A sustainable decline in prices will be possible only with an increase in agricultural supply and its corollary, the dismantling of protectionism. This reform would meet both the rise in demand for food and the unpredictable behaviour of Mother Nature.
This debate is difficult in Quebec and Canada, where one can get the impression that we are benefiting from high international prices and reaping profits while people die of hunger in faraway places. But exporters cannot be blamed for the fact that grain, energy and fertilizer prices are hitting record levels. Canada is the world's biggest producer of potassium, a fertilizer found mostly in Saskatchewan and Alberta. The price of potassium and other fertilizers has been pushed up by increased corn production.
More corn is being grown because of the huge rise in the world's heavily subsidized production of ethanol and other biofuels. This has also led to corn being diverted away from animal feed and human consumption as well as to a reduction in land areas used to grow wheat and soybeans. Up to a quarter of the land used to grow corn will be devoted to ethanol production in the United States in 2008.
This situation benefits our economy but hurts subsistence agriculture in developing countries. Fertilizers and fuels account for just a small portion of food costs here, but not in less developed countries where food is significantly less processed.
We hear regularly that worldwide income growth, especially in India and China, has caused higher demand along with the resulting price pressure. The good fortune of some does not always bring misfortune to others: Greater wealth cannot explain the explosion in food prices seen in the last two years. Grain demand has tended to rise continuously, at a rate that has not varied substantially in the last 10 years.
The only solution for feeding the planet is to increase agricultural supply and then to let prices fall naturally. How do we get there?
First, higher agricultural prices and the pending conclusion of the Doha round of negotiations are a golden opportunity to advance international trade and reduce protectionism to stimulate exports and food production. A system of freely set prices must play a primary role in world agriculture for supply to meet demand and for farmers in the Third World to raise production. Traditional farm policy in developed countries, including Canada, has focused on subsidizing agriculture. This has led to surplus supply on world markets, thwarting production incentives and reducing agricultural investment in developing countries. The price system is again being prevented from doing its job because of export restrictions adopted in some developing economies with the aim of preventing higher prices at the local level. However, such policies end up pushing supply below production capacity, thereby keeping world prices higher than necessary.
Next, some countries could increase food supply by cultivating land not needed for urban development, especially in the former eastern bloc. These countries have seen the areas available for farming rise with the higher productivity permitted by abandoning the collectivist economy.
Finally, large-scale efficiency gains may still be possible by using higher-performance farm technologies, for example through better use of fertilizers, despite their recent price rise. Similar technologies made possible the "Green Revolution" of the 1960s and 1970s in India and elsewhere, saving millions of people from famine.
Ian Irvine est professeur au département des sciences économiques de l’Université Concordia et chercheur associé à l'IEDM.