The Hindu Business Line : Green Revolution II needed, and not export curbs

Boosting research on improving farm yields, investing more in irrigation and rural transportation, and powering farms with solar and wind energy seems to be the need of the hour to drive a second green revolution and tackle the impending food crisis, says SUNIL KEWALRAMANI.

The prospects for increased food supply rely on bringing more land into productive use and improving farmers’ access to finance and markets.

In India, inflation at the wholesale level has been hovering above 7 per cent on an annual basis, well above the government’s comfort zone. In an effort to curb inflation, India’s government has recently suspended futures trade in four commodities — soya oil, chick-peas, potatoes and rubber — for at least four months. It had banned futures trading in rice and wheat last year. In addition, India banned exports of non-basmati rice on March 31, 2008.

Inflation is not a problem idiosyncratic to India. Most countries are beginning to look inward and close their doors to tackle the problem. Egypt has halted rice exports, Malawi has suspended external sales of maize (except to Zimbabwe), Indonesia has curbed medium-grade rice exports, Kazakhstan has halted wheat sales and Vietnam has extended the rice sale ban until June.

Last month, Egypt’s President, Hosni Mubarak, commanded his army to increase the output of bread at the many bakeries it controls — usually used to bake loaves for soldiers — to cope with lengthening bread queues and occasional outbreaks of violence.

Distortions in pricing

The Washington-based International Food Policy Research Institute (IFPRI) estimates that due to governmental interventions, domestic maize prices in Mexico have been up to 35 per cent higher than world prices since the beginning of 2005, while in India rice was, on average, more than twice as expensive as it was on the global market.

Such governmental measures may alleviate domestic supply problems in the short term. But they also create shortages in the global markets, accentuating the problems of those who depend on imports. When such efficient producers as Argentina and Ukraine restrict exports, each importing neighbour will be left to fend for itself, ultimately to the detriment of everyone.

Most countries which have imposed export curbs do not seem to realise that such actions may undermine their brand name and they may be termed unreliable suppliers. This could seriously erode their credibility. In the early 1970s, the US barred soybean exports to fight domestic inflation — and this ended up encouraging Brazil and Argentina to vastly increase soybean production.

Such export curbs often distort global market signals. They even encourage other deficient countries to seriously take to farming of deficient crops, to the long-term detriment of the countries imposing such export curbs, thus resulting in a permanent loss of their customer base.

Export curbs not in favour

The World Bank is appealing to economic self-interest. It helped Ukraine lift grain export restrictions by convincing Kiev it was ruining its reputation as a global grain supplier. Ukraine was once the “bread basket of Europe” and had reached this position by adopting free trade policies and not export curbs. Ukraine now wants to join the join the North Atlantic Treaty Organisation and negotiate a free-trade pact with the EU, to jack up its image.

Doha Round

Doha Round is certainly no quick fix. But in the long run, it would drive down commodity tariffs and reduce export taxes which limit the flow of farm goods in international markets — hardly irrelevant given the need for more liquid global farm markets.

More importantly, the deal on the table has the potential to reduce by as much as 70 per cent the trade-distorting subsidies paid to farmers in the developed world and eliminate altogether the subsidies paid to agricultural exporters.

Higher cost of INPUTS

The rising crude oil price is boosting diesel, power and fertiliser costs. In Argentina, the cost of wheat seed has jumped by 95 per cent compared with the last season, according to the Buenos Aires Grain Exchange. Corn seeds have gone up 46 per cent, soya 51 per cent and sunflower seeds 56 per cent. The price of a tonne of nitrogen manure, a crucial fertiliser for crops such as corn, has jumped to about $410 a tonne, up from $300 a tonne a year ago. Fertiliser prices have risen at least 200 per cent in the past five years.

Consequently, in spite of a 50 per cent rise in price of wheat, the Pakistan government, for example, has forecast a lower wheat crop this spring. A lower use of fertilisers cuts wheat yields, eroding farming income.

In Argentina, after the government slapped an export tariff of 44 per cent on soybeans, the harvest has been delayed and analysts have cut their forecast for next year’s soya acreage. Farmers have no incentive to plant more if they cannot cash in on record international prices.

In Egypt, where the local rice price rose from $200 a tonne in October 2007 to $430 by April 2008, the government’s decision to ban export sales for six months knocked $ 100 off the price in a single day.

Withdraw oil subsidies

Both China and India are heavily subsidising the price of oil within the country. The way to tackle the demand-side disequilibrium is to withdraw the subsidies and let the price of oil find its own level. It will immediately shoot up to find its natural level, at which demand will fall drastically and price of oil will come down to earth.

This, coupled with unwinding of futures which is expected to take place since the price of oil is now volatile, will burst the oil bubble and sanity will return to all markets, including commodities, food items and even the equity market.

Japan, china to the rescue?

The price of rice has increased 85 per cent since mid-March. The market in rice is very shallow and thinly traded. Rice provides nearly one-third of the developing world’s calories, but only 6-7 per cent of world production is exported.

It is generally believed that food security ensuring a regular supply of basic sustenance — is best served by keeping a large proportion of production at home, especially in countries where import supply chains are inefficient or controlled by monopolists who may restrict sales to hold up prices. Today, Japan has 1.5 million tonnes of rice in stock, which it keeps off the market to boost the incomes of local farmers.

China, similarly, exported 1.3 million tonnes last year, but is now restricting exports. If Japan and China bring even some part of their inventory to market, that will help in immediate correction in prices as it will create panic in the rice futures market and result in massive liquidation of speculative positions.

Look to 1970s for help

The last time a global food crisis hit was in the early 1970s, during a familiar combination of general rises in commodity prices, financial market turmoil and rising demand for food from the developing world.

In the 1970s, the US reversed 40 years of farm policy dating back to the Great Depression and changed its programmes to encourage output rather than to support prices by limiting production and imposing export curbs. This helped in immediate and long-term resolution of the 1970s global food crisis.

Boosting research on improving farm yields, investing more in irrigation and rural transportation, and powering farms with solar and wind energy seems to be the need of the hour to tackle the impending food crisis. Hoarding makes sense politically for individual countries. It does put a lid on prices domestically and reassures worried voters. But it is a disaster internationally.

In the medium term, the prospects for supply rely on bringing more land into use and improving farmers’ access to finance and markets. Increased spending on research will be essential, especially into farming in dry-land conditions.

The move towards genetically modified food is essential for developing countries. In the longer term, hope may rest on technology — wider adoption of genetically modified food or a repeat of the “Green Revolution” of the 1960s and 1970s that provided new strains of crop and helped countries such as India to become self-sufficient in food.

India needs to usher in a Green Revolution II to tackle the current food crisis. Even declaration of intent will be very helpful, as the message to markets will immediately cause speculative positions in commodities to be unwound and sanity to return in prices.

In 1985, when the yen had climbed up to 85 to a dollar, Paul Volcker, the then Fed Chairman, had let some shorts build up. At an opportune time, a small US treasury intervention caused the dollar to reverse course and suddenly climb very high as the knockout options got triggered. If the government is proactive and clear in the communication of its message to the markets, a similar reversion of course in prices of commodities and food items can be expected instantaneously.

(The author, a Wharton Business School MBA, is a leading consultant for multinational companies and foreign institutional investors. E-mai: sunilkew@gmail.com)

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