Blog Post

Soft commodities hit the heights

What’s at stake: Droughts in Russia, Ukraine and Kazakhstan, which together account for 26% of world wheat exports, as well as floods in Canada are leading to fears of tight supply and super-charging prices. This has led to widely reported increases in wheat prices as well as higher prices for corn, soybeans, rice and other […]

By: Date: August 23, 2010 Topic: Global Economics & Governance

What’s at stake: Droughts in Russia, Ukraine and Kazakhstan, which together account for 26% of world wheat exports, as well as floods in Canada are leading to fears of tight supply and super-charging prices. This has led to widely reported increases in wheat prices as well as higher prices for corn, soybeans, rice and other food staples.  A couple days ago wheat prices went up more than six percent in one day as Russia announced it would stop exports in an attempt to keep domestic wheat prices from getting too high.  This of course led to higher price for the rest of the world and possibly export bans in other countries.

Matthew Kahn of UCLA and author of the blog greeneconomics points that we can all emphatically argue that countries shouldn’t ban exports in response to a crisis.  But the reality is that these kinds of responses will happen just as they always have happened.  So if climate changes brings about these kinds of episodes more frequently, or generally causes greater uncertainty as agricultural production shifts to new regions, we can probably expect more price spikes and more hunger in the poorest food-importing countries.  Greater variability in production and uncertainty about policy responses will also cause speculators to rationally store more grains. While greater storage will help to buffer the greater uncertainty, by holding inventories at greater levels greater uncertainty can also cause prices to be higher on average, even if average total production is unaffected by climate change.

Raghu Rajan writes the drive for national economic security will continue to lead to collective insecurity. Even as the world becomes more integrated, the word “security” crops up again and again, as in “food security” or “energy security.” Typically, this means a country creating and controlling production facilities no matter what the cost. Many countries make decisions to locate production locally fearing market breakdown through war, trade sanctions, or simply short-sighted decisions by foreign governments to protect their own populations from price increases – Russia’s decision to ban wheat exports makes this issue particularly topical. Paradoxically, once a country ensures its own security, it has weaker incentives to avoid the market breakdown that prompts the initial search for security. International agreement to ensure that countries do not prohibit exports, especially of critical commodities, except under severely (and verifiably) adverse domestic circumstances, would help reduce fear of market breakdown. Similarly, the creation of international strategic resource reserves on neutral territory and under neutral management could help alleviate concerns about politically motivated disruptions.

Michael Schuman at the Curious Capitalist writes that the sudden price spike has a scary déjà-vu feeling, that the world will return to the nosebleed agricultural prices and food riots witnessed during 2007-08. That would not only punish the poor, but also drag on the already uninspiring recovery from the Great Recession. The fact is, though, that the food crisis never really went away. Though prices for agricultural foodstuffs have decreased from the lofty heights of two years ago, they’re still at higher levels than before that big price spike, even after the damage caused to economic growth, incomes and trade by the Great Recession. Today’s wheat scare is the just latest sign of what could be one of the biggest challenges facing the global economy over the next 20 years – the fight to feed the world. That means we’re likely to see higher food prices overall over the next decade, and the continued risk of dangerous price fluctuations like the one we’re experiencing now with wheat.

Shaun Richards wonders why the stockpiles that exist are not used to calm the situation down. This theme seems familiar to the way the euro zone and its politicians dithered and delayed when countries such as Greece hit problems. Perhaps it is something to do with the bureaucratic and political mindset. Anyway whilst the holders of the stockpiles dither the world faces the potential prospect of some food price based inflation.

Michel Ruta, economist at the WTO, writes in VoxEU that the tension between rising demand for natural resources and their scarcity is one of the challenges that most modern societies must address. Indeed, the resulting tensions seem likely to increase, especially as the global economy recovers from recession. Fears of insufficient access to supplies in resource-scarce countries and of inappropriate exploitation in resource-rich regions could lead to trade conflict or worse. All this raises an important question: how to adequately design rules that can promote mutual gains from resources trade? The general principles of the multilateral trading system provide a framework for limiting non-cooperative and self-defeating trade policies, including within resource sectors. In addition, several WTO rules have relevance in relation to the specific features of natural resources, such as the exceptions in Article XX of the GATT that allows the use of trade measures relating to the conservation of exhaustible resources. WTO rules, however, were not drafted specifically to regulate natural resources trade and may not always respond adequately to sectoral specificities.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


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