FORUM FOR INTERNATIONAL NEGOTIATIONS - EIGHT SIMULATION

Monday, 26 May 2008

Museum für Völkerkunde - Seminarraum DG39

A-1010  WIEN, Neue Hofburg

"UN Summit on Global Food Crisis"

_____________________________________________________________________________________________________

I. Conference settings

Reality: Recently the UN Secretary General, H.E. Mr. Ban Ki-Moon has repeatedly called for a global immediate effort to the end the global food crisis caused by the rise of food price. He established a task force consisting of IMF, World Bank, UN specialized organs and several experts to propose recommendations to solve the problem. On 6 May 2008, the UNSG stressed his invitation of heads of state and government to come to the High Level Conference on Food Security which is to be held from 3-5 June in Rome (Food security is a terminology to be understood as ‘ensuring a regular supply of food’) with ‘fresh ideas’ that will help deliberating measures to fight global food crisis and coordinate the cooperation between states and international organizations.

Hypothetical scenario: the Forum simulates the UN-Summit to be held in Rome. Unlike the real summit, where the recommendations of the task force will be discussed by all member states, at the 8^th simulation some countries and inter-governmental organizations are selected due to their special role in the crisis. Being fully aware of the lack of the actual recommendations of the task force in the simulation, we believe that at the real summit the IGOs will also express their own point of view and highlight their contribution in the recommendations. There is no rule concerning the conference procedure. The scenario of the simulation fully corresponds to the facts concerning the global food crisis until the negotiation date, 26 May 2008.

II. Background information (as of 12 May 2008)

Current Situation

Since 2005, the S&P agricultural commodity prices have risen by more than 150%. Since 2007, wheat export prices have increased by 130%, rice by 98%, and maize by 38%. The domestic prices of these goods have also increased, more dramatically in Sub-Saharan Africa and agriculturally unproductive, food-importing countries around the world. Much populated food-importing countries tend to suffer from price hike more than others.

Soaring food grain prices in recent months have caused serious concern around the world. Poverty impact is very large and intensive in certain countries and area, especially in densely populated food-importing countries and the LDCs. As lower-income households, which are the vast majority in these countries, spend more than 70% of total income on food, the crisis most affects the poor and the vulnerable, and more strongly those in poor-countries. The Social implication of the crisis is severe. Social security and public health in these countries have come under distress.

Most of the countries increase food production subsidies, rationalize the consumption, eliminate import tariffs on agricultural goods and impose price ceilings to slowdown the price rise. Some of these measures are a growing pressure on the state’s financial burden and thus not sustainable. Many developing countries have exhausted their support potential. Subsequently, riots and protests have been breaking out which show the discontent with the authority’s dealing with the problem. Political instability increases in many developing countries.

Even in some food-abundant countries, tension is rising due to the high food price. Theories might argue that a high food price helps empowering the poor food-producing segment of the population, the reality shows that the farmers in these countries do not profit from the rise. Large food-producing countries start to face food shortage and have to impose export bans. There are very few countries that are entirely self-sufficient and continue to export food without any restriction.

Terms of trade in food-importing countries are likely to lower, leading to a higher current account deficit and strong exchange rate fluctuation.

Causes (very briefly described and non-exhaustive)

Cyclical cause and global warming: production of grains in some countries has declined due to bad weather and natural catastrophes, as well as the effects of global warming, such as drought and floods. This is especially the case in Sub-Saharan countries.

A larger demand of grains for consumption and livestock in developing countries. However, the increase of the demand coming from developing countries in recent years compared with preceding decades is not exceptional. From 1995-2000, the demand increase from developing countries accounted for 80% of the global demand increase. The estimation for 2007 and 2008 shows that the developing countries account for only 50% of the increase

Surging speculative demands in agricultural commodity along with the turmoil in financial markets and the decreasing attractiveness of investment in other ‘goods’ such as property or overheated stocks. Not only international investors believe in the higher price in the future, also traders in food-exporting countries as well as government, which in many cases still maintains monopoly on certain goods, begin hoarding food to create an opportunity for profits.

The increasing diversion of cereal use from food to energy sources. Most importantly, the expansion of biofuels in developed countries (US, European countries) and developing countries (India, Brazil) reduces the arable area for food production and the supply of food. However, most of the food price rise is caused not by the competition on the production factor, but by the fact that a large quantity of food is directly used as raw materials for the production of biofuels.

