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The Results of the momagri Model, An Essential Tool for the Future of World Agriculture
Press Conference, European Parliament, Brussels, 9 April 2008
The momagri Model: Improving Strategic Vision
The momagri Model was developed to account for the ways in which agricultural markets operate in reality, in response to the observation that all of the « standard models, » commonly used by international institutions (World Bank, OECD, FAPRI, etc.) and governments, follow industrial models.
The unique characteristics of agriculture, however, make it impossible to continue to base national and international decisions and analysis on such ill-suited models, particularly given the high stakes for agriculture as we move into the 21st century. The sector affects everything from development in the poorest countries to protecting the environment and feeding the world’s population.
momagri chose to start from the beginning by making the greatest contribution it could to improve strategic vision, namely building an economic model that would facilitate making the right decision and avoiding wrong ones. momagri’s aim was no less than to develop the tool that would become indispensable to issues of worldwide agriculture.
The need is urgent – very urgent. Irreversible decisions are on the verge of being made in Europe, in the context of CAP reforms, as well as internationally within the framework of the Doha Round and in many other countries and regions through negotiations that will mark out our course for the future.
All of these decisions are based on beliefs inherited directly from the results of standard models and ideological convictions that see unregulated free trade as the panacea for agriculture.
Subscribers to this idea are constantly singing the praises of full competition. They claim that it would encourage farmers around the world by ensuring that they receive remunerative prices, as well as consumers by providing them with low prices and a reduced tax load as all subsidies are eliminated.
As a further bonus, this doctrine goes so far as to believe in a « miraculous improvement » for poor countries, which under this system should be able to export their goods without obstacles (because they would no longer have to pay customs duties to gain entrance to rich countries).
Such fabrications so closely resemble what everyone wants to believe that we might as well call the whole story « Alice in Liberalization-land. » This idyllic view of the world, dressed up in many apparently solid guarantees, is false and likely to end in disorder and tears.
We have been defending this perspective since 2005, fighting against a deluge of preconceived notions. We believe that even if worldwide demand for food products increases, prices will not necessarily continue to rise. Why? Simply because that expectation fails to account for changing supply and the powerful effects of speculation.
Today, we can demonstrate that our reminders to use common sense are based on concrete, reliable results.
We have successfully completed the first part and strategic core of our model, whose architecture is described in the « Facts and Figures » document that lists its main components.
• the Computable General Equilibrium model that includes major innovations in comparison with other standard models, such as distinguishing between rich and poor rather than falling back on the usual device of the representative consumer, differentiating between modern and traditional agriculture and accounting for unemployment…
• the «Risk» module, which is entirely new and accounts for agriculture’s main unique characteristic, namely price volatility, by successfully representing the three causes of this volatility in the form of equations. These causes are:
> anticipation by farmers who decide on future production based on current prices at the time when they make the decision, which is the underlying cause of the constant gap between supply and demand. Indeed, these choices are never verified because of the one- or two-year time lag between the beginning and end of the production process.
> the impact of speculation in futures markets; speculation is becoming increasingly financial in nature and tends to amplify the sector’s intrinsic volatility.
> natural risk (climate, epizootic disease, etc.)..
The first two risks are described as endogenous, since they depend only on the people involved. The third is exogenous, because it is independent of their actions.
These modules allow us to simulate the reactions of agricultural sectors (seven are identified in the model) and the world economy to the various possible scenarios.
Liberalization of Agricultural Markets Heightens Price Volatility
What does our work show?
The results demonstrate that agricultural price volatility increases sharply as we approach unregulated free trade on an international level.
The graph below (Figure 1) charts changes in global prices for two main business sectors (grains and large-scale farming, and meat production), based on the assumption of complete market liberalization in 2008. .
For the period from 2001 to 2015, the momagri model uses the latest worldwide data available (2001 GTAP base) to reconstruct the trends observed on these markets from 2001 to 2007 with extreme accuracy, particularly the recent price hike for grains.
Beyond that, it indicates increased volatility for grains in a marked downward trend, as well as a collapse in prices for beef production, which none of the world’s regions could bear for long.
It is important to note that the underlying assumptions are highly conservative, because the percentage of purely financial speculators is estimated at only 75% of all speculators in 2015 (up from 55% at the beginning of the period), even though they have taken on an increasingly important role over the past several years.
Some believe that already, nearly all positions taken on stock exchanges for agricultural raw materials are purely speculative. One variation based on this established fact results in even more aggravated levels of volatility.
We have also developed a groundbreaking new indicator that illustrates the relationship between the percentage of financial speculators and increasing volatility for agricultural prices. The results speak for themselves (Figure 2): the more speculators present, the greater the amplitude of variation in worldwide prices. This trend is magnified by unregulated market liberalization.
This completely invalidates the ubiquitous claim that increased liberalization paired with sustained demand would ensure that prices remain stable at a remunerative level. Only a myopic vision that expects current conditions to persist into the future could support such a claim. In fact, this is the very same belief that haunted most financial experts as they attempted to predict the evolution of global stock markets in 2000, and which led them to confuse the internet bubble with the emergence of a new world of stock trading flowing with milk and honey.
Three fundamental facts should be mentioned at this point:
• If we simulate the conditions of decreased customs duties as described in Falconer’s proposal to the WTO, the resulting graph is nearly as chaotic (variations from 1 to 3), differing slightly only when a minimum of customs duties remain to serve as shock absorbers.
