Globalization of World Food Markets

Globalization of world food markets has had a number of unintended consequences. Nations find themselves limited in their ability to avoid food shortages in the face of increased consumption elsewhere on earth. The poor all over the world are adversely affected by food price increases. The risks inherent in the globalization of food production have not yet been adequately addressed within the system, leading to the potential of further shocks in the future.

Global Food Markets

The idea of global food markets relatively new. The economic theory of comparative advantage gave rise to the idea that a country should only produce those goods in which it has a comparative advantage and use the income made from that production to purchase the remaining goods that it has. The result of this idea has been the rise of the global economy, and all commodities are impacted by this global trade. Food markets have emerged as one of the major commodity markets affected by global trade. Nations that cannot or do not produce enough food to meet their own needs have survived and even grown as food importers. Tied to this growth is the fact that economic expansion increases the purchasing power in many parts of the world has increased consumption per capita, so say nothing of population growth.

Global food markets function roughly in the form of perfect competition, meaning that there is equal information among all buyers and that the products are largely indistinguishable. There are substitute products, for example lentils can be substituted for white beans and tea for coffee. Prices are therefore set on the world market, and are driven by agricultural production, demand, the cost of inputs such as fuel and to a lesser extent the price and availability of substitutes. Demand is increasing, which has meant that in recent years when shocks occurred in either the price of inputs such as with the 2008 oil price run-up or when supply falls due to a decline in agricultural output, prices increase significantly. The problem can then be exacerbated as countries move to protect domestic food supplies with trade barriers.

There are several impacts of escalating food prices. The world's poor, for whom food costs are a significant component of spending, suffer the most as they must reduce their food consumption. In the wealthiest countries, food prices increase resulting in inflation if the cost increases are sustained. In other nations, governments find their budgets strained by the need to spend more on world markets to provide feed for their people. If the strain grows too great, as has been the case in Venezuela, the nation faces currency devaluation, which in turn reduces purchasing power and reduces food intake.

The Case for Increased Trade

Comparative advantage created global food markets, and it is the most powerful tool by which food price shocks can be alleviated. When nations use trade barriers to shore up their own food supplies, they lower the supply on the world market, which drives up the price and creates even worse shortages in other nations. If nations committed to greater free trade, the markets would be more liquid, and therefore less subject to these types of strongly negative price shocks. Prices would increase during times of shortage, but the impacts would be lower. Tariffs may alleviate problems domestically in the short run, but they also cause harm to the global market for food.

Food Security

The problem with comparative advantage is not that it fails to work -- it does work. The problem is that it convinces some nations to eschew food production. Through trade in food, populations grow rapidly in places that normally could not sustain much human life. Rapid population gains in desert landscapes like the American Southwest and the Arabian Peninsula are perhaps most emblematic of this problem. This commitment to surviving via the production of other goods and trading them for the means to buy food works as long as there is sufficient food to purchase. What the spring of 2008 indicated was that for the first time we are beginning to realize that there are constraints to this produce and trade strategy. The earth has limited capacity to produce, and when demand exceeds this capacity, the inevitable result will be starvation.

National food markets function in a similar fashion to global ones. The presence of a border, however, allows for that market to become closed. Nations that can feed themselves will continue to do so even if there is unmet demand elsewhere, because ultimately food is more important to survival than money. The value of money for survival, after all, is dependent on the ability to exchange that money for the means of survival. During the food price run-up in the spring of 2008 many nations restricted trade in key foodstuffs, a trend that is likely to escalate in the face of rapidly increasing demand.

Agribusiness

In Monsanto's 2009 Annual Report the company points out that a farmer today must feed 130 people, whereas 30 years ago a farmer only fed 25 people. The company's mission, therefore, is predicated on increasing the yield of agricultural land in order to help meet the needs of a growing population. Innovation is at the core of this strategy to improve yields (Monsanto 2009 Annual Report). There is a tacit recognition in this strategy that demand is beyond our control, so we as a species must work to increase supply. There are risks inherent with Monsanto's innovations, of course, but agribusiness does offer the hope of increased yields and with it the ability to feed the world's growing population.

Imperialism and Neo-Colonialism

The application of the comparative advantage model of trade on the world can be viewed as an act of imperialism. The concept may be universally true but its application is rooted squarely in Western thought. The modern global trading system was designed by Western nations and it, more or less, serves to meet the needs of Western nations. The food price shock impacts illustrate this -- we see it as a source of inflation while the world's poor see it as a threat to life. In times of food shortage, we can still afford food. Moreover, many Western nations have done a better job of protecting their food supplies than the developing world. This has occurred because weak governments in the developing world have had little impact on global trade policy and have little power over the actions taken by multinationals on their soil due to rampant corruption. Ultimately, the solutions proposed for hunger in the developing world are those proposed by agribusiness and bodies rooted in Western thought such as the World Trade Organization.

Western food interests have also guided consumption patterns in the developing world, to the detriment of food security. The example of swapping lentils for white beans is important, because aid agencies imposing diets on people have the ability to make such substitutes based on pragmatism. In many parts of the world, however, traditional foods are being replaced by heavily marketed foreign foods (Streitfeld, 2008). Nations that do not grow wheat now eat bread, causing trouble when the price of wheat escalates if local producers of substitutes have exited their businesses due to falling demand. Likewise, a wheat price increase causes crisis a land where noodles or pasta are the norm, because consumers will be reluctant to switch to rice or other cheaper substitute. At the low end, consumers dependent on rice have few if any lower-priced options in the event of a rice price shock.