Farmers’ markets: why international trade matters to agriculture

Ag trade policyHere are some things we started doing in the year 2000 and have been doing ever since: taking photos with digital SLR cameras; saving data to USB drives; watching Big Brother; and negotiating the WTO Doha Round. In fact the Doha Round, or the Doha Development Agenda to give it its full name, only started officially at the WTO meeting in Doha, Qatar, in 2001, but negotiations on agriculture had started a year earlier. As a new OECD book, Issues in Agricultural Trade Policy, Proceedings of the 2014 OECD Global Forum on Agriculture  puts it, “agriculture has proven to be a critical element in the effort to reach agreement”. Another way you could put it would be to say, as the WTO did, that talks collapsed in July 2008, because of the failure to agree on agriculture and NAMA (non-agricultural market access).

The failure came at a particularly bad time. When the talks had started, food prices were at historically low levels, but 2007/8 saw high volatility and high prices. Issues in Agricultural Trade Policy proposes both structural and more short-term reasons for this. Demand for food for humans and feed for animals was rising steadily as the world population grew and the economy expanded. Stocks were falling and biofuels production was increasing. The short-term shocks included key grain producing regions hit by droughts and other weather effects; exchange rate movements; and hoarding.

Governments have to take their share of the blame too. For a start, many of them encouraged biofuel crops, a measure that “contributes little to reduced greenhouse-gas emissions and other policy objectives, while it adds to a range of factors that raise international prices for food commodities” according to an OECD assessment. When the food price crisis hit, the trade restrictions and import measures, coupled with panic purchases by some governments, made matters worse. In fact a report by the International Food Policy Research Institute (IFPRI) concludes that “trade events were pervasively important in all of the major grain markets and arguably provide the most tangible explanation for the […] price series data.”

The price rises provoked food riots in a number of developing and emerging countries. The reaction in many cases was to adopt “a more defensive stance towards international markets”. Countries tried to become more food self-sufficient by for example subsidising production and penalising imports. One of the biggest changes noted by the new OECD report is the evolution of “agricultural support” – the subsidies, tax breaks and other ways governments help the sector. In 1995, the seven emerging economies for which the OECD collects information on agricultural policies accounted for just under 4% of the total support for OECD and emerging economies combined. By 2012, these seven countries accounted for over 45% of the total.

Even so, most countries comply with current WTO commitments and would have little trouble complying with what is proposed. Countries where the government is becoming more active in domestic markets are usually developing countries whose agricultural sector has a large number of poor farmers, low productivity and lack of access to well-functioning markets. Their main policy options are similar to those elsewhere – interventions in markets; provision of public goods such as roads or other infrastructure; income transfers; and reform of institutions, including land reforms and property rights, financial sector reforms, and legal frameworks – but the actual mix should depend on national circumstances.

In the case of developed countries, the OECD has established a basic principle for choosing among these instruments, stemming from the notion that policy objectives can be divided into two categories. The first is a matter of efficiency and is concerned with correcting “market failures”, for instance, if the cost of water pollution from pesticides or other agricultural chemicals is not accounted for in the market price of produce. The second set of objectives is concerned with the distribution of income (an equity issue). The principle is that policy should first seek to address market failures – ideally by tackling them at source – and then address distributional concerns with targeted policies such as payments for those affected.

However, in poorer countries where market failures are more widespread, it is often difficult to tackle them directly. For example, farmers may have low incomes partly because they have no access to credit. Subsidies to buy fertiliser or other inputs have been suggested as a practical solution to the problem of developing markets for inputs and providing financial services to small farmers. Similarly, price stabilisation has been proposed as a relatively simple way of mitigating the impacts of price shocks on poor households, as opposed to market-based forms of risk management such as insurance or the provision of income safety nets. The OECD argues that while there may be plausible reasons for governments to intervene in agricultural markets in poorer economies, the short-term benefits from the money spent may be far less than benefits from investments to support long-term agricultural development. In other words, policies that have been abandoned by OECD countries because they are inefficient and inequitable are unlikely to prove successful elsewhere.

But what do you do in the meantime? For Issues in Agricultural Trade Policy, the way to help the poor cope with sudden price movements is not agricultural policy but redistributive measures. Apart from anything else, sudden price increases or collapses do not have the same consequences for poor farmers selling food and poor urban (or rural) dwellers buying it. A policy that helps them all to maintain or improve their standard of living makes sense.

More generally, the book argues that a more open trading regime can help the agricultural sector achieve its goals, including food security, in the face of demographic and economic growth and possible threats such as climate change, by providing a greater diversity of products for consumers and by allowing the benefits from changing patterns of specialisation to be realised. Or: “The key challenge for governments in the period ahead will be to maintain a clear focus on the benefits of further reform, to renew efforts to integrate agriculture into the multilateral trading system, while addressing legitimate domestic policy interests in ways that are effective and minimise distortions to production and trade.” That’s the OECD-FAO Agricultural Outlook for the year 2000.

Useful links

OECD Global Forum on Agriculture 2014

OECD work on agricultural trade

Patrick Love

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