Media Global Economy 2020.06.05
Export restrictions imposed by Russia, India and other countries in the face of the COVID-19 pandemic have led some people to insist that a food crisis could hit Japan. When the Trans-Pacific Partnership was negotiated, some agricultural economists argued that leaving food to free trade was dangerous because it could be weaponized as a strategic material by exporting countries.
Only a few people correctly understand issues such as which countries in the world export and import what agricultural goods; what are the prevailing agricultural/food situations in those countries; have food-exporting countries imposed export restrictions in the past and if so what were the outcomes; and what kinds of international regulation exist on export restrictions and why they do not function.
Not only commentators but also agricultural economists, international economists and bureaucrats talk about food crises or engage in international negotiations without this basic knowledge.
Some people discuss agricultural issues as if agriculture was a uniform industry. But just as the manufacturing industry has diverse sectors ranging from steel to electric appliances and automobiles, various types of agriculture exist, including grains, vegetables, fruits, livestock and so on.
Labor shortages do not uniformly affect all agricultural sectors. Grain production in developed countries is so mechanized that it hardly requires human labor. Since it is land-intensive farming, the larger the agricultural fields, the larger the machines that can be used, which results in lower production costs. In contrast, vegetable and fruit production is labor-intensive and does not require large tracts of land. These sectors may be affected if they can't rely on immigrant labor due to the pandemic, but grain production in developed countries won't be.
Among food items, those most indispensable to sustaining human life are calorie-rich grains such as rice, wheat and corn plus soybeans. They can also be used as livestock feed.
Wheat, soybeans and corn exporters are mainly developed countries like the United States. While it is often believed that developing countries enjoy a comparative advantage in agriculture, why do advanced economies become food exporters?
Demand for food is in proportion to the size of a population. If the population doubles, food demand increases twofold. Unlike the industrialized nations, developing countries saw a steep surge in food demand as their populations rapidly increased.
Productivity for grains and soybeans shot up by leaps and bounds in developed economies thanks to mechanization and advancements in breeding technology, whereas technological progress and capital accumulation were limited in developing countries.
A substantial increase in supply against demand in developed countries caused grain prices to decline substantially, strengthening their position as exporters. Those countries beefed up agricultural protection as farmers' income dropped. But the better protection increased supply and applied downward pressure on prices.
Real international grain prices have been on a long-term decline for more than 100 years despite the population explosion. While it is argued that food production must increase by 60 percent by 2050, this growth in output can be easily achieved.
Conversely, demand exceeded supply in developing countries, pushing up domestic prices and leading to reliance on imports. In addition, in sub-Saharan African countries that shifted to the monoculture of coffee, cocoa and other agricultural products due to an erroneous understanding and application of economic theories, the international prices of such products steeply dropped and the terms of trade worsened. As a result, these countries became unable to import sufficient amounts of food, giving rise to famine.
The stable exporters of grains and soybeans are the U.S., Canada, Australia and Brazil. Unlike India, these countries, thanks to their high income level, do not need to resort to export restrictions even if grain prices rise. To begin with, food costs, whether in the U.S. or in Japan, mostly go to the processing, distribution and food service industries. Only about 10 percent of the spending goes to agricultural products such as vegetables and fruit. Even if prices of grains and other agricultural products rise sharply, as they did in 2008, it will have little effect on food costs as a whole.
If we look at the supply side, wheat exports by the U.S., Canada and Australia amount to 60 to 70 percent of their production. If they curb exports, their domestic markets will be flooded with grains and soybeans and prices will plummet, triggering a serious agricultural slump.
In the U.S.-China trade war, import restrictions by China forced American farmers to stockpile soybeans in the open, causing a fall in prices that required the U.S. government to spend heavily on supporting the farmers. The same thing would happen if the U.S. imposes export restrictions. However, the U.S. would never implement agricultural export curbs again because it suffered greatly from its banning of soybean exports and of grains exports to the Soviet Union in the 1970s.
