Coping with High and Volatile Food Prices

So high and volatile food prices may be with us for awhile.  What should we do about it?

At the end of my Room for Debate column I wrote:
The best immediate response to these problems would be to reduce barriers to international agricultural trade, and to develop mechanisms to protect the world’s most vulnerable from inevitable price spikes. Such protections, if credible, might convince markets that crude market interferences like export bans were less likely, which would reduce speculative inventories and prices today.
Economists almost always favor free trade.  I'm not quite as ideological about this as the headline "Open Up Trade" may have suggested (NYT chose the titles).  But in this case I think free trade is the right answer, but with an important caveat:  I think the international community (UN, FAO, rich nations, etc.) need to develop a clear, credible, anticipatory mechanism for delivering aid, perhaps in the form of food subsidies, for the poorest people in the most vulnerable places in the event prices do spike.

What I'm suggesting here is a form of market intervention.  Call it a conditional cash transfer that depends on food price levels.  Such commitments from the international community might be offered in exchange for commitments not to interfere with trade in other ways, like tariffs, export quotas, taxes or bans.  I think these kinds of conditional transfers would be a more efficient way of dealing with the problem than other policies being suggested, like public storage projects.  And they would likely have fewer unintended consequences.

For example, I worry that public storage projects would be managed in erratic and unpredictable ways, and thus attract private speculators and storage in addition to public storage, no matter the size of public storage projects.  The more we store, the more eventually spoils, which ultimately means higher average prices.   And in the process of building up public inventories we would effectively be increasing demand even more.  This would be an easy thing to screw up and make the food price problem worse than it is already.

Furthermore, I don't perceive any evidence that commodity markets are storing in insufficient quantities.  Indeed, commodity markets look remarkably efficient to my eyes.

Now, by guaranteeing low food prices for the poor we would, in effect, cause demand to be artificially  more inelastic than it is already.  Thus, guarantees could, indirectly, cause larger price spikes.  I believe private markets would quickly recognize this and respond by developing larger inventories on their own--a speculative bet that would pay off when price spikes do happen (and they *will* happen).  Guarantees for the poor would mean that prices would have to rise to the point where the relatively more wealthy would have to reduce quantity demanded.  But the relatively wealthy can afford it.  We can find other things to eat besides grain fed beef and chicken.

Most importantly, however, such a policy might do a lot to stave off the most destructive policies, like export bans.

Right now, this is the best idea I have.


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