leading momagri to establish cooperation agreements with international institutions, research centers or agricultural organizations overseas. A world premiere! As early as the spring of 2008, the momagri economic model announced a turnaround in agricultural commodity prices by showing, for the first time, the causes of the high volatility of agricultural markets. Because it incorporates natural hazards (climate and epizootic diseases), market risks (farmers’ expectations and financial speculation), this model has the capability to evaluate the volatility of agricultural commodity prices. At the forefront of economics research, the momagri model now provides a political decisionmaking tool tailored to meet the challenges of the 21st century. This document presents an overview of the latest simulations of the momagri model and the learning opportunities it generates. Additional information is available on our website www.momagri.org. 1 Dr. Richard E. Just, Professor of Agricultural Resource Economics, University of Maryland, or Dr. C. Peter Timmer, Professor of Development Studies, Harvard University › The volatility of agricultural prices is catastrophic the agricultural potential of developed nations, esp Increased volatility of agricultural prices Risk n° 1 Unfettered liberalization of international agricultural trade goes hand in hand with increased volatility of agricultural commodity prices for the 2010-2023 period. This result doubly contradicts the linear projections of evolution with an upswing trend published by the IFPRI2, the World Bank or the OCDE3. Key takeaways: • Sharp variations that do not exist in any other economic field. Graph n°1 (source: momagri model, 2009) • A volatility increase from 1 to 4.5. • Such volatility will prevent any lasting production for many farm units. Evolution of annual grain prices. Dr. Bertrand Munier, momagri’s Chief Economist and Professor of Economics and Management at several prestigious French and international universities, addresses two issues: Quotas, tariffs and export subsidies are gradually disappearing, yet price fluctuations are increasing. How do you explain the fact that “less regulation leads to higher volatility”? This can be summed up by the very specific nature of risk when we deal with agricultural markets: in addition to the natural production risk, we face the fact that it is humanely impossible for farmers to foresee the prices that will be set at the close of the harvest. The financialization of agriculture (that is to say the arrival of short-term investors looking for straight profitable purchase/resale operations on agricultural exchanges) we witnessed for the past few years has considerably heightened this volatility. 2 3 Are we not seeing faulty interpretations of the results of standard economic models by government leaders? Worldwide standards models were built on the basis of knowledge and prototypes available more than twenty years ago. They prove unable to take into account the market risks and structures we just mentioned. They never introduced the impact of speculative behaviors or central banks’ monetary policies on prices. And they overlooked revenue distribution in every region of the world or the impact of innovation and intellectual property regulations on agricultural development. These types of approximation only generated marginal errors in the past, but they are no longer acceptable today. IFPRI is a U.S. think tank, the International Food Policy Research Institute - www.ifpri.org OECD is the Organization for Economic Cooperation and Development - www.ocde.org for farmers in developing countries and dangerously undermines pecially so in the European Union! Risk n° 2 Sharp decline of revenues for most farmers Fifteen years from now, the agricultural price hyper-volatility spawned by unfettered liberalization of international agricultural trade will lead to: Who will be the winners and losers of unfettered liberalization of international trade? Most of the world’s farmers will be on the losing end. The severe shrinkages of revenues are reaching such levels that, after seven or eight years, the resulting shocks will force governments to intervene. • drastic drop in farmers’ revenues in poorest nations (less 60 to 80 percent A for some years), • A significant deterioration for importing developing nations (less 30 percent for China and less 40 percent for India in some years), •While only exporting emerging nations, such as Brazil, would come out unscathed. Graph n°2 (source: momagri model, 2009) Key takeaways: Evolution of revenues of grain producers in emerging and less developed countries until 2023, following total liberalization in 2010. Graph n°3 (source: momagri model, 2009) • A decline tendency of revenues in developed nations (with losses of about 30 percent). Indeed, no State can govern without a policy to ensure food security for its population! Evolution of revenues of grain producers in developed countries until 2023, following total liberalization in 2010. Existing subsidies in 2001 are maintained in these projections. › Agriculture and food security are in great danger! An increase of price volatility and the sharp drop in revenues generated by unfettered liberalization of agricultural trade will wipe out the agricultural potential of developed countries and will lead to a humanitarian disaster in poorer nations. Indeed, no economic activity can thrive with such uncertainty regarding sale prices and such high volatility of revenues! On the basis of simulations obtained by the momagri economic model, forward research enables us understanding that, barring the implementation of a regulation policy, future global agriculture will be marked by: • A concentration of farms in the world’s more competitive regions, such as Tomorrow, there will not Brazil. be enough agricultural Yet, one cannot accept that feeding production to feed the world’s nine billion people! the planet relies on the good will of a few. In addition, it is illusive to think that adequate production can be secured by only one region of the world, whichever innovations are considered. • A financialization of this type of activities. Yet, allowing food security be the We need all the world’s responsibility of short-term investors agricultural activities in such volatile markets can lead to and all available farmland food crisis situations. to feed the planet! Food insecurity: A neglected risk! Why? Because no one has really assessed the consequences of a model for “concentrated and financialized” agriculture: • Mammoth job losses. Let’s not forget that 42 percent of the world’s population farms for a living. This ratio can reach 60 to 70 percent in poorer countries. • Poverty increase in poorer countries. • Rural exodus leading to international emigration. • A return of the 2008 food riots resulting in increased global food insecurity. Only a system of international governance of agricultural market will prevent such nightmare scenarios. momagri’s mission Faced with such enormous challenges, momagri provides political decision-makers and international organizations with a risk evaluation tool, economic and political indicators and draws up proposals for an International Agriculture and Food Policy. momagri is a Paris-based think tank that promotes a new vision for agriculture. It includes representatives of agricultural enterprises and officials from the healthcare, economic development, strategy and defense fields. Website: www.momagri.org • Contact: [email protected] • Tel.: +33 (0)1 43 06 42 70