Farm Subsidies in the Midst of Inflation

The main culprits behind this inflation in food prices are the high oil price, weather-related production shortfalls in important food exporting countries, increased demand from emerging economies such as China and India, and subsidies to ethanol and other biofuels in the US and Europe.

Much of the burden of high food prices can be expected to fall on the world's poor. Some countries, including Argentina, India, Russia and Vietnam, have resorted to export restrictions on food to counteract high prices by increasing the supply for the domestic market. In many cases these measures have been the response to mobilising and even rioting consumers.

Still, there are those who benefit from the hike in prices. Many food producers are likely to experience a substantial increase in profitability as greater demand and ethanol subsidies inflate the food industries' output prices without having much of an effect on its input prices.

At first, ethanol subsidies raise only the price of corn. Then, as land is substituted from other farming activities into corn production, and consumers substitute their budgets into relatively cheaper foods not based on corn, the price of a broad range of foods increases. The boost in profitability is thus likely to be shared by a broad range of food producers.

Many developing countries have long considered the excessive farm subsidies in Europe, Japan and the US a particularly evil protectionist tool. One of the problems of competing with a subsidised producer is that you do not only get put at a competitive disadvantage in their domestic market, but also in common export markets. Accordingly, some developing countries have expended considerable effort in trade negotiations to achieve a substantial reduction or the abolishment of the rich world's agricultural subsidies.

In the era of food price inflation, however, governments in the developed world are experiencing rising pressure from domestic consumers demanding cheaper food. In addition, the farm lobby is likely to be less effective in pursuing its objectives because its arguments are blunted by the farmers' increased profitability and because it may be more forcefully opposed by disgruntled consumers.

Unfortunately, in a time of rising food prices, further abolishing subsidies is unlikely to be politically feasible if it was not politically feasible in a non-inflationary environment. Currently, even consumers in the rich world may oppose the end of subsidies. However, the developed world's governments could exploit the policy space to drastically decrease import tariffs on food. Lower tariffs imply lower prices which equals happier consumers.

In this new environment there exist large incentives and scope for developing and developed countries to sit back down at the negotiating table and discuss trade barriers in agriculture. Developing countries, including SA, should be careful not to waste this opportunity by sticking to an anti-subsidy stance that is based on a world of low food prices. If developed and developing countries co-operate on innovative solutions in agricultural trade, concessions could go a long way in reviving the Doha round of trade negotiations.

View the AllAfrica story by clicking here.

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