AGRICULTURE
Figure 4: FAO Food Price Indexes; 2002 - 2004 = 100 500
400 300 200 100 0 Note: The FAO Food Price Index is a trade weighted average of the component indexes 2002-04=100. Source: GIEWS (2011).
“Higher commodity prices are a positive signal to a sector that has been experiencing declines in prices expressed in real terms for many decades and are likely to stimulate the investments in improved productivity and increased output needed to meet the rising demands for food. However, supply response is conditioned by the relative cost of inputs while the incentives provided by higher international prices are not always passed through to producers due to high transactions costs or domestic policy interventions.
In some key producing regions, exchange rate appreciation has also affected competitiveness of their agricultural sectors, limiting production responses.” OECD/FAO (2011), OECD-FAO Agricultural Outlook 2011-2020, OECD Publishing and FAO.
The FAO-OECD clearly has concerns
about current biofuels policies, which broadly it sees as distortions to trade which result in the inefficient allocation of resources. However, its policy recommendations naturally focus on measures directly relevant to the agricultural sector, namely improving productivity growth and establishing means to deal with the sector’s inherent price volatility.
Increased access to market-based instruments are also
recommended, amongst other measures. As small producers do not have the knowledge, assets or access to such instruments, the FAO sees governments playing a more active role in hedging agricultural and associated foreign exchange price risks. However, this recommendation is slightly at odds with where
Increased access to market-based instruments are also
recommended ... slightly at odds with where the report stands on the debate surrounding speculation and commodities
It says, “volatility may be reduced
by measures to increase market transparency and reduce uncertainty, and ensuring that volatility reflects underlying market fundamentals, and not misinformation, speculation, panic or incoherent policies.” Key measures are increased market transparency with regard to data collection and dissemination, as well as reintroducing buffer stocks, although the FAO recognizes the costs involved as problematic.
62 September 2011
the report stands on the debate surrounding speculation and commodities. The report acknowledges that there has been a huge influx of funds and non-traditional participants into commodity markets since the mid-2000s. It notes that the literature on the subject is divided. However, the report ultimately sits on the fence: “Increased financial funds investment in commodity markets has been a persistent feature during the period, although their
influence on commodity price movements remains unclear and would require further research.” Yet, for the OECD, sitting on the fence is a shift in position in itself – towards the view that speculation is a problem. If current thinking continues to move in that direction it raises a dilemma when considered against the recommendation of an extension of market-based instruments as a means of managing market volatility.
Policy Outlook Food and energy are the two most basic human requirements.
Food has the greater potential for sparking social unrest, but blackouts and fuel price inflation are both well documented precursors of discontent. Both have the same basic drivers, and,
Meat Price Index Food Price Index
Cereals Price Index Sugar Price Index
Dairy Price Index Oils Price Index
2000
2005
2010 2011
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