Food policies 'must motivate producers' to ensure supply

By Sarah Hills

- Last updated on GMT

Food policies 'must motivate producers' to ensure supply

Related tags 2007–2008 world food price crisis Food and agriculture organization

Untargeted subsidies and price controls may stimulate demand for food but they are likely to hinder supply, according to a senior economist.

Heike Harmgart, of the European Bank for Reconstruction and Development (EBRD), said that between 2008 and 2011, concerns over high global commodity price volatility and the impact of the financial crises on consumers led many countries in the transition region (ranging from Central Europe to Central Asia) to intervene in food and energy markets.

Measures included consumer subsidies and budget support to producers, price controls, export restrictions and bans, elimination or reduction of import tariffs and other tax measures.

However Harmgart said: “There are reasons to believe that government market interventions often aggravate the pressure on food markets by removing important price signals to which food supply can react.

“Such measures also often come at a heavy fiscal cost, and their removal may prove politically increasingly difficult.”

Harmgart stated in an EBRD blog that untargeted subsidies and price controls reduce price incentives for food producers to react to shortages with increased production, while stimulating demand for food due to artificially low prices.

She concluded: “Policy makers worrying about food and energy price volatility need to take a broader view that considers the need to boost food supply through adequate price signals and policies that help rather than hinder long-term supply responses.”

Harmgart highlighted the example of agricultural commodity exporting countries such as Russia, Ukraine, Belarus, Uzbekistan and Kazakhstan, which imposed export restrictions on wheat in the wake of drought related shortages in the summer 2010. A ban on fertiliser exports was imposed in Turkmenistan and Kazakhstan prohibited all exports of food items except to Russia and Belarus in October 2010.

Harmgart said: “These measures, even if later reversed, have contributed to higher global wheat price.”

Meanwhile long-term trends of rising food demand and the increasing link between food and energy price dynamics are likely to maintain food price pressures in the foreseeable future.

Wider impact

Fluctuating commodity prices and demand has forced increasing numbers of food ingredients suppliers either to specialize or diversify, according to Euromonitor International head of ingredients research, John Madden.

He said last month that energy costs, oil costs and climate change were all having a massive impact.  Peer-to-peer competition and competition for cereals and land for crops with biofuel suppliers was also putting increasing pressure on ingredients processors.

Madden added that companies traditionally operating in the agricultural space have been hit particularly hard by unstable commodity prices and have been forced to diversify.

Food prices

In January, global food prices jumped nearly two per cent marking the first increase since July 2011, according to the price index from the UN’s Food and Agriculture Organization (FAO).

The level was seven per cent lower than in January last year, but prices of all commodity groups in the index registered gains. Oils increased the most, followed by cereals, sugar, dairy products and meat.

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