Some countries accumulate food stock fearing a further price increase, or introduce export ban to ensure an amount of food stock sufficient for domestic use. Such measures artificially reduce supply and increase demand.

Higher production price due to higher fuel price and fertilizer price. High fuel price also leads to higher transportation costs and more incentives to biofuel production.

The depreciation of the US Dollar against currencies of food-exporting countries increases the global price of exported food, as most of the agricultural commodities are nominated in the US Dollar.

Lack of investment in agricultural sectors and inadequate infrastructure such as irrigation system and transportation system, preventing a full use of resources and market access.

Further consequence

The global food crisis can reverse the development trend by increasing poverty. It will surely jeopardize the Millennium Development Goals, not only the first goal of halving the poverty by 2015 but also other goals.

In short-term, several larger developing countries are still able to use political and economical measures to prevent a proportional food price rise in domestic markets. As soon as the world price must proportionally be transmitted to domestic price, a larger scale of civil unrest is expected also in these countries.

Facing food shortage in the country, government of food-exporting countries might extend measure to ensure a sufficient food stock for domestic use, such as export restrictions. These restrictions lead to further world price hike and speculation, which raise the incentives for government to further restrict export, thus fuelling the price rise.

Export restrictions or domestic price controls artificially reduce the price, and so the profits for farmers and agribusiness. The logical consequence is less investment incentives for the producers. This will in long run severe the crisis rather than resolve it.

If no measures are taken, i.e. no policy introduced to affect food demand and supply, the price is likely to increase and remain at a high level. On the demand side, the food-importing developing countries will starve and subsequently be excluded from the market, while other emerging developing countries’ food demand will continue to rise. In sum, the global demand might not rise as dramatically as before, but that’s precisely because some people just cannot afford food. On the supply side, food production will continue to decrease, while its costs steadily rise due to higher fuel costs.

It is likely that such a situation would lead to political destabilization in food-importing developing countries and among the poor everywhere resulting in increased migration, riots and fights over resource, humanitarian crisis and health crisis, threat to peace and security, separatism in resource-abundant areas, rise of religious fundamentalism, violation of human rights etc.

Dramatically deteriorating terms-of-trade in food-importing developing countries will eventually lead to higher current account deficit, indebtedness, higher domestic interest rate and recession. International financial system and economy might further come under distress. High food price also increase inflationary pressure on global economy and complicate the trade negotiations on agricultural products.

Further production of biofuels will increase the correlation between food price and energy price. Given that the latter’s strong fluctuation and further assumed rise in the future, the food crisis might become a long-term and structural phenomenon.

Policy options (non-exhaustive)

Short-term and long-term investment in agriculture and agribusiness, especially in the field of fertilizer, better seeds, infrastructure, food standard and irrigation. As such investment is capital intensive, more money needs to be channelled towards developing countries with little or no capital stocks. This might spark a debate about, firstly, a change in the pattern of development aid grants (who? Bilateral or multilateral? How much should be allocated to agricultural capacity building?) and, secondly, a rethinking of the concept of agricultural production (e.g. self-sufficiency oriented production along with export orientation?). Many actors and concepts will have to be involved in financing agricultural investment and creating incentives for food production.

Governments might reconsider their stance towards genetically modified crops, and support both the production of genetically modified crops and the scientific research in this area.

As the rise of food price is accompanied by a strong fluctuation due to speculations, in short-run governments might attempt to stabilize the price by establishing a cartel for each product. As most of food-exporting and food-importing countries are developing countries, the so-called south-south cooperation can be reviewed or extended to include the element of price policy coordination.

Finally, even food-exporting countries will find themselves in mutually harming, protectionist crisis spirals. Therefore, trade policy coordination between countries is highly recommended, in order to prevent protectionism. Advice from and consultation with international economic institutions are also needed.

Further reduction of tariffs on imports of agricultural products is also another option compatible with trade liberalization. Government of food-exporting countries could also take the opportunity of high market price to reduce subsidies for agricultural production. Both measures also help to moderate domestic food price.

An urgent social protection program should be introduced in hard-hit countries including cash transfer programs, employment programs, targeted subsidies and social security and health systems strengthening. In this regard, short-term bilateral or multilateral humanitarian aid coordinated by the UN is needed. Whether export bans, direct price controls or the financing of production are appropriate measures or not, is a subject to be debated.

