Food price volatility: what role for trade measures?

Paper for a research project and conference on commodity price volatility, organized by the Korea Development Institute and Korea University for input into the Mexican and Russian G20 deliberations, Seoul, 21 September 2012. The author is grateful for discussions with Will Martin and Signe Nelgen, and for funding support from Korea University, the Australian Research Council, the Rural Industries Research and Development Corporation and the World Bank. Views expressed are the author's alone. 2 Abstract The growing demand for food and energy raw materials in rapidly emerging economies, and the biofuel policy responses in Brazil, Europe, the United States and elsewhere, are prompting many governments to re-examine their strategies for dealing with both short-term and long-term food security concerns. The G-20 group have also expressed concern over the recent volatility of international food prices. Fear that extreme weather events associated with climate change will make food price spikes more frequent is adding to these concerns. In the past, governmental responses to both the long-term trend level of international food prices and to fluctuations around trend have not always been the most appropriate. In particular, trade policies rather than more-efficient domestic measures have been commonly employed, and by both high-income and developing countries. When many countries restrict their imports to alter the trend level of domestic prices, the net effect is to 'thin' international markets and thus lower the mean and increase the variance of international food prices. And when many countries make short-term adjustments to their trend level of trade restriction in an attempt to insulate their domestic market from fluctuations in international food prices, that response exacerbates those fluctuations in border prices. Progress has been made over the past 25 years in reducing both agricultural protection in high-income countries and agricultural disincentives in developing countries, but much scope remains to improve economic welfare, reduce income inequality and poverty, and 'thicken' international markets by removing remaining agricultural trade distortions. Furthermore, the propensity of governments to insulate their domestic food market from fluctuations in international prices has not waned. Both food-importing and food-exporting countries continue to engage in insulating behaviour, which amplifies international food price fluctuations. Moreover, biofuel subsidies and mandates are becoming a new form of agricultural protection that threatens to add to food price volatility by thinning international food markets and linking food and fuel prices. The paper concludes by examining how unilateral actions or multilateral trade arrangements could reduce food price volatility and simultaneously boost global food security.