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Oct 29, 2012 ||
When people talk about food security, what first comes to mind are usually things like people starving in developing countries, the rising price of food globally, or adverse weather conditions that exacerbate the problem. There were many important discussions around these issues and the solutions to them when we celebrated World Food Day on October 16.
These are critical issues, which is why any serious solution to global food security concerns must consider the necessary role of commodity markets.
I was recently part of a panel discussion organized by Washington Post Live on the subject of food security. I enjoy the opportunity to take part in discussions like these because it gives me the chance to share an idea I’ve always believed — that markets don’t just play an economic role in addressing food challenges. They also play a humanitarian role. The agriculture industry that uses our markets provides food for the world, and without a mechanism for hedging and transferring risk, they would simply not be able to do that – at least, not without passing on greater costs to consumers.
The panel’s moderator, the Washington Post’s Mary Jordan, asked me about the smartest way to have a stable pricing system for food. There are a couple of parts to the answer.
One is that futures markets are already providing that system by sending price signals to the market. When there’s a grain shortage, or an expected grain shortage, the market takes account and prices go up. That’s the price discovery role our markets play.
But that doesn’t ensure that prices will be low, and that food will be affordable. Transparent markets supply an excellent mechanism for determining price. But if you can’t afford food at the grocery store, sound economic theory isn’t going to solve your problems. That brings up the second role that markets play in solving the price stability issue – providing incentive for the investment of capital.
The world is expected to reach 9 billion people by 2050. In the meantime, growing middle classes in India and China, among other countries, are eating more food with better nutrition. Roger Thurow, a Senior Fellow at the Chicago Council on Global Affairs who sat with me on the Washington Post panel, estimates that by 2050, this will require us to produce twice the amount of food we’re producing now.
This puts pressure on farmers to produce more crops on the same amount of land. In Rogers’s words we need to produce “more crop per drop”. The only way to do that is to increase capital investment in agriculture to find better irrigation, better seed technology, better fertilizer and better storage solutions – not just in the U.S., but in developing parts of the world like Africa.
Our markets can encourage that investment. One of the blessings of high prices is that it attracts new investment in agriculture. The challenge is not that U.S. producers and manufacturers don’t have capital. The challenge is moving that capital offshore, and establishing the realization that investment in agriculture in Africa and other developing areas is not just charitable, it is financially savvy. To make that occur, investors need to earn a reasonable return on this investment. This can be as big scale investments in places like the Ukraine, or smaller investments in providing credit, education and inputs for smallholder farmer in Africa,
But let’s be honest, these are long term solutions to solve a long term problem. In the short term we need to acknowledge higher prices hurt many, especially in underdeveloped economies. In the U.S. we spend roughly 16 percent of our disposable income on food. The middle class in China spends 40 percent and many people in developing countries spend almost 100 percent. There is a need for short term help for those people in the form of food aid and other relief. Government and charities are best positioned to provide these things. While this needs to happen, we cannot lose sight of the long term objective of developing additional production, and governments should focus on providing a social safety net, not on blaming the market and trying to control prices.
That’s why markets are part of the solution to food security concerns around the globe – from both an economic and humanitarian perspective.
Infographic: The Facts Behind Food Prices
Tim Andriesen is managing director of commodity products at CME Group.
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