Monday, May 05, 2008

Food prices? Blame government

If ever you wanted to witness the catastrophic effects of government intervention in markets you need only see the international crisis around food prices. The primary reason why food prices have been increasing is demand from middle income consumers in India and China. This increase should easily have been accommodated by a free and open global market for food production. Demand increases, prices rise and this should encourage production in the commodities most sought after. Farmers and wholesalers of such goods would make good profits they can reinvest in growing more, and doing so more efficiently. Consumers benefit as this dynamism and entry into the production market helps keep prices from increasing too rapidly.
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Well it would work that way, but for the European Union, US federal government, Japanese government and other agricultural protectionists.
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Many have blamed the new found fetish for biofuels. They are partly right. Now biofuels are meant to be good because their production absorbs the same CO2 produced when they are burnt, and can replace oil. Sadly, whilst biofuels may have a future, governments in many countries have started subsidising them, making it more economic to grow corn and wheat for fuel rather than food. Half of the growth in crop consumption is due to biofuels, and that would not have happened had the US, EU and the like thrown bad money at it. Rather than letting oil companies choose to invest in the best options for more energy, there has been massive diversion to biofuels - the result is higher food prices. If biofuels were not subsidised they would face the same pressure on prices that oil (and food) has, making their economics more questionable and helping ensure that the balance of agricultural production is not leaning towards fuel.
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The biofuel agenda has been promoted by environmentalists such as the Green Party, keen to mandate compulsory targets for biofuel production. As much as they may wish to plead that it should be "sustainable", the vile meaningless buzzword of the 21st century, the truth is simply this - Government incentives for biofuel production increase the price of food. Environmentalists who want the state to encourage biofuels are doing so at the cost of food - simple as that.
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However, the new fad for biofuels may, at least, have a future. If left well alone, biofuels may well become important, but will be competing with hydrogen fuel cells, solar energy, wind energy, nuclear and dare I say it, new sources of oil.
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There are two far bigger concerns around the trade in food that are hindering, enormously, the ability of the food sector to respond to increases in demand.
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The first can be quickly addressed, these are the failures of the developing countries in the form of price controls, import controls, domestic monopolies and the like which have existed in many of the countries most suffering from the increases in prices. The price controls on food have restricted the economics of food production in those countries, and restrictions on imports have also hindered supply. Deregulating the import, export, production and sale of food should be a priority so that the right signals can be sent to increase production, and for food exporting countries to enjoy the windfall to encourage them to invest in producing more. Sadly the socialism of countries like Venezuela, keeping food prices down, has exacerbated the situation.
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However, for all of these failiings (and in many countries these barriers are being dismantled out of necessity), nothing beats the abject catastrophe created by the European Union, USA and Japan with agricultural protectionism.
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Liam Halligan in the Sunday Telegraph attacks, quite rightly, the French Agricultural Minister Michel Barnier who claims, without a hint of irony, that the EU Common Agricultural Policy (CAP) is a "good model". Model of what?
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Millions will happily protest against so called US imperialism, and have no doubt about it - US agricultural policy is only slightly better (and the Democratic Party led Congress is now pushing through another Farm Bill to spread pork to the feather bedded US farming lobby), but who protests the multi billion dollar distortions and disasters that result from the EU's CAP.
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Let's review what the CAP actually does.
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For starters it inflates the price of food in Europe by imposing tariffs, quotas and bans on food imports from countries outside the EU. It does this to protect inefficient European farmers, and so hurts European households by making them pay more than they need for food. The knock on effect is that efficient food producers outside Europe get poor access to that wealthy market, hindering their production in favour of the small, energy intensive subsidised farms of Europe. So the CAP first favours the less productive against the more productive, and European consumers pay more, whilst disadvantaging others.