Among grains, rice is an exception. Developing countries such as India and Vietnam are rice exporters. They are more prone to curbing exports to give priority to supplying rice to their poor populations. Exports accounted for 7 percent of domestic production in India, 35 percent in Thailand and 14 percent in Vietnam in 2017.
Compared with wheat and soybeans, the shipment of rice for export is small relative to its domestic production. The international rice market is a "thin market," whose trade volume is about one-fourth the global wheat market. A slight fluctuation between good and bad harvest translates into sharp ups and downs in trade volume.
India's rice exports, which were about 2 million tons in 2010, jumped six times to 12 million tons in 2017. Rice export restrictions are likely because the main exporters are developing countries whose exports are unstable. But among the rice exporters Thailand does not restrict exports because its income level is relatively high.
In 2008, the Philippines was affected by export restrictions introduced by India and other countries. At the initiative of Japan, the ASEAN members, Japan, China and South Korea put the ASEAN Plus Three Emergency Rice Reserve in force in 2012, supplying rice to the Philippines and other countries when crises hit. Disruption in rice supply such as the one in 2008 will likely not be repeated.
The World Trade Organization rule on export restrictions, or Article 12 of the WTO Agreement on Agriculture, has a major defect. Between 1995 and 1997, when international grain prices went up, the European Union halted the payment of export subsidies designed to dispose of the EU's surplus farm products in the international market and instead halted exports of the bloc's farm products and imposed export taxes (equivalent to the gap between the high international price and the low prices within the region) on exporters so they would supply grains to EU consumers and food processing firms at prices lower than in the international market.
In the Uruguay Round talks under the General Agreement on Tariffs and Trade, the EU argued that it was supplying food to developing countries at cheap prices by means of its export subsidies. But when international prices rose and developing countries faced difficulties buying food, the EU gave priority to securing the food supply within the bloc by means of export taxes.
Export taxes have the effect of pushing domestic prices lower than in the international market. Domestic food processors can get the foodstuffs at costs lower than their competitors in other countries. Argentina imposed taxes on soybean exports for many years because it wanted to export soybean oil, a product with higher added value than soybeans. Indonesia and Malaysia impose taxes on log exports to promote the export of processed wood products.
Export taxes have an effect equivalent to that of export subsidies, which are prohibited under WTO rules. While export taxes and import tariffs have the same effect according to the theory of international economics, there are no GATT or WTO rules that control the former.
Big exporters like the U.S. don't restrict their exports. If developing countries like India restrict exports, other nations cannot tell them to maintain the exports even if it results in famine at home. The international rule on export restrictions has limitations.
Although many countries have introduced export curbs, none of them issued notifications of their actions under Article 12 of the WTO Agreement on Agriculture as far as I am aware. To resolve the issue of global food security, the eradication of poverty in developing countries and expansion of food production are more important.
Grain and crude oil prices have become closely linked. The U.S. is both the biggest corn producer and exporter. Recent shifts in energy policy led to a sharp increase in the output of corn for production of ethanol, a substitute for gasoline. Ethanol production accounts for 30 to 40 percent of the total use of corn in the U.S. Demand for corn is closely related to crude oil supply and demand through ethanol.
Grain price increases in 2008 were caused by the expanded use of corn for ethanol production, which was driven by U.S. government aid and an increase in crude oil prices. Rising corn prices due to increased demand caused a chain reaction of price hikes for soybeans, wheat and rice. Currently rice prices have gone up for a special reason. But if rice is not available, products made from wheat can take its place. Thus the current situation is different from 2008 when all grain prices went up.
Crude oil prices have plummeted amid the sharp decline in demand due to the COVID-19 pandemic. There is a possibility that the reverse of the 2008 phenomena and mechanism will kick in, causing steep falls in grain and soybean prices. However, the decline in crude oil prices, which account for a large part of the grain production cost, will offset the effect of a fall in grain and soybean prices on farmers' earnings, and grain production might not be significantly affected.
People in developing countries may see their income decline as their jobs are impacted by the pandemic. But falling grain prices will likely offset that effect. Can a food crisis still occur in this situation?