A popular newspaper recently ran the following headline "At the Chicago Board of Trade, the drought has caused corn prices to rise". The current shortage of corn on the world’s markets due to a poor harvest did indeed cause prices to rise by 30% in a single month at the CBOT. This rational explanation has reassured our experts, who have always attributed price variations on the agricultural markets simply to risks associated with the climate!
Science without conscience is but the ruin of the soul! Rabelais
I can already hear them saying: "Move along, there’s nothing to see here"! But for five years now, we and several agricultural officials have been ringing alarm bells about the risk of a serious imbalance between supply and demand. However, very few politicians and experts have, up until now, sized up the stakes in terms of sovereignty that a shortage of agricultural produce on the world’s markets represents.
It is fashionable to have us believe that we are experiencing a situation of global over-production and that the international trade liberalisation model itself regulates imbalances.
However, current speculative movements have been triggered by the fact that certain variables, which up until a few months ago were unknown, can now be taken into account in forecasts. We are now aware of low stock levels in China and India, making it possible to anticipate future tensions with regard to demand and prices.
It is sometimes unwise to wait and "see in order to believe". In the world of agricultural produce, it is fatal to wait in order to observe the imbalance between supply and demand and the ensuing consequences.
However, this is certainly what is currently happening with regard to corn: supply is much lower than demand, partly because of the poor harvest, and partly because stock levels are lower than we thought! In addition, the demand for corn is set to increase in the long term in response to an increasing global population and to the fight against the malnutrition afflicting over a billion people. This is why prices are soaring.
One could be forgiven for thinking that price plays its part as an adjustment variable and that everything will resolve itself. In reality, however, it is the consumers from the poorest countries who will become the adjustment variable by having to reduce their consumption, because they lack the funds necessary to buy these agricultural raw materials.
And this brings us to one of the specificities of the agricultural sector, which is its strategic nature. Reducing its purchases of grain is undoubtedly not without consequences for the economic and political stability of a country!
This situation also reveals the illusion that the world has been regularly over-producing agricultural produce since the 1970s and that shortages are a thing of the past.
I can assure you that food shortages are sadly not a part of ancient history and that various signals are now turning to red!
This is also why I do not believe that this price increase is speculative in nature, since it expresses a chronic imbalance with regard to supply and demand, reinforced by stocks that are too low and accentuated by the atypical operation of the agricultural markets.
The team of economists at WOAgri (World Organization for Agriculture) has recently demonstrated this clearly: the volatility of prices of agricultural produce is an intrinsic characteristic of this market.
As for the climate variable, this arises out of certain conditions and can only act as a temporary accentuator.
There are, in reality, several factors of a much more fundamental nature that are responsible for the current situation.
Firstly, regularly decreasing stocks no longer compensate for a fall in production or to an increase in demand. For example, global grain stocks, which currently stand at 57 days against 116 days in 1999, are now lower than the critical security threshold of 70 days.
However, unlike the period between 1950 and 1990, during which grain yields and arable areas increased in line with the increasing population, yields are now stagnating and the amount of land being cultivated is decreasing, within a context of strong demographic growth.
Secondly, pressure exerted on lowering the prices of raw materials and of corn in particular does not encourage the cultivation of new land, but is in fact the reason why land is left fallow. Without aid, farmers can no longer make a living from their produce. In rich countries, governments compensate depreciation through aid. In poorer countries, farmers abandon their land and migrate to towns in the hope of finding employment!
Here we are faced with a process that is closely related to the oil market. The increased prices witnessed over the past few years were mainly due to a lack of investment in production capacities (eg. refineries). As soon as demand increased unusually, supply was insufficient because production took several months to catch up, which is why prices went up!
Absorbing price fluctuations and/or influencing quantities available on the market is possible by using regulating instruments. However, the agricultural market deregulation favoured by the WTO will not only do away with the "protections" afforded to producers, but will also remove the consumer’s "ability to lay in adequate supplies". To put it plainly, the security of supplies is made fragile by removing those instruments that regulate markets. Again, a comparison can be made with the energy sector. If, in future, governments are obliged to make their energy and agricultural product supplies secure, they will be "at the mercy" of their suppliers.
What can we learn from this episode about the corn market?
> We do not have access to performance indicators that would enable us to anticipate meaningful developments and the consequences of various policies. This is why we need to construct an economic model that is adapted to the agricultural sector and an assessment agency put together by WOAgri.
> Agricultural markets do not operate according to the same logic as those that guide the development of industrial or service markets. It is time perhaps that experts and politicians became aware of this.
In Europe, the benefits of the common agricultural policy in terms of regulating production have given rise to profound amnesia when it comes to the consequences of market hazards for the agricultural sector.
> The WTO is debating the wrong issue: by banning regulatory tools, it is causing very many farmers to cease their activity on account of "unsustainable" competition with imported products, which, in short, will seriously destabilise the food supplies of different countries.
What we need is a "regulatory sieve", not only in order to defend farmers, but also to ensure a minimum degree of food security to the population!
How can we be unaware of the risks posed by this imbalance between supply and demand when we know that, on a global scale, production capacities will be "hindered" by water resources.
> The challenge is to produce "more and better", and not to destroy current production capacities in temperate zones in particular, with a view to securing our food supplies.
With this in mind, it is necessary to make public the scientific surveys showing that the most recent technologies enable farmers to produce a great deal more with a great deal less input than previously, leading to much lower greenhouse gas emissions. Major agronomic advances make it possible, for example, to measure very precisely a crop’s needs in terms of nitrates and other components.
At a time when numerous working groups are talking about CAP reform and continuing the Doha negotiations, we should remember what was said by De Montesquieu: "I like farmers because they are not clever enough to reason soundly".
20 November 2006