Although some bio-fuel producing countries start to introduce policy to slow down its production (such as the reduction of tax incentives) or modify the pattern of production, such an action must be taken worldwide in order to sustainably increase the arable land for food production.

Links to information on background information of the global food crisis

General

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/13/AR2008031303347.html

http://www.imf.org/external/pubs/ft/survey/so/2008/NEW041008A.htm

http://www.imf.org/external/pubs/ft/survey/so/2008/CAR032008A.htm

Comments and analysis by experts

http://www.ft.com/cms/s/0/451604c4-e30b-11dc-803f-0000779fd2ac.html

Rise of commodity prices (not only food)

http://www.imf.org/external/pubs/ft/fandd/2008/03/helbling.htm

Policy options

http://www.ifpri.org/pubs/confpapers/20080322jvbchinaforum.pdf

http://www.ifpri.org/german/pubs/bp/bp001gr.pdf (in German)

http://www.iht.com/articles/2008/05/06/business/glob07.php

III. Participants

UN Secretary General (Chairperson)
FAO
IMF
World Bank
China
Egypt
European Commission
India
Thailand
United States
Representative of the LDCs, LLDCs and SIDS

UN Secretary-General (Chairperson)

As the administrative chief of the UN, the UN Secretary General has prioritised the global food crisis. He is determined to use the UN’s universal competencies, capacity and expertise to lead the policy coordination between countries and international organisations and to take lead in the fight for food security. Given the acuteness of the crisis and its severe implication, he believes that the solution must be taken in an inclusive and very timely manner, taking relevant entities and concerned countries into the decision-making process relevant entities and concerned countries, and it must be a comprehensive and in integrated manner. His tasks at the conference are raising the attention to the problem, mediate between parties, negotiate for a common solution and offer the leading role of the UN organs, but also to draw attention to other issues related to food crisis both short-term and long-term, such as international development aid, human rights, MDGs or climate change. He will also represent the opinion of other UN specialized organs not present at the conference. The organisations are for example the World Food Programme, the UN Development Programme, bodies working on human rights protection and humanitarian aid or UNCTAD, the negotiator wishing to play the role of the UNSG should therefore understand the opinion of these bodies in addition to the relevant activities of the UNSG.

The UNSG supports the plan of the WFP to moderately ration food aid in response to the higher price of agricultural commodities. Most importantly, the UNSG is worried that new donations might not arrive in time to be channelled through the WFP, and therefore also calls for an end to speculative hoarding. He also believes in a long-term investment in the agricultural production capacity building to guarantee a sufficient level of production and to adapt the production to the effects of climate change. He is also very concerned with the fact that the fundamental human right - the right to have food - can be widely violated.

FAO

FAO considers biofuels and the diverstion of grain from being consumed by people to meat production the most important factors that cause the price hike, especially for corn and soybeans. However, in the case of high rice, vegetables and wheat price, it believes that speculations are responsible. In the long run, the organisation is preoccupied with the question as to how to boost a sustainable investment in food production, how to feed a growing global population under the impact of climate change and to ensure that small farmers and entrepreneurs will also profit from reasonable prices. Additionally at the conference, the FAO will also play the role of expert in the agricultural issue. FAO believes that as short-term measures, trade restrictions and speculation in agricultural commodities should be eliminated in order to alliviate speculative price pressure. In the long-term it is essential to increase agricultural investment in water control and infrastructure, to support an effective marketing and processing system for agricultural products and to facilitate small farmer access to inputs, so they can raise their productivity and income and a similar food crisis can be prevented. FAO is willing to play a leading role in this regard.

IMF

IMF considers trade restrictions and global food market distortion by national policy as the main reason for the global food crisis. According to the Fund, countries should avoid export bans or any additional barrier to food trade as well as a direct intervention such as price or quota setting, but are recommended to introduce when necessary temporary, targeted subsidies to reduce negative social side effect, and moderately tighter monetary policy to control inflation. Countries are not recommended to take measures that further distort the market including cartel buildings and direct intervention in global commodity markets. Countries should also take this opportunity to complete the Doha trade negotiations on agricultural products to boost food trade and food productions. IMF also believes that an open commodity market is the best long-term solution.

