Going against the grain with a global cereal reserve would stabilise prices

Harvesting has been going well, but most farmers, growers apart, are happy to see grain prices falling

Liam Dunne

March 24 2008 04:48 AM

EXPLANATIONS for the large and unexpected increases in food prices in recent times are manifold. They include a combination of the ongoing shift to Western-type diets in China; the diversion of grain to bio-energy production; and drought in a number of the larger grain-producing countries.

But there are more fundamental issues at play here, including declining international grain inventories and the global move to freer trade.

The dissipation of international food stocks, particularly for grain, is the primary cause of the sudden and sharp increases in the prices of cereals and milk.

The sharp increase in grain prices has already affected concentrate feed prices and the economics of intensive livestock farming.

This will ultimately result in some herd liquidations, which will initially increase meat supplies and reduce prices but will ultimately lead to reductions in the supplies and an increase in meat prices.

The ongoing world shift to freer trade and the EU's participation in this has greatly exposed Irish food prices and farm incomes to international commodity price fluctuations.

Consumers must absorb increases in food prices. They are then likely to seek cost recovery through higher wages -- thus feeding cost increases into the economy in general.

Since cereals, including rice, are the basic food, the erosion of world grain stocks has very serious economic and even ethical consequences. It brings into sharp focus the price competition between the 'four Fs' of the cereal market. These are:

- Human food;

- Animal feed for intensive livestock production;

- Bio-energy fuel;

- Their land use competition with fibre products, including forestry.

The allocation of supplies between these uses and the relative prices is not of major public concern when supplies are adequate. However, when reserves are low, there are serious differences in the capacity of each of the first three market segments to pay for the higher prices.

In essence, the poor man's predominantly cereal-and=rice- based food diet is a very weak competitor for the rich nations' capacity to pay extra for cereals to feed their pigs, poultry, dairy cows and cattle much less their bio-energy fuel needs especially in a period when mineral oil prices are also increasing. The fundamental question is, can the four F's be accommodated in a more balanced market mechanism?

Economists favour the market as the most efficient method of rectifying mismatches between supply and demand. In a free and open market, any impending imbalances should normally be signalled and reflected well in advance through "futures trading" in the commodities markets. However, recent experience suggests the futures market was rather slow at responding to the consequences of the rundown of surplus -- or buffer -- stocks and the impending market imbalances for both grain and milk.

Individual countries could contribute financially towards a global reserve grain buffer, with the cost related to their share in production and consumption.

Most countries are now part of the World Trade Organisation with the aim to facilitate freer trade. Why not have the creation, management and financing rules for the world grain buffer stock part of the next WTO agreement?

Apart from the social and ethical benefits of reducing the volatility of world grain prices, a grain buffer stabilises grain and food prices, farm incomes, wage demands and knock-on cost increases for industry and society in general.

Liam Dunne is an economist at Teagasc's rural economy research centre