Monday, February 7, 2011

Natural Disaster Contributed to Price Rise Could Spark Unrest

High and volatile prices for key commodities, including food products, could spark unrest in poor countries, warned the heads of the WTO and the UN Conference on Trade and Development (UNCTAD) on Monday.

Rising food prices “are now stoking global inflation, not to mention political unrest of proportions that we could have seldom imagined” said WTO Director-General Pascal Lamy, speaking at the opening of a two-day conference on commodities in Geneva this week.

UNCTAD Secretary-General Supachai Panitchpakdi echoed his comments, telling delegates that a predictable supply of commodities is needed “to address the acute problems of food and energy security, especially in environments of extreme poverty with the potential for social and political unrest.”

While neither Supachai or Lamy explicitly mentioned the political upheaval in North Africa and the Middle East, tension around food prices and unemployment may have been a factor that helped trigger protests.

Supachai cautioned that growing numbers of young people in the developing world “will not easily withstand” future price rises, especially given the lack of social protection in many countries, and “what has so far been a jobless recovery” from the recession.

Demand: Propelled by growth

Supachai told delegates that copper prices had risen 35 percent since the summer, while gold, sugar, and cotton were all at 30 year highs. The FAO´s agricultural commodity index had recently touched just one point below its maximum level reached in 2008, Supachai noted, “clearly signaling that the 2010-11 price hikes are similar in magnitude to 2008″.

Lamy predicted that prices for most commodities would continue to rise in 2011, as global GDP growth of 4 percent bolsters demand. Over 70 percent of the growth would come from commodity-intensive emerging markets, he said, with China, India and Latin America playing a major role.

“The ascent in prices is likely to be most pronounced for crude oil, due to contracting global inventories, copper, gold, corn, and soybeans” said Lamy. “Droughts and biofuels in several parts of the world have tightened the supply of corn and soy, together with much higher Asian demand for the latter”.

Natural gas, zinc and cattle would see the least pronounced price rises, Lamy said, with higher grain prices having slowed demand for live cattle.

Supachai argued that that the rise in commodity prices was likely to continue. “The historical trend is towards increasing demand, especially in high growth areas in the developing world”, he observed. Commodity producers could benefit from the increased demand, he said, if resource rents were properly managed.

Supply: Floods, fire, drought, and biofuels

Natural disasters had contributed to the tightness of supply, speakers at the conference acknowledged. Last year “major weather events, from floods in Pakistan to fires in Russia and drought in other areas of the world” had affected the prices of commodities such as wheat and cotton, Supachai said.

Lamy noted that corn and soy supply had been affected by drought as well, with biofuel policies an additional factor affecting the growth in demand.

“It is still open to speculation whether such events are related to climate change”, said Supachai, “but the balance of evidence points to the increasing impact of climatic changes on agriculture”.

Hunger rising

David Nabarro, who was appointed by UN Secretary-General Ban Ki-Moon as a special representative on food security and nutrition, also echoed Lamy and Supachai’s concerns. During previous price spikes in 2008, a 30 to 50 increase in the food bill of the poorest one billion people “led to some very, very difficult choices”, Nabarro said, noting that small children and pregnant women had been hit particularly hard by the shocks.

Supachai underscored that the poorest communities were most at risk from sudden price changes. “Volatility has huge negative impacts on vulnerable groups, such as low-income households in developing countries, for whom food expenditure can account for up to 80 per cent of household budgets”, he warned.

More than one hundred million people are believed to have been pushed into hunger as a result of the 2008 price spikes. “These are people whose voices are not generally heard”, Nabarro noted, “but some of them did decide that this was just too much to bear, and in more than 32 countries we had riots by people who just could not cope with these food price rises”.

The current food price situation is therefore “not just an issue of hunger and nutrition, it’s also an issue of security,” he argued.

Debate on role of commodity markets

The magnitudes of recent price volatility “point to speculative distortions” which can complicate the management of commodities production and trade, Supachai told the meeting. The “financialisation” of agricultural commodities, and the activities of certain commodity funds that “seek to manipulate prices” also played a role, he said.

However, other participants at the forum argued that speculation had played little, if any role, in contributing to recent price spikes. “There is little evidence that speculators have been the underlying cause” of dramatic corn and wheat price increases in the last six months, said Brian Durkin, managing director and chief executive officer of CME Group, a Chicago-based operator of derivatives and futures exchanges.

At the instigation of French President Nicolas Sarkozy, the G-20 group of leading economies is expected to highlight food price volatility in a series of summits throughout this year. France is reportedly keen to tackle speculation of commodity markets as part of this initiative.

Although Lamy made no mention of the relationship between price volatility and speculation in his remarks, he recently told a meeting of agriculture ministers that there was no consensus on how policy-makers should best respond.

Trade: Export restrictions and price volatility

Instead, said Lamy, governments should look at whether trade policies such as export restrictions have exacerbated shortages of commodities, especially for food. These measures “were the single most important reason for the 2007-08 price explosion on the rice market”, said Lamy, who also identified Russian and Ukrainian wheat bans as having made an important contribution to the 2010-11 price rise for cereals.

Lamy acknowledged that “there is an imbalance in the WTO rule-book between the stringency of the rules for imports and their laxity for exports”, even though export restrictions “could actually starve” net-food-importing countries. He suggested that the WTO’s ongoing Doha Round of trade talks provided countries with “a window” for tackling agricultural export taxes and export restrictions.

More broadly, Lamy suggested that a Doha deal would “oil the wheels of international trade in commodities, giving the developing world its fair share of the market”. Warning participants that “volatility is at its worst in tight and closed markets”, he emphasised that a Doha deal was an opportunity to reduce the developed world’s remaining tariff peaks, such as those on rice; an opportunity to reduce tariffs in emerging economies; and to cut developed country farm subsidies for products such as cotton. “These subsidies crowd out the developing world from international markets, and prevent it from fairly competing,” Lamy said.

Lamy also told the gathering that climate-induced pressures on resources would make a new global deal even more important. “Droughts, and other natural catastrophes, should not deprive parts of the globe from food,” he said.

Source :-
CDRN Team :-
Swati Pahuja
B5/6, 4599
Vasanat Kunj,
New Delhi-110070

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