Being aware of the negative consequences of the crisis on global economic stability and development, in short-term the IMF is prepared to work with member countries that are likely to be negatively affected to accommodate the macroeconomic consequences of high food price, such as the deterioration of the balance of payment, and to augment the provision of additional financing in the framework of Poverty Reduction and Growth Facility (PRGF). To facilitate a long-term investment, the IMF supports the insurance-type financing of investment in agribusiness.

World Bank

As the world’s largest development financing institution, the WB believes that High food prices are threatening recent gains in overcoming poverty and malnutrition, and that they will persist in medium and long term. Similar to the IMF, the Bank believes that the rising prices are linked to government’s measures. In addition, higher non-food commodity prices, climate change and higher fertilizer price also drove up the production costs. Along the arguments and similar policy set put forward by the IMF, the Bank explicitly recommends further liberalization of food trade (lowering tariffs on food) as a very effective short-term price reducer as well as a review of national biofuel policy. Additionally the Bank also calls on the international community to make up the $500 million food gap required by the UN's World Food Program to meet emergency needs. In the longer run, the World Bank Group will help countries strengthening basic infrastructure (transport, power and irrigation) and investing in agricultural technology, and make agriculture a priority by double agricultural lending.

China

China is the world largest food producer and consumer. As the country still partly relies on import, the recent rise in food price elsewhere has also raised domestic average food price by more than 20%, constituting the biggest contributing factor to the record-high 8% of inflation rate. The heated economy and the growing income disparity combined with high food price poses a serious problem to Chinese economy and political stability. The government responded to this problem by the accumulation of grain reserves, export bans and targeted subsidies for the growing number of urban poor. In long-term China is in a development dilemma: how to ensure both that farmers can sell the products at a reasonable price and that the urban poor can still afford food. In long-term China will have to continue to import wheat and rice in a large scale, despite government’s efforts to support agriculture.

It is true that the demand for food (official statistics show that this demand has risen by 1.8% compared to 2006) in China has led to an increase in food import. And given the size of the country, the additional import demand could have an impact on world price. It is however not the main factor for the recent price rise, as the world prices in the last decade remained stable while China’s import demand rose. China has also been criticized for its export bans on rice and corn. The government of China believes that these bans will lead to domestic price stability and thus help to stabilize the world grain market. Unlike China, which has adopted modest biofuels expansion plans for fear of food security, developed countries continue to subsidise biofuel production, prevent investment in agriculture in developing countries through subsidies and import tax, and have not taken any measures to stop speculation on food price. For China, these are the main causes of the crisis.

Egypt

Egypt is the most populated country in the Middle East. Although the country is able to produce food, the consumption exceeds the production by one fold. Within half a year, the price of rice has doubled. A large proportion of the population is considered poor whereas a very small part can still afford imported food. This extreme income inequality combined with a dramatic price rise cause unprecedented social tension. At such a very critical moment, government has introduced a range of policies to help the poor through the crisis; subsidised food (unsubsidised bread can, for example, cost 10 times more than subsidies bread), lower import tariffs for food, export bans on food, direct food production by state authorities. The government even uses foreign currency reserves to buy grains. Despite all these short-term measures, Egypt is facing a social unrest, which will threaten domestic political stability in a long run and increase violence from and support for extremist organisations. Egypt might have similar demands like those of the LDCs, the consequences of the crisis are however multifaceted, very urgent and have a clear political implication.

European Commission

According to the European Commission, the surging demand for food in emerging economies and bad weather conditions as a result of global warming are the main causes of the food crisis. The export restrictions, clearly a wrong policy response, and speculative hoarding exacerbate the food scarcity. On the background, countries should withdraw mercantilist policies, such as food export ban introduced in most of the largest food-exporter, as the first urgent step to curb the price. In this regards, the European Commission also urges countries to take this opportunity to open their agricultural markets and increase the food supply in their own country. The European Commission defends the Common Agricultural Policy, which has officially decoupled subsidies from the production, and the existing tariff rates for imported agricultural goods as not being accountable for the crisis and the Biofuel Directives as necessary, sustainable and balanced contribution to solve the problem of global warming. Moreover, the policy of biofuel production is largely a national decision.

As the President of the European Commission, the negotiator will have to take into account the opinion of the colleagues responsible for issues related to the crisis, such as the commissioners on trade, agriculture, external relations and development cooperation. A broader perspective on the consequences has to be reflected in the policy deliberation: terrorism, failed states, migration, inflation and income equality, development goals.

