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Listen for the signal, not the noise

12 Sep 2019

According to latest projections by OECD and FAO, food supply growth over the next ten years will modestly outpace demand growth. Not surprisingly, therefore, real prices for most crops and livestock commodities are expected to decline, in the order of one percent per year. Monthly and annual price variations, however, can be much larger that this overall trend, sometimes up to +/- 40 percent in a given year.

Agricultural markets are inherently volatile, which underscores the need for effective risk management policies. But if policymakers respond to short-term price declines, for example by protecting domestic markets through trade barriers, they risk dodging the necessary farm adjustment challenges that long-term price declines imply.

Countries that restrict trade to stabilise internal prices effectively export instability onto world markets. Moreover, they obstruct global food security and a sustainable use of resources. The parts of the world that experience rapid population growth are frequently not the same as those where supply can be increased without causing serious harm to the environment. Rather than safeguarding farm incomes through protectionist policies, countries should use targeted measures that address the long-term needs of producers, consumers and the natural environment.

Looking at past and current trends, markets seem to be responding well to the challenge of feeding the world. Policies, on the other hand, have often performed less well in protecting the earth’s natural resources, tackling all forms of malnutrition, and providing viable livelihoods for farmers. The market “signal” may be weak relative to the “noise”, but policymakers need to respond to the signal.

 

OECD/FAO (2019), OECD-FAO Agricultural Outlook 2019-2028, OECD Publishing, Paris.
https://doi.org/10.1787/agr_outlook-2019-en.