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How to rebuild confidence in food markets after this summer’s spike in wheat prices


REGULARITY and repetition—of returning rains, of seasonal temperatures, of the cycles of life and death—are the essence of agriculture. So perhaps it is not surprising when events recur. In 2007-08, food prices soared. Mozambique and 30 poor countries endured food-price riots. Russia led a procession of grain exporters to restrict sales. And the world had to face up to changes in the pattern of food demand, reversing decades of declining real prices. It was the end of cheap food.

This summer, world wheat prices have spiked again (see article). Mozambique has been rocked by food riots. And Russia has banned wheat exports for the second time in three years. Is the world facing a new food-price upheaval?

Not really. This is not Food Crisis 2.0. In 2007-08 prices rose across the board for months; this summer, the rise has been confined to a few commodities (notably wheat); average food prices are only slightly above where they were at the start of the year. In 2007-08 grain stocks were at their lowest relative to output for 30 years; now they are back to normal. Mozambique’s upheavals have little to do with recent price rises (see article). And unlike in 2007-08, this summer has not seen another fundamental shift in the balance of supply and demand. The 2010 world wheat harvest is the third largest of all time. Rather, the summer has seen a supply shock of the sort that food markets are supposed to be able to absorb without fuss.

And there lies the problem. Harvest failure in a country with just 8% of the world’s wheat has produced embargoes and panic buying. What are importers to make of that? For some the answer seems to be obvious: don’t trust markets; grow it yourself; food security begins at home.

This is deeply depressing. Self-sufficiency is inefficient and shallow markets are more volatile than deep ones. And it will get worse. On the current best guesses of scientists, climate change is likely to produce more events like the heatwave in Russia. These will disrupt harvests and make prices more volatile still. And climate change will probably shift patterns of production; some marginal land will become infertile; land now barren will come into production; some countries will import more, others export more. Retreating into self-sufficiency just when production may be reshaped is a starve-thy-neighbour policy.

The best way for countries to adjust to the shocks and disruption would be for markets to become deeper and more resilient. Instead, they are getting shallower and more vulnerable. Reversing this trend is in everybody’s interest. But how?


Three impossible things before breakfast

First, America, Europe and Japan should reduce farm protectionism, because that will mean more food is traded across borders. This argument has been made before (and to some effect: reform has happened, albeit not enough). Climate change and distorted markets make it more compelling.

Next, food trade needs some insurance against export bans. This may sound impossible, because agriculture has been the great stumbling block of the World Trade Organisation. But the North America Free Trade Agreement allows export restrictions to incur penalties. The WTO should do the same. Importers have legitimate interests, too.

Third, the world would benefit from a global system of food stocks. These would give importing countries confidence that supplies will always be for sale when prices spike, calming panic buying and reducing pressure to retreat into self-sufficiency. John Maynard Keynes proposed something similar after the second world war. The idea remains a good one. And though there are practical difficulties, such as who would control the sale of stocks and when, these are not insuperable. The UN’s World Food Programme could run such a system.

Food markets are often treated with suspicion by farmers, environmentalists and governments alike. This is short sighted. A billion people are already hungry and the job of feeding the world is getting harder. More food requires more investment, but investors need large commercial farms to invest in, and they need global markets. Such markets are not optional to the job of feeding humanity. They are integral to it. They need help to work better.