TN/AG/GEN/45
29 May 2017
(17-2873) Page: 1/4
Committee on Agriculture
Special Session
Original: English
THE SHORT-TERM PRICE VOLATILITY IN AGRICULTURE
NEED FOR STABILITY FOR SMALL-SCALE FARMERS IN DEVELOPING COUNTRY MEMBERS
SUBMISSION BY THE G-33
The following submission, dated 24 May 2017, is being circulated at the request of the Delegation
of Indonesia on behalf of the G-33.
_______________
1.1. In 2011, the Agriculture Ministers of the world's 20 biggest economies (G20) noted that "[t]o
feed a world population expected to reach more than 9 billion in 2050, it is estimated that
agricultural production will have to increase by 70% over the same period, and more specifically
by almost 100% in developing countries". They also recognized the fact that "[s]mall-scale
agricultural producers represent the majority of the food insecure in developing countries and the
bulk of production in many countries: increasing their production and income would directly
improve access to food among the most vulnerable and improve supply for local and domestic
markets."
1
1.2. While small-scale farmers, with equal to or less than 2 hectares of landholdings, provide up
to 80% of food supply in some developing regions and represent 85% of the world population
active in agriculture
2
, three out of four of the world's extreme poor live in rural areas.
3
Sustaining
the small-scale agriculture is, thus, critical for maintaining food security in developing country
members, as it is the source of income for the overwhelming majority of the poor on the one hand,
and the main source of food supply, on the other.
1.3. As rural households in developing countries are both producers and purchasers of agricultural
products, the impacts of price volatility for them are complex. The small-scale and resource-poor
farmers face serious problems in case of both price collapses and dramatic price surges.
1.4. While smooth and predictable price changes in line with long and well-established trends
reflecting market fundamentals are not problematic, large and unanticipated price variations
create uncertainty for agriculture producers and lead to sub-optimal decisions, in terms of both
production and investment. Especially sudden and unexpected price falls pose significant problems
for farmers who face the risk of losing the return on their investments and even lead to a dramatic
loss of purchasing power for the small-scale and livelihood farmers when they have already
planted their crops with a certain price expectation. The small-scale and livelihood farmers in
developing economies, who are not able to operate on large scale and with financial independence
for carrying over income from one year to the other, find themselves in financial incapacity for
affording the inputs for planting again and staying in the production. Thus, the excessive price
volatility puts in danger the subsistence of the livelihood farmers and the viability of production in
developing countries, where the production is largely dominated by the small-scale subsistence
farming. Therefore, maintaining the agricultural price stability is crucial for sustainable agriculture
production, rural development and poverty alleviation in developing country members.
1 Ministerial Declaration, Action Plan on Food Price Volatility and Agriculture, Meeting of G20 Agriculture
Ministers, Paris, 22-23 June 2011, p. 3.
2 FAO, The State of Food and Agriculture 2014: Innovation in family farming, Rome, 2014.
3 FAO, The State of Food and Agriculture 2016: Climate Change, Agriculture and Food Security,
Rome, 2016.
TN/AG/GEN/45
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Chart 1: Average Size of Agriculture Holdings (ha)
349.07
186.95
87.09
32.53 27.27
2.92 2.2 1.12
0
50
100
150
200
250
300
350
Note:
a) Burkina Faso, Congo (Democratic Republic), Djibouti, Egypt, Ethiopia, Guinea, Guinea-Bissau,
Lesotho, Libya, Malawi, Namibia, Reunion Island, Uganda;
b) India, Indonesia, Iran, Myanmar, Nepal, Pakistan, Philippines, Thailand, Viet Nam;
c) Argentina, Brazil, Colombia, Honduras, Panama, Paraguay, Peru, Puerto Rico;
d) Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
Netherlands, Portugal, Spain, United Kingdom.
Source: Diaz-Bonilla E, Macroeconomics, Agriculture & Food Security: A Guide to Policy Analysis in
Developing Countries, IFPRI, 2015.
1.5. Short-term volatility of the prices of basic agricultural commodities still continues to rule in
the agriculture markets which are intrinsically subject to greater volatility than other segments of
the economy due to the effects of natural shocks, i.e. weather and pest/disease conditions, low
demand and supply elasticity in the short term, the inability of adjusting supply to price variations
as production takes considerable time and depends on seasons. The volatility of international
prices rose 52% for maize, 87% for rice, and 102% for wheat in the aftermath of the 2008 global
financial crisis, compared to the three decades before.
