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Anwarul Hoda: Taming international food inflation

What can make a real difference to food prices is determined international action to increase production in regions richly endowed with land and water

Anwarul Hoda 

What can make a real difference to food prices is determined international action to increase food production in regions that are richly endowed with land and water resources

High food inflation has been the source of major concern in India for more than a year. Soaring food prices have been the cause of unease internationally as well. A Food and Agriculture Organisation (FAO) press release of 3 March, 2011 indicates that international food prices have risen relentlessly over the past eight months, and export prices of major cereals surged by 70 per cent over the last year. World wide production of food has not kept pace with the increasing demand, particularly in fast growing and large emerging countries like China and India. In fact, food supplies have shrunk because of the vagaries of the weather. In Russia and Ukraine there was an unprecedented heat wave in 2010 and China is facing a severe drought in 2011.What can make a real difference to food prices is determined international action to increase food production in regions that are richly endowed with land and water resources

Rising oil prices have been another critical factor. High oil prices increase the price of fertilisers, a major agricultural input, and strengthen the incentive for diversion of agricultural production from food to bio-fuels. While price volatility in agricultural commodities has been a concern for a long time, now the outlook is more serious, as the prospect is for international prices of basic staples staying at elevated levels for an extended period. There is particular concern at the plight of the poorer segments of the population in the developing countries, for whom food accounts for a large proportion of the household budget.

French President Nicolas Sarkozy is seeking to make food security one of the top concerns of the G20 during France’s one-year rotating presidency of the group. He initially expressed concern that speculation in international commodity markets has been exacerbating volatility in prices. There is wide suspicion about the activities of hedge funds and pension funds in the commodity markets, as the majority of transactions entered into by them are financial deals, and only a few of them translate into a physical transaction. The suggestion coming from France was for tighter regulation of the commodity market, but this was opposed by major agricultural exporting countries, such as Canada and the United States.

Consequently, the focus in the G20 seems to have shifted to greater transparency in commodity markets. The emphasis now seems to be not so much on the activities of private sector enterprises, but on the stock positions maintained by governments. It would be a pity if the possibility of joint governmental action for curbing speculative activities in the grain trade is not fully explored, and the attention gets limited solely to transparency relating to government stocks.

But it would not be surprising, as the developed countries generally resist regulation of the activities of multinational enterprises, while advocating closer scrutiny of the activities of governments and government enterprises. We have to wait for sometime more to see if the discussions in the G20 really get limited to transparency in commodity markets, or wider action is envisaged covering speculative activities as well.

The second concern in France is with export prohibitions and restrictions applied on foodstuffs. Such measures are applied by governments generally in the interest of the domestic consumer. With short supplies of wheat threatened last year following adverse weather conditions in Russia, the government felt compelled to reserve local production for the domestic consumer.

India too takes similar measures from time to time to prohibit or restrict exports of basic foodstuffs such as non-basmati rice, wheat, lentils, and sugar, not to speak of onions. Export restrictions and prohibitions are covered by the WTO Agreement. As a general rule, that agreement prohibits quantitative restrictions on imports as well as exports, whether through quotas, licenses or other measures. However, there is an exception provided for — a prohibition or restriction applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting member.

The only condition that has to be fulfilled is that the measure must be of short duration. The WTO Agreement further stipulates that before imposing such a measure a member must give advance notice to the Committee on Agriculture and furnish information on its nature and duration. The member concerned is also required to hold consultations on any aspect of the measure with other members with a substantial interest as importer.

In the Doha Round negotiations on agriculture, Japan has been prominent in proposing disciplines on the imposition of export prohibitions and restrictions. The emphasis has been on procedural improvements rather than on changes in substantive disciplines. In the Chairman’s text of December 2008 on the modalities for negotiations in agriculture, it has been proposed that the existing prohibitions and restrictions in foodstuffs and feeds shall be eliminated by the end of the first year of implementation and that any new export prohibitions and restrictions should not normally be longer than 12 months, and shall only be longer than 18 months with the agreement of the affected importing countries.

If the Chairman’s text in the Doha Round agriculture negotiations is accepted, it would imply a modest advance in rule-making in the WTO on the subject, as it would impart greater clarity on the duration for which an export restriction or prohibition can be maintained. Rule-making in the WTO or elsewhere can at best alleviate the volatility of food prices in a small measure.

What can make a real difference in food prices is determined international action to increase food production in regions richly endowed with land and water resources. At the L’Aquila summit of eight leading economies in 2009 the leaders pledged $20 billion over three years to support sustainable agricultural development in the developing countries. Such initiatives need to be purposively implemented and replicated.

The author is a professor at ICRIER and a former member of the Planning Commission

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First Published: Sun, April 03 2011. 00:19 IST