Download Agricultural Markets Volatility: A Threat to Global Food

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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
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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.
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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