Global food prices and CAP reform

| October 24, 2011 | 0 Comments

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No single factor to blame for food price rise 

Agricultural prices rose sharply in 2007-2008 and are forecast to remain high, at least in the medium term.

There are many reasons put forward to explain rising food prices. These range from changing eating habits to trade restrictions and climate change.

While there are more mouths to feed as the world’s population grows, increased demand for meat and dairy products from rapidly growing economies, particularly China and India, further increases the overall pressure on the price of grain used to feed livestock instead of being consumed by humans directly.

The use of food crops for biofuels, such as maize for bioethanol, as well as EU and US subsidies for biofuel production, are said to subject grain for human food to further competition. Other factors affecting grain prices include poor harvests, varying crop yields and environmental pressures caused by an increasingly variable climate, as well as higher fertiliser, energy and transport costs due to surging oil prices.

Speculation in commodity markets helped by low global food stocks are also singled out for driving up food prices. Subsidies, concentration of important agricultural markets in the hands of a few firms, trade restrictions by important exporters to protect domestic consumers, depreciation of the US dollar and lower productivity growth due to low investment in agricultural research are also said to affect the price of food.

As for price formation, the shelf price of foodstuffs is influenced by the cost of energy, transport, processing and labour, and much less so by changes in farm-gate prices. According to the European Commission, agricultural ingredients represent only 5% of the final cost of a loaf of bread, for example.

Role of CAP

The EU’s Common Agricultural Policy (CAP) was established in 1958 to subsidise farmers, encouraging them to produce more to ensure stable supplies of affordable food. Once self-sufficiency for food was achieved in the 1980s, the policy began to lead to almost permanent surpluses of basic farm commodities, referred to as ‘butter mountains’ or ‘wine lakes’, which were bought up in the interest of food security.

By agreeing to conduct a CAP Health Check in late 2008, the European Commission stressed that the EU had taken ”decisive steps” towards more market liberalisation. Reforms agreed as part of the Health Check include the abolition of set-aside areas in arable land, the gradual phasing-out of milk quotas and “the conversion of market intervention into a genuine safety net”.

The EU executive believes that these measures will help farmers respond to changing market conditions, as decoupled direct payments leave them free to produce what the market is asking for.

However, the commitment to abolish milk quotas, for example, has led to unforeseen protests by milk producers, who claim strict regulations limiting production are needed to keep them in business.

Soaring global food prices in 2007-2008 have prompted a renewed debate about maintaining sufficient subsidies to the EU farming sector, as some argue that feeding people cannot be left to the mercy of the market.

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