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Secondly, the £33 billion per annum in subsidies - yes £33 billion - is poured into the farms that already have a protected market, so they can produce. Ah, you cry, but if they didn't produce wouldn't the price of food go up? Um hold on, part of these subsidies is to pay farmers NOT to produce, much like in the US. This trick was to eliminate over production, caused by the protectionism and subsidies in the first place. So yes, the EU pays for farm land to be unproductive, as does the US federal government. Be nice to end that straight away so that farm land might be more profitable used AS farm land than as a source for a welfare cheque - but no the French government says "it is a model". However, what is truly destructive about these subsidies is how they decimate food production elsewhere in the world, you see the CAP subsidises exports of inefficiently produced European food to the rest of the world.
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The result? Agriculture in many developing countries has been stunted by the EU's exports of its highly subsidised produce undercutting efficient production elsewhere, whilst shutting its own doors to imports.
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As Halligan says "the CAP, along with other Western subsidies, has delayed the cultivation of, and investment in, vast swathes of potentially fertile land across Africa, Asia and Latin America. And it's this land which should now be supporting the large-scale commercial production of the food these regions - not to say global markets - so badly need."
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So the EU, followed by the USA (and don't doubt Hillary Clinton and Barack Obama will keep this going, McCain's opposition to "pork" spending may hold some hope) and Japan (on rice predominantly) have stunted and hindered food production elsewhere by propping up their own inefficient agricultural producers. The insanity of the CAP is such that the more efficient dairy farmers in the UK can't benefit from record dairy prices because of quotas of production within the EU - what rational agricultural policy prevents your farmers from making money from high commodity prices, but ensures your consumers pay more than that for what they buy?
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The CAP was originally about two things - ensuring European farmers had adequate incomes and food security. The latter is a nonsense, given the UK used to consume virtually all of NZ's food exports until the 1970s, and international trade in food with record prices will help ensure food security. The former is even more of a nonsense. The CAP stops European farmers from realising the benefits of high commodity prices, whilst simultaneously hindering production elsewhere. If there were ever a time to remove agricultural subsidies and trade protectionism for agriculture it is now.
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The clear message to Brussels, Washington and Tokyo should be plain and clear. It is time to dismantle your pork barrel laden agricultural protectionism. That means abolishing subsidies so that production isn't distorted in favour of inefficiency, and abolishing tariffs, quotas and bans on free trade in agricultural commodities - so that your own consumers aren't paying over the odds.
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Agricultural subsidies are the invention of socialists and economic nationalists, the truly economic braindead. They are immoral, destructive and a cancer upon the world of food production and trade. Nothing would assist in addressing food shortages more than dismantling these abominations, and meanwhile the enormous money saved might just be a boost to the flagging European, US and Japanese economies. Farmers in these countries need to be told - as prices for dairy, meat, wheat and rice are at record levels - you should stand on your own feet. Meanwhile, it would be nice if the EU's budget was halved and taxpayers got their money back.
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As is said by the Economist, ever the friend of free trade:
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"Defenders of the CAP and other rich-country farm policies cannot have it both ways. They cannot demand more money when prices are low, and then ask for extra protection when they rise. High food prices further undermine their already rotten arguments for support, and offer a golden opportunity to dismantle rich-country farm protection"
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The environmentalist new left movement is propagating a new form of snake oil called "food sovereignty". The UN Rapporteur on the "right to food" Jean Ziegler, a supporter of Cuba's agricultural policies, is a cheerleader for this.
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It's about time that these economic fraudsters were exposed for what they are. Their philosophy is literally killing people, and it is impoverishing farmers throughout the developing world. The time is now for all those who give a damn about food to call for a complete liberalisation of agricultural trade. Nonsense like so-called fair trade and the like should be ignored for what it is, a distraction.
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Meanwhile blame the environmentalist movement for biofuels, along with agricultural protectionism (although socialists and economic nationalists are equally to blame here). However there isn't much hope, with Sarkozy's administration talking about "community preference" as a new form of protectionism, and both Clinton and Obama pushing anti-trade agendas. S0 when will those who claim to care about poverty speak up against agricultural corporate welfare?

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