The benefits of free trade and unfettered access to world agricultural markets are being oversold to farmers, according to Daryll E. Ray, an agricultural economist at the University of Tennessee.
Economic principles such as supply and demand and comparative advantage don’t work the same with food as other commodities. Food, like insulin to a diabetic, is essential, he told the Canadian Wheat Board’s Grain World conference in Winnipeg Feb. 23.
“A diabetic will pay anything that is required to get the insulin that he needs,” Ray said. “You drop the price of insulin by 90 per cent and he uses no more. Food is not quite that inelastic but it is close.”
Farm production responds to market signals, but there’s a long lag time and by then, lots of farmers are out of business. Unlike in other sectors when a farm fails, production doesn’t stop. Another farmer takes on the land.
No farmer cuts all his crop production because prices are too low. But Dell doesn’t make a computer until it receives an order, Ray said.
The trend the last 10 to 20 years has been for farmers in the United States, and to a lesser extent in Canada, to lose market share to developing country competitors.
“The question then becomes if they are able to absorb an increasing share of our market now what’s going to prevent them from doing that if we had free trade?” Ray said.
In the 1970s, the U. S. accounted for 90 per cent of the world’s soybean exports, now it represents 40 to 50 per cent of the trade.
“We are the GM (General Motors) of soybean production,” Ray said.
World wheat export trade is flat, but the United States’ share is under 20 per cent, versus 50 per cent in the 1970s.
Most developing countries are determined to produce as much of their own food for national security and to keep peasants on the land, he added.
The World Bank has encouraged developing countries to produce cash crops for export to earn revenue to purchase food, but it hasn’t worked.
If world trade rules call for more market access, Ray said countries will find ways to impede imports. Canadian farmers have seen it first hand with U. S.-imposed barriers such as country-of-origin labelling.
“There are some folks who believe free markets are the answer to every problem along with tax reductions,” Ray said. “It’s a religion.”
Some of those same people say the U. S. can negotiate away its farm program because with free trade and market access markets will effectively determine prices and farmers will be better off.
But they are not taking into account, “random occurrences,” such as weather disasters or political policies that can affect supplies.
He advocates a food reserve. There are lots of critics, even though there’s a reserve for oil.
It wouldn’t be easy to operate, but Ray believes it would have moderated the impact of the run-up in grain price in 2007-08. Ray disagrees with the critics who say it would be too expensive.
“Compared to what? Ray asked. “How many more hog producers would we have in business today in Canada if we’d had a supply of grain that could be brought out of that reserve and keep the price from being what you guys paid up here?”
There was an opportunity to build a grain reserve among major exporting countries between 1999 and 2001 when grain prices were well below the cost of production, Ray said later in an interview.
North Americans want to continue developing their food production capacity. To that end governments should invest more in agricultural research. But farmers shouldn’t be penalized for lower grain prices that could come from increasing production. A reserve could help address that issue too, Ray said.
During a question period Blair Rutter, policy manager of the Western Canadian Wheat Growers Association, asked to Ray to justify the U. S. sugar policy that bolsters U. S. sugar prices benefiting U. S. farmers but hurting sugar producers in developing countries.
Ray said he doesn’t follow sugar, but suspects the world could better handle big changes in sugar prices than the price of staple foods.
“Free trade in general is really key to some increases in income that we’ve seen worldwide, but in the case of food we need to be careful about whether or not it can be applied as stated in economics textbooks,” Ray said in an interview. [email protected]