Aligning agriculture policies with market signals

Aligning agriculture policies with market signals

20 September 2019

The 2019 OECD-FAO Agricultural Outlook projects that food supply growth over the next ten years will modestly outpace demand growth, primarily due to productivity gains. For most crop and livestock commodities, gradual real price declines are projected in the order of 1% per year.

At the same time, the Agricultural Market Information Service (AMIS) Market Monitor notes that monthly price variations (due to a wide range of factors) are much bigger than the medium-term trend, often in the order of plus or minus 40%. In other words, the “noise” from short-term market disruptions is much greater than the “signal” from medium-term market fundamentals.

What are the implications for policymakers?

First, the overarching trend for lower real prices will impose income pressures on farmers who are not simultaneously improving their productivity, implying a continued need for adjustment policies. At the same time, risk management strategies - both proactive measures to mitigate systemic risks and build resilience, as well as remedial measures to reduce the negative impacts of unavoidable risks - will become even more important to address the effects of market volatility. Policies that respond to short-term income declines (be they due to price or yield shocks) by providing increased support and protection risk impeding long-term adjustment.

Second, while there is unlikely to be a shortfall in global food availability, global hunger will not be reduced by simply increasing food supplies . This is because for most of the world’s undernourished, the problem is not food availability, it is access to healthy and affordable food. The real priority - and the needed focus of policy - is on widespread poverty reduction. Specific policies will also be needed to counter wider problems of poor nutrition across developed and developing countries.

Third, ensuring improved sustainability will imply (directly or indirectly) pricing natural resources according to their wider social cost. Land sparing productivity growth and better water management will be essential to delivering sustainable increases in output, and to helping ensure that agriculture contributes to climate change mitigation. In some cases, policies can support the creation of markets; in other cases, policies may remunerate farm and other providers for environmental services.

Fourth, while adopting more plant-based diets, curbing over-consumption, and reducing food waste could take pressure off land resources and contain GHG emissions, there are trade-offs. For example, many people in poorer countries would benefit from more, not less, animal protein in their diets. Coherent policy packages will therefore need to be tailored to countries’ specific circumstances.

Fifth, the parts of the world where food demand is growing most strongly are not always the same as those where supply can be increased sustainably. Hence, trade will be increasingly important for food security. Moreover, countries that use trade barriers to stabilise internal prices effectively export instability onto world markets. Well-functioning input and output markets will be essential for food security and sustainable resource use - an international agreement to open markets further will bring the greatest benefit to the most people.

So, while the latest Outlook concludes that markets are responding well to the challenge of feeding the world, current policies are doing less well at protecting our natural resources, addressing climate change, tackling malnutrition, and providing viable livelihoods for farmers and others along the food chain. Open markets, supported by policy packages that respond to the “signal” rather than the “noise” will best serve producers, consumers and the natural environment.

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