• The consequences of climate change are also exacerbating price volatility, but the «climate» factor is only the straw that could finally break the camel’s back; the situation is already out of balance. This is clearly visible in the graph in Figure 1, where the lighter-colored curves result from minimizing the potential impact of climate effects (in other words, they assume a nearly ideal climate to optimize production, which has yet to occur and is even less likely to do so in the future).
• We eventually realized that in order to obtain a regular, linear increase in agricultural prices over the coming years (as predicted by the standard models), events would need to conspire in a way that defies the laws of probability. We could refer to this as the «utopian scenario» (Figure 3). It assumes that there are no speculators, that farmers are able to anticipate the future completely and that weather conditions are ideal. The scenario depicts a Garden of Eden where supply automatically adjusts to demand, financialization does not affect agriculture and there is no such thing as climate change.
These three observations could seem trivial – if they did not reflect the utopian vision currently being used as a basis for major international negotiations, particularly those relating to the CAP and the WTO.
This is why our initial results can be used to instantly draw several conclusions of significant economic, political and strategic import.
For the CAP Health Check:
Analyzed in light of the initial results from the momagri model, the CAP health check adopted by the Council of Ministers on 17-18 March 2008 is in urgent need of revision because:
• It is not based on any serious evaluation, for lack of appropriate assessment tools.
• It is based on premises such as the idea that agricultural prices will remain high, and that there will be limited impact from risks (which are seen as solely climate-related).
• It ignores the price volatility inherent to the operations of agricultural markets and its impact on farmers’ income, and therefore on the CAP as well, in any form.
In fact, the main risks farmers face are endogenous risks that depend solely on the people involved and are not, by definition, insurable by private insurers. They are difficult to quantify and cannot be mutualized, just like climate risks, which are exogenous and, therefore, independent of any form of human action.
The principle of insurance is to calculate premiums based on the probability that events will occur. This is common practice for exogenous risks, and the science of insurance is based on a long scientific tradition carried down by actuaries. This is impossible for endogenous risks, with the best illustration being the stock market.
Therefore, the CAP Health Check and the planned reforms, which aim to eliminate every last mechanism for public regulation, are completely illogical because they have almost completely discounted the search for such regulatory measures, although these offer the only possible response to the specific characteristics of agricultural markets.
Worse still, they leave it to member States to find solutions, which will lead to re-nationalization and therefore cause differences among nations, making Europe even more fragile through a sector that, we are beginning to realize, is at the heart of tomorrow’s strategic concerns.
For the WTO and Developing Countries:
The Doha Round has proclaimed itself the «development round.» From the time it was founded, momagri has explained that this is an imposture attempting to spread the belief that a multilateral decision to reduce customs duties, internal support mechanisms and export subsidies across the board would benefit mainly the poorest countries. This claim is based on the results of the standard models, which, as we can now demonstrate, are completely unsuited to international negotiations.
In a courageous audit in 2006, the World Bank itself agreed that its model was imperfect, as were interpretations of it.
Despite this, one school of thought – albeit a diminishing one – still persists in the illusion that decisive liberalization of agriculture would be an encouraging sign for the future of humanity.
In fact, because the International Agricultural Policy for which we have been hoping so fervently does not yet exist, any dismantlement undertaken outside the framework of international cooperation would lead to disaster for the poorest countries while impoverishing the richest.
When we superimpose the zone representing total cost (reduced to aggregate indexes, shown here with red lines) over the curve representing changes in grain prices, it becomes clear that for most of the period from 2001 to 2015, simulated market prices are below cost, sometimes substantially (Figure 4).
In other words, farmers who do not receive public support in situations where prices are lower than total cost will not be able to survive in a market that has become highly chaotic.
How can we imagine that in a world experiencing current rates of demographic growth, in which urbanization and living conditions in emerging countries are increasing rapidly, we can afford to bypass an international regulatory policy for agricultural markets to protect the fundamental balances essential to humanity?
How can we believe that, as soon as the borders are opened, the poorest countries will be able to export their production regardless of the fact that they lack such necessary resources as mechanization, inputs and infrastructure?
Some still continue to believe that if prices remain high, export opportunities will feed on themselves. Such a perspective ignores the fact that, in the meantime, Brazil, Europe, the United States or other stakeholders will have flooded their markets at prices that make competition impossible.
On top of all this, people wish to ignore the fact that trade in agricultural raw materials represents only 10% of global consumption. Based on this figure, the main problem is ensuring that production levels are compatible with demand in an approach that focuses on food security rather than financialization of production.
In the future, do we want all countries to be dependent on several large investment funds from just a few countries that practice environmental and social dumping?
Or would we rather have a World Agriculture Organization to serve as a catalyst in the framework of international cooperation between institutions such as the FAO, the WTO, the UNDP, UNCTAD and UNEP, supporting an effective free market effective through regulation?
That is the task we have set for ourselves, and we are finding more and more support among farmers, elected officials, economists, scientists and journalists.
To meet their expectations, we will finish the momagri model by the end of 2008, gradually implementing the various modules. In 2009, we will also launch a ratings agency, which will provide necessary support.
Well aware of our responsibilities and of what is at stake, we will create an independent scientific advisory board to ensure the scientific validity of the model and supervise its development based on the suggestions we will request from economists around the world.