This summer, a new episode of agricultural price hyper-volatility has revived fears of the reoccurrence of the 2007-2008 scenario, when a sharp increased in food prices led to “food riots” in many developing countries. As early as September, following soaring food prices due to the drought in the United States and in the Black Sea Area, the international community called on the world’s different players to act rapidly and prevent a new global food crisis. Similarly to the FAO, the IFAD and the WFP in their September 4 statement1
, the international community also stressed the need to tackle the root causes of price hyper-volatility and food insecurity, beyond emergency measures. As he very rightly points out in an article2
we highly recommend are excerpting below, Thierry Pouch, Director of the Economic Studies Division of the French Permanent Assembly of Chambers of Agriculture (APCA), this new crisis provides a genuine opportunity to restore the principle of agricultural market regulation at the national, regional and international levels. This is particularly urgent for Europe, which, since the early 1990s, is committed to a rationale of dismantling regulatory mechanisms in agricultural markets––as shown by the current CAP reform––with all risks induced by such strategy, in economic, strategic and food security terms.
momagri Editorial Board
The FAO Food Price Index is a valuable indicator of the long-term development of agricultural prices. Since the mid-2000s, a trend in increased agricultural prices has been recorded, with two significant spikes in 2007-2008 and in 2010-2011, in contrast with the previous period during which agricultural prices personified stability in real terms. These two episodes of agricultural price spikes were punctuated by a sharp decline in 2009, due to the acute global economic crisis triggered by the August 2007 collapse of the real estate bubble.
The successive sharp agricultural price increases and declines might a priori not be surprising, since we know that agricultural markets are unstable by nature. Except for the fact that it was followed by a long period of agricultural price stability that lasted from the end of the 1930s to the early 2000s, with the exception of soaring prices during the first half of the 1970 decade. Many economic publications, including econometric estimates of explanatory causes of such agricultural commodity price volatility, rapidly flourished and fed the debate not only on these causes but also on the type of regulatory tools that should be instigated to stabilize agricultural markets. […]
The need to intervene on agricultural markets
The neo-classical economic theory is teaching us that adjusting supply and demand in markets is spontaneous, if no unrest comes to hinder such balance. Yet, this balance is very difficult to achieve in the case of agriculture. In fact, agricultural production is the result of expectations that cannot lead to the formation of balance. In farming, decisions on output precede the output itself, mostly because the short-term inelasticity of supply, as well as the poor elasticity of demand. In other words, supply decisions are made at the “t-1” time, but in accordance to prices applicable to the “t” time.
If, under the influence of a favorable pig meat price /grain price (grain for animal feed), farmers might increase meat volume and market delivery but, because of inexhaustible demand, prices might fall during the next period, forcing these farmers to lower their production volume accordingly, a chronic market instability might result and escalate in fiery market oscillations.
This is the famous Cobweb model, in which market fluctuations can differ. As it magnifies the criticism on the natural market adjustment between supply and demand, this model paves the way for a theoretical as well as practical justification of governmental intervention in agricultural market mechanisms. Because the divergent instability of agricultural markets spawns the deterioration of farmers’ incomes. From that point of view, the U.S. agricultural crisis in the 1930s represents an event that must be examined. […]
The current crisis as a restoring force
Economists have often compared the current crisis to that of the 1930s. The current turmoil is structural, multifaceted and marked by commodity market instability, whether it concerns agricultural or non-agricultural commodities. Oil and industrial commodities are also experiencing price volatility. […]
The economic turmoil represents a genuine opportunity to identify and recognize the specific nature of agricultural markets, such as endogenous or exogenous shocks, wrong expectations, imperfect information and inelasticity of supply. In this sense, it also reflects the watershed of yesterday’s key argument based on the conviction that markets are efficient. Furthermore, one feels that rallying the concept of regulation is gaining wider acceptance, including among the economists who, just yesterday, showed true hubris in believing that global market operations freed from all sorts of restrictions would represent the instrument best suited to supply nations with agricultural and food products.
The positions have indeed greatly evolved since the 1992 CAP reform, and an opening toward new horizons can be expected. […]
More often now than in the past, we are reminded of the requirement to regulate agriculture. Evaluating the benefits and limitations of past, present and future regulatory tools will still oppose economists and political decision-makers for a long time. But amid these controversies, we forget that regulating agricultural markets cannot historically be disconnected from comprehensive macroeconomic regulation. The Common Agricultural Policy was designed jointly with the modernization of the economic and social structures in the European Community.
That is why it is always wrong to examine it without looking into the growth regimen started in 1950, and around which the CAP was built. While it is specific regarding either its operations or the variety of national output models, agriculture has played a decisive role in global economic growth (workforce available for manufacturing due to the decline in the volume of agricultural work and rise in agricultural productivity gains, increase of agricultural production generated by rising mass consumption, itself assisted by urbanization and social compromises regarding wage formation and development driven by a processing industry.)
Current imbalances in agricultural markets cannot solely justify the recourse to regulatory tools. Once this first step in the thought process is taken, it will be time to identify the conditions to formulate this recourse according to the new economic growth that, in Europe as in the rest of the world, is slow to come about––with the current crisis as the most visible symptom. Immaterial growth, green growth, service economy… These are the many possible paths that are opening to us regarding the role of agriculture. One thing is certain, governmental intervention remains a basic given for economic activity.
1 Please see momagri article “Tackling the root causes of soaring food prices and world hunger”, http://www.momagri.org/UK/points-of-view/Tackling-the-root-causes-of-soaring-food-prices-and-world-hunger_1144.html
2 The complete Thierry Pouch article in issue 1209 of Focus is available on the APCA’s website, http://www.chambres-agriculture.fr/grands-contextes/cles-de-lagriculture/economie/actualites/toutes-les-publications-economiques/article/tirer-les-enseignements-de-la/