The G20 should be sure to stay level-headed during high grain prices

As with every price peak, there are also calls for action to be taken to bring down the high prices, or at least to smooth out the great fluctuations. For instance, LTO Netherlands chairman Albert Jan Maat has argued for stockpiles of grain to be created in the Netherlands.

The group of the twenty richest countries, the G20, now wants to discuss the high prices at an emergency meeting in the week commencing 27 August. Following the food price crisis of 2007/08, a new body was established under the chairmanship of France - the ‘Rapid Response Forum’. This forum meets in the event of 'abnormal market conditions'. It will be the first time that a Rapid Response Forum meeting is held. During the Forum, discussions will take place on what can be done to rein in the ever increasing prices. The director of the FAO (the Food and Agriculture Organisation of the United Nations), José Graziano da Silva, has already made an opening move in an article in the Financial Times, arguing that the production of biofuels in the USA (which predominantly uses maize) should be temporarily halted as it is driving prices up even further.

What can the G20 achieve within the Forum? There are no quick or easy ways of bringing prices back to an acceptable level. Stockpiling by governments is not an efficient measure. (See also: the IATP Grain Reserves Reader). In the short term, this could actually cause prices to rise even further.

The question is therefore whether intervention is required or should be avoided. Measures taken by governments often have the opposite effect to the effect intended. This was demonstrated in 2007/08, when the price of rice reached a record high despite there not actually being any real shortage. The price was pushed upwards as a result of panic measures taken by Asian governments (see also: Policy Support Domain International Cooperation (BOCI)/LEI paper), such as stockpiling and setting up export barriers. This kept domestic prices low but led to scarcity on the global market. The best thing for the G20 to do is therefore to keep their heads cool and to make agreements to refrain from taking such market-disrupting measures.

But shouldn't something be done? Of course it should. High prices hit poorer consumers in particular; in places where this leads to starvation, the affected people need to be given help, for instance through food subsidies. The G20 can also do more than merely agreeing not to interfere with market forces. The G20 countries could discuss how to make markets work better. There are two options in this regard. Firstly, the price-insensitive compulsory additions to fuels could be abolished, which in principle indicate that energy takes precedence over food. According to some economists, the effect might not be huge, but why would you enforce such a measure if biofuels can be encouraged in other ways? In addition, why stimulate this first generation of biofuels if we already know that we need to focus on the second generation of biofuels? A second point is of course the investment in productivity. This is not a quick or easy solution, but it is essential, particularly in Africa but also in Russia and Argentina: invest in infrastructure, education, research, and information provision.

Lastly, we will probably need to learn to live with higher food prices and realise that higher prices are also good news; farmers (including those in developing countries) receive higher prices, enabling them to invest more in boosting their productivity. Governments can - and must - assist in this through infrastructure, research, and information provision. The latter is particularly essential in order to ensure that the demand for food can be met.

Incidentally, there is another silver lining to the cloud of high food prices, and one that is frequently forgotten. One of the reasons why the prices have increased is the fact that the incomes of many billions of people have increased in recent years, not only in Asia but also in Africa. More people are therefore now able to afford better food, particularly meat, the production of which requires a great deal of grain. In relative terms, fewer people die of starvation in today's world, even when prices rise.