An update on the plane crash in the French Alps. Saudi Arabia launches air strikes against Yemen rebel bases. And President Barack Obama slows U.S. troop withdrawal from Afghanistan. A panel of journalists joins Diane for analysis of the week's top international news stories.
Around the world, prices for food and other basic commodities are going up. The price of food has climbed by almost 30% in the past twelve months. Cotton is near a ten year high, and copper is the highest it’s been in forty years. Some say the price hikes are a sign of global economic recovery, but for the world’s poor, the increases can be devastating. Please join us to talk about what’s behind the recent price spikes for food and basic commodities and what these increases could mean for consumers and governments worldwide,
- David Leonhardt columnist, New York Times
- Zanny Minton Beddoes economics editor, "The Economist;" formerly, economist at the International Monetary Fund
- Robert Zoellick president, The World Bank former Deputy Secretary, U.S. Department of State
- David Orden senior research fellow,International Food Policy Research Institute and professor, Virginia Tech Institute for Society, Culture and Environment.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The global economy is recovering, but the world's poor are paying a toll. Prices for food and other basics have been on the rise. Sharp increases in recent months have thrust millions into poverty and raised new concerns about inflation. Joining me here in the studio to talk about what's behind soaring prices and the possible political implications, David Orden of the International Food Policy Research Institute. He is professor of agriculture and applied economics at Virginia Tech. Zanny Minton Beddoes, she is economics editor at The Economist, and David Leonhardt, columnist for The New York Times.
MS. DIANE REHMWe will open the phones shortly, 800-433-8850. Send us your e-mail to firstname.lastname@example.org. Feel free to join us on Facebook or send us a tweet. First, we are joined by Bob Zellick, who is president of the World Bank. He joins us from a studio there. Good morning, sir. Thanks for joining us.
MR. BOB ZOELLICKGlad to be with you, Diane.
REHMYou know, you said food prices have reached dangerous levels. Just what does that mean?
ZOELLICKWell, in terms of numbers, we are -- we've seen, over the past year, an increase of about 29 percent. But, of course, you have to look market by market, and you have to look crop by crop. And we're now just a little bit short with an index we keep of the levels that were in 2008. And what this means is our estimate's another 44 million people pushed into extreme poverty, below $1.25 a day, but, equally important, stress on social systems and the dangers of malnutrition and, obviously, political implications.
REHMSo what's behind these spikes that we're seeing now?
ZOELLICKWell, in the near term, it's been primarily weather related. The problem's in central and eastern Europe, in the U.S., in Australia, now in the Southern Hemisphere have pushed up some of the basic grains prices, particularly wheat and corn or maize. Over the longer term, there's a problem that -- or an opportunity as well, that we're now starting to see greater demand from emerging markets. So people eat more meat. That involves more grains. Now, in 2008, you had another problem, which was, stocks were very low. Stocks are not quite in as bad a condition, but the margins are less.
ZOELLICKBut again, it varies by market. Rice, for example, which is important for many people in Africa, in East Asia -- not quite in as risky a condition. Corn in Sub-Saharan Africa -- or maize -- they've had some relatively good crops. So you really have to look market by market. But at this point, the main reason that, I think, a lot of us are sounding the alarm is if you're a poor family, you may spend up to half or more of your income on food. So you've got little margin for error, and we're very much near that margin or over it, in some cases.
REHMIt's interesting. The other day in The New York Times was a photograph of a man in China, sitting before a mound of cotton. I wondered to what extent individuals and, perhaps, even governments are beginning to stockpile not only