4
The 2014 World Trade Report of the
WTO points out that "price volatility is, and is likely to continue to be, a concern for importing and
exporting countries."
5
1.6. Due to the fact that supply cannot respond to the price changes in the short term, a
phenomenon particular to the agriculture markets is the lagged supply response to the price
changes which provokes cyclical adjustments but, in general, creates over-reaction and additional
price volatility. This happens especially when producers plant crops that bring high returns in the
season t, which leads to a collapse of the prices due to oversupply in the season t+1, as often
named 'hog-cycle'.
6
4 Minot N. "Food Price Volatility in Sub-Saharan Africa: Has It Really Increased?", Food
Policy,2014, 45 : 45-56.
5 World Trade Organization (WTO), World Trade Report 2014: Trade and Development: Recent Trends
and the Role of the WTO, Geneva, 2014, p. 132.
6 H. F. Breimyer, "Emerging Phenomenon: A Cycle in Hogs", Journal of Farm Economics, Vol 41,
November 1959 and Dennis L. Meadows, Dynamics of Commodity Production Cycles, Wright-Allen Press, 1970.
TN/AG/GEN/45
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Chart 2 Nominal Prices of Selective Agriculture Commodities (monthly, USD, left axis for wheat and maize, right axis for rice and soybeans)
Source: UNCTADSTAT.
1.7. The price volatility is particularly important for developing country members when imports have a large share in the domestic consumption of the product in question, where the volatility is transmitted from international to domestic markets through imports. A recent study shows that the price volatility in international markets is more likely to be transmitted into the domestic markets when the ratio of traded volume to domestic production is greater than 40%.7 However, there is a number of exceptions to this pattern. Some members even with little trade volume in a commodity are affected by domestic price volatility that is parallel to international volatility, mainly due to the fact that local traders act according to international markets and prices because of the possibility of arbitrage between domestic and international markets.8
7 Ceballos F, Hernandez M, Minot N, Robles M, IFPRI Discussion Paper 01472, Grain Price and Volatility Transmission from International to Domestic Markets in Developing Countries, October 2015.
8 Ibid.
TN/AG/GEN/45
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Chart 3: Changes in the World Average Import Prices of Selective Agriculture
Commodities (yearly per tonne, %)
-40%
-20%
0%
20%
40%
60%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Barley Wheat Soybean Rice Maize Cotton
Source: Calculation made on the data from ITC TradeMap.
1.8. As the great majority of producers in developing country members are small-scale farmers,
they are highly dependent on the seasonal income that they would earn from their harvest.
Therefore, they have little market power to influence prices and are mainly price takers in the
short term, which makes them highly vulnerable to price changes.
1.9. It is vital for developing country members to protect the resource-poor and small-scale
farmers from excessive price volatilities of agriculture commodities to ensure a predictable income
for rural populations and alleviate rural poverty, together with achieving long-term objectives of
food security. Limiting the impact of international price collapses on domestic prices should be one
element of this strategy.
1.10. Some developed members apply "farm income safety net systems", including "price loss
coverage mechanisms" to protect their farmers from the adverse effects of price changes and to
maintain a predictable income level for rural populations. These kind of tools are not generally
accessible to developing countries due to financial, technical and social development constrains.
1.11. In their report on the "Price Volatility and Food Security", the High Level Experts on Food
Security and Nutrition of FAO noted the necessity for adopting "[s]afeguard measures that
effectively protect against import surges;" and "[f]lexibility to raise tariffs according to pre-defined
conditions, possibly including price bands for vital crops" under the WTO rules, for the protection
of small-scale farmers from negative effects of price volatilities.9
1.12. Against this background, the implementation of an effective and operational Special
Safeguard Mechanism (SSM) has become an urgent need for developing country members, to be
able to effectively address the negative impacts of short-term international price volatilities on the
resource-poor small-scale farmers.
__________
9 FAO HLPE, Price volatility and food security. A report by the High Level Panel of Experts on
FoodSecurity and Nutrition of the Committee on World Food Security, Rome, 2011.