India

India generally faces a similar social impact of food price increase as China. Although India has a larger number of poor population to nurture, the food market in India is more self-sufficient and the income inequality is less than in China thanks to distributive policy of the government. The state regularly supports the poor with subsidised food. However, inflation has also increased in India and threatens to destabilize the fast growing economy.

As the representative of India, the negotiator will have to defend the export bans imposed on milk and dairy products (whose global price does not increase as much as that of grains, which India continues to export). India also does not believe that a 2% increase in food consumption proved by the FAO could be the principle reason for worldwide upward price spirals. India also defends the national strategy to substantially expand the production of biofuels. Accounting the hedge funds and financial market traders for the crisis, India considers a ban on trading in food futures at the national level and is willing to cooperate with countries to regulate hedge funds’ activities in commodity market.

Thailand

Thailand is the largest exporter of rice worldwide and one of the few countries that has not yet imposed trade restriction measures on main agricultural products, although hoarding can be observed among consumers. Being hyper-productive in food production, untouched by natural catastrophe and having a strong agro-industry sector, a disadvantage resulting from high non-food commodity price is compensated by advantage from high food price and a larger quantity exported. As the prices are likely to remain high over a long period, it is predicted that the economy as well as small farmers also profit from the crisis.

Thailand has recently planned to establish a rice cartel with four rice-producing neighbouring countries in order to stabilize the market price. This plan has been implicitly criticized by international economic institutions. Moreover, as the foreign trade of rice is largely controlled by the state, Thailand might divert a part of its rice export to its neighbours, such as the Philippines or Myanmar. In recent years, the production of palm oil has also steadily grown in Thailand.

United States

The US has been criticized for its subsidies in the production of biofuels. The government estimated, however, that the corn-based biofuels production account only for three percent of the price increase. In contrast, the price increase takes place predominantly because of a higher demand for food in emerging economies, and because some countries instituted restrictions on agricultural exports. The cause of the price hike is not on the supply-side. Nevertheless, demand-induced price increase can be compensated by supply increase by eliminating market distorting measures and lifting restrictions on genetically modified crops. Migration and political instability are also main concerns of the US administration.

In short-term, the US administration has proposed a total sum of 2.1 billion USD for the bilateral food aid programme between the US and other 78 developing countries. It has also proposed to purchase up to 25 percent of food assistance directly from farmers to ensure a direct additional income for small farmers and to build up local agriculture. The US also calls upon developed countries for further commitment for additional food aid in short-term, and upon developing countries to finish the Doha trade negotiations round and refrain from market-distorting subsidies and trade restricting measures. The US stance towards financing future investment in agribusiness is less clear.

Representative of the LDCs, LLDCs and SIDS

The groups of the LDCs, landlocked developing countries and the small island developing states are the ones that are more gravely affected by the crisis. On average, more than half of calories come from imprted foods. In response, the governments have step up food subsidies and decrease import tariff rates, thus risking public indebtedness. In some countries, where the government is not able to contain the negative effect of the price increase, riots und protests have broken out. In short-term these countries argue for urgent food aid and a more open food commodity market or any price stabilizing measures. Nevertheless, the crisis has a structural root lying in the unproductiveness of the agricultural sector, which is partly due to the lack of investment and dependence on certain crops and partly owing to the lack of competitiveness compared to heavily subsidies products from developed countries. Without an immediate crisis relief many of these countries cannot reach the MDGs and might be at the brinks of internal chaos.

Links to information on country positions

Measures against speculations on commodities (India)

http://www.ft.com/cms/s/0/2e7677da-1a92-11dd-aa67-0000779fd2ac,dwp_uuid=a955630e-3603-11dc-ad42-0000779fd2ac.html

Long-term policy options for fast-growing Asian economies (a useful link for both China and India)

http://www.ifpri.org/2020/focus/focus15/focus15_06.pdf

China’s Economic Net (with a collection of pro-Chinese news)

http://en.ce.cn/

UN-OHRLLS (with a large number of documents on the group’s activities)

http://www.unohrlls.org/

World Bank Policy Research Working Paper, No. WPS 4594 (LDCs)

http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2008/04/16/000158349_20080416103709/Rendered/PDF/wps4594.pdf

High food price and the Millennium Development Goals (MDGs)