Overcoming Traders’ Block

During the global food crisis of 2007-08, one country after another slammed the door on food exports to protect domestic consumers from rising food prices— and thereby made the crisis worse. With the world food system under increasing pressure, how can we keep the export doors open?

In fall 2007, Indian policymakers were getting nervous. Each year, they need to purchase tons of grain for the government’s main antipoverty program, which provides low-cost food to millions of poor people. Government officials had to meet their target for rice purchases, but rising prices and heavy demand on the world market gave suppliers strong incentives to sell rice abroad instead of to the Indian government. On October 9, 2007, in an attempt to ensure rice supplies, the Indian government banned rice exports. Unsurprisingly, exporters protested. Several weeks later the government switched tactics: it lifted the ban and imposed a minimum export price of US$425 a ton for non-basmati rice. In other words, exporters could not sell rice overseas for any price under US$425—surely, Indian authorities believed, that price would be high enough to keep cheap varieties of rice in the country.

It wasn’t. Indian policymakers soon found themselves playing leapfrog with world prices. Over the next several months, Indian officials jacked up the minimum export price repeatedly, but world rice prices surged past these benchmarks, and exports continued pouring out of the country. Finally, on April 1, 2008, the Indian government set a minimum export price of US$1,200 for basmati rice and banned exports of non-basmati rice altogether.

Meanwhile, nerves were also fraying in the Philippines, the world’s largest rice importer. The country produces growing quantities of rice, but demand for the grain is rising even faster. The National Food Authority planned to purchase 1.2 million metric tons of rice in 2008, but Philippine farmers had produced less rice than expected. In late 2007 and early 2008, prices were shooting up and supplies on the world market were getting tight. Philippine authorities panicked: they bought their entire annual quota of rice in the first four months of 2008, at prices that by April exceeded US$1,000 a ton.

The desperate attempts by India, the Philippines, and other countries to ensure their own food supplies initially seemed rational from a national perspective. By pushing the world toward a food price crisis, however, these attempts backfired. Food prices—not just for rice, but also for wheat, maize, and other commodites—had already been raised to new heights by drought in Australia and Ukraine, escalating use of food crops in biofuel production, rising oil prices, a falling dollar, and increased noncommercial activity in the derivative markets for food commodities. But trade restrictions and bans on grain exports were also major contributors. In 2007 and 2008, more than two dozen countries restricted food exports. A recent study by Will Martin of the World Bank and Kym Anderson of the University of Adelaide found that these restrictions on exports accounted for 45 percent of the price increase in rice and almost 30 percent of the increase in wheat. By the time they peaked in mid-2008, world prices of wheat and maize were three times higher than at the beginning of 2003, and the price of rice was five times higher.

“If we tell countries, ‘You should keep your country open to imports and depend on markets,’” says IFPRI Senior Research Fellow David Laborde, “we need to ensure that exporters will keep exporting.” But that’s easier said than done.

A Policy of Last Resort

In theory, international trade is supposed to help diversify risk, not magnify it. Agricultural production varies quite a lot from year to year in a single location, but overall world production tends to vary much less. When some countries have poor harvests, others have good harvests, and trade helps transport food from areas of surplus to areas of deficit.

In reality, this risk-reducing aspect of trade does not work as well as it could because only a few countries export most of the world’s wheat and rice. Nine countries account for 90 percent of the world’s wheat exports, and just five countries account for 85 percent of the world’s exports of milled rice. In fact, together Thailand, India, and Vietnam produce 66 percent of all milled rice exports. “When one of these countries has a problem, the world has a problem,” says Maximo Torero, director of IFPRI’s Markets, Trade, and Institutions Division.

The problem gets worse if countries respond by banning or restricting food exports. Export bans and restrictions not only reduce the supply of food on the world market, pushing up prices, but also generate fear among importing countries that they will be unable to meet their food needs. When panicky food importers start gobbling up more of the scarce supply on the world market, prices go even higher. “Raising export taxes in big food-exporting countries increases world prices by reducing world supply, and it’s bad for small food-importing countries,” says Torero.

Source: D. Headey and S. Fan, Reflections on the Global Food Crisis, Research Monograph 165 (Washington, DC: International Food Policy Research Institute, 2010).

“Reducing import duties in large importing countries has exactly the same effect—an increase in world prices because of expanded demand on world markets. Both of these policies can be a real disaster for small food-importing countries.” Although large or rich countries can usually absorb a price shock that results from an export ban, or retaliate against it, small countries have no choice but to pay whatever price the world market sets.

Why do countries ban food exports when the effects can be devastating for their neighbors? When prices start to soar, governments face intense political pressure to act: people expect their governments to protect them from shocks that threaten their well-being. “It’s a political economy issue,” says IFPRI Senior Research Fellow Shahidur Rashid. “Rising food prices in India can cause a government to fail.” An export ban is a clear response that is relatively easy for a country to adopt.

But Derek Headey, an IFPRI research fellow, points out that export bans are not the only policy tool available. “It is understandable that governments want to protect their poor,” says Headey. “But export bans should be a policy of last resort.” India had alternatives, he says: it could have released rice stocks, imposed only a low tax on exports, or let prices rise a bit more—which could have helped poor Indian rice farmers.

