Rising Food Prices Series: Part VI

Posted by Patrick O'Connor on 5/19/08 11:59 am

This post contains agricultural stocks that are in our top-ten holdings.

This article is the sixth part of a multi-part series about rising global food prices. In this installment, we will explain one of the factors that is contributing to a rise in global food prices: trade restrictions. In the following weeks, we will discuss other factors. Read Parts I, II, III, IV, and V.

Trade restrictions prevent supplies from flowing to the places of highest demand

Rising food prices have caused protests and even riots in some of the world’s poorest countries, prompting many governments to maintain or increase trade restrictions such as quotas, price controls, and export bans. But the unrest could be a blessing in disguise if it makes governments eliminate the trade barriers that push prices higher, according to the International Policy Network (IPN), a non-partisan, non-profit organization dedicated to encouraging public understanding of the role of the institutions of a free society.

Food prices are rising because demand is increasing, primarily from the growing middle class in China and India. But this increase in demand should easily have been accommodated by a free global market. As demand increases, prices should rise, encouraging production of the agricultural goods that are most in demand. Then, as more agricultural goods flood the market, prices should fall.

The problem is that many countries resist free trade in food by limiting imports and exports in some way—through outright bans, quantity restrictions, or tariffs, for example. Almost all agricultural staples are affected. A number of Asian countries, including China and India, restrict the export of rice. Russia and Kazakhstan restrict the export of wheat. Argentina restricts the export of corn, wheat, and soybeans.

This may seem understandable: why send food abroad when it is needed at home? And why let another nation sell food to your population when producing your own food would increase local jobs? But longer term, trade restrictions prevent supplies from flowing to the places of highest demand. This makes crops the least profitable when they are most needed—and leave little incentive for farmers to plant, harvest, and store crops in case hard times arise.

Indeed, decades of trade restrictions have helped Sub-Saharan Africa—home to some of the world’s poorest countries—little. According to the IPN, crop yields in much of Africa have steadily decreased since the 1980s. As a result, 70% of the continent’s work force is still in agriculture, but contributes only about 25% of gross domestic product.

In addition to having no positive effect, trade restrictions have a negative effect: they cause prices to rise. Rice may be the best example. Only about 5 percent to 7 percent of the world’s rice production is reportedly traded across borders. This means that when prices rise, the people who want the rice most cannot obtain it. This causes prices to rise even further. Indeed, the price of many types of rice has roughly doubled since 2007—and it is not because of limited supplies. The United Nations Food and Agriculture Organization (FAO) estimates that global rice production increased by 1 percent in 2007 and will increase 1.8 percent in 2008. That’s not a significant amount, but it should not lead to starvation.

So, which countries are most to blame? According to the IPN, the world’s poorest countries have the highest trade restrictions: the IPN estimates that 70 percent of the world’s trade barriers are imposed by governments in poor countries on people in other poor countries. It would be unfair, however, to ignore the role of wealthier nations’ trade restrictions. Although the United States and the European Union (EU) tend to be less protectionist overall, they by no means have full free trade in agricultural goods. The EU’s Common Agricultural Policy (CAP), for example, imposes tariffs, quotas, and bans on food imports from countries outside the EU; this protects inefficient European farmers and keeps efficient non-EU farmers away from the wealthy EU market, forcing food prices up within the EU and keeping them artificially low elsewhere. Meanwhile, the United States pays farmers to not grow corn for food (in the form of ethanol subsidies; see Part III of this series).

Africa may have the worst trade restrictions. For many years, regional governments forced farmers to surrender their crops to state-run marketing boards at below-market rates. Although some of these boards have been abolished, many other trade restrictions remain. Nigeria, for example, has banned imports of wheat, rice, maize, and vegetable oil. According to the IPN, agricultural exports between sub-Saharan countries face an average tariff of 33.6%, the highest of any region in the world.

How damaging are trade restrictions such as these? The World Bank has estimated that free trade in all goods globally would add $287 billion to world income each year, half of that going to poor countries. Sixty-three percent of that gain would come from freeing agricultural trade alone.

World policymakers are pressuring the World Trade Organization (WTO) to exert whatever influence possible to get food-producing countries to maintain exports. European Union Trade Commissioner Peter Mandelson has said that “if we restrict trade, we’re simply going to add food scarcity to the already large problems of food shortages that exist in different countries.” And Japanese Agriculture Minister Masatoshi Wakabayashi has said that Japan will propose that the WTO set clear rules for food export restrictions.

In response, a few countries are looking into easing trade restrictions. Thailand, for example, is considering a cut of 50% in tariffs on a variety of agricultural imports, including corn, soybeans, and other animal feed, according to the IPN.

It may be too little too late, however. Today, many populations—including that of the Philippines—are responding to the global food crisis by hoarding food, which only makes the food crisis worse.

Below is a list of Navellier agricultural companies that are top-ten holdings.

Vantage Portfolio:
Terra Nitrogen Co., L.P. (TNH); 1-yr Chart; Profile

Dynamic MPT Portfolio:
Mosaic Co. (MOS); 1-yr Chart; Profile
Potash Corp. (POT); 1-yr Chart; Profile
CF Industries Holdings, Inc. (CF); 1-yr Chart; Profile
Terra Industries, Inc. (TRA); 1-yr Chart; Profile

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Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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