“Many countries try to insulate themselves against food price increases,” says Will Martin, research manager for agriculture and rural development at the World Bank. “It’s sensible for individual countries, but collectively it doesn’t work. Countries that didn’t or couldn’t insulate themselves against price increases got hammered.”

SOURCE: K. von Grebmer, M. Torero, T. Olofinbiyi, H. Fritschel, D. Wiesmann, Y. Yohannes, L. Schofield, and C. von Oppeln, 2011 Global Hunger Index: The Challenge of Hunger: Taming Price Spikes and Excessive Food Price Volatility (Bonn, Washington, DC, Dublin: Deutsche Welthungerhilfe, International Food Policy Research Institute, and Concern Worldwide, 2011).

Time to Rewrite the Rules?

Although the rash of food export bans of 2007–08 has passed, the practice of restricting food exports continues. India imposed a ban on wheat exports that lasted from 2007 to 2011. Drought in mid-2010 led Russia and Ukraine to restrict wheat exports. And in late 2010 and early 2011, Ethiopia, Tanzania, and Uganda halted exports of some grains, especially maize.

Moreover, the conditions that tend to produce food export bans could become more common in the future. Forecasts from IFPRI and elsewhere show that global food prices are likely to be high and volatile in the coming years owing to climate change, high oil prices, changing food demand, population growth, and other factors. It will be crucial to stabilize the world trading system, so that countries’ attempts to protect their own consumers do not end up making the whole world worse off.

Despite the outsized role that export restrictions played in the 2007–08 food price crisis, they were perfectly legal according to international trade rules. Current trade agreements—and even proposed future agreements—allow countries to restrict exports in the case of “critical shortages of foodstuffs.” But because there is no consensus about what constitutes a “critical shortage,” countries are essentially free to do as they wish.

Many economists believe that the best solution would be to create binding rules against agricultural export bans. Will Martin of the World Bank says that addressing the problem of restrictions on food exports will be “difficult but not impossible.” He believes there is now hope for progress given that the large food-exporting countries have seen the effects of their policies on world prices and on poor food-importing countries. Although the severe weather and food price increases in 2010–11 have so far resulted in fewer export restrictions and less panic buying than three years ago, trade rules have not changed to prevent such outcomes. “In the World Trade Organization you need a consensus to change the rules, and under the right circumstances we could gradually achieve that,” says Martin.

IFPRI’s Maximo Torero agrees: “The only way forward is to reopen the Doha Round of WTO trade negotiations. Brazil, India, and China could get together to push Doha forward. There is a little window of opportunity, but it’s getting smaller over time, and the Doha Round needs to be adjusted to the current situation of higher and more volatile prices.”

Other observers are less hopeful about prospects for abolishing export bans. “To give up the export ban as a policy instrument is to say that foreign interests in food security are more important than domestic ones. I don’t see any food minister being able to say that,” says Peter Timmer, professor emeritus at Harvard University. He sees the way forward as a joint effort to raise agricultural productivity and to gradually increase the level of reserve stocks held within individual countries. “Both steps will increase confidence in keeping borders open to food trade because we lower the likelihood of price spikes,” Timmer says. “The need for export bans goes away because of ‘fundamentals,’ rather than some legalistic requirement for which enforcement will be impossible.”

Shenggen Fan, director general of IFPRI, argues that eliminating food export bans must be the long-term goal: “We should abolish bans unconditionally. It will be hard, just like free trade. But we have to continue to work on it.” In the meantime, he says, the task is to build national, regional, and global resilience to shocks like extreme weather by raising farmers’ productivity, providing them with insurance, setting up appropriate grain reserves, and protecting the poor and other vulnerable people. And more can be done to protect small importing countries, says IFPRI’s David Laborde, by, for example, creating a quota system that gives them access to needed food imports or by compensating them through fees charged to large exporters when they restrict exports.

Wanted: More Exporters

For now, there are two main approaches to reducing the likelihood of future restrictions on food exports: one is to try to smooth out the swings in food prices, and the other is to change how countries respond to those price swings. The G20 has made modest moves on both fronts. In late June, the G20 agriculture ministers adopted an action plan on food price volatility in which they committed to invest more in agricultural production, which should help stabilize food prices. They also agreed to create a system for providing information on global production and prices of wheat, rice, maize, and soybeans, which should help prevent panic in food markets by creating more transparency about actual food supplies. In addition, they agreed to eliminate export restrictions for food purchased by the World Food Programme for humanitarian purposes. Observers greeted these decisions with a mixture of relief that food supplies for humanitarian purposes would be protected and dismay that more was not done to address the causes of food price volatility, including biofuels and export bans. The G20 Summit in November 2011 may bring further progress.

In the contentious debate over countries’ food policies, one conclusion garners support from all sides: the need to boost agricultural productivity to both smooth food prices and strengthen global trade by increasing the number of food-exporting countries. What if, when droughts hit Australia and Ukraine in 2006, substantial wheat exports had also been available from Mexico and Tunisia? What if major rice exporters included not only Thailand, India, and Vietnam, but also Ecuador and Egypt? More productive farming in more countries would not eliminate the need for other measures to ensure a healthy global system of food trade—but it could help export bans become a last resort instead of a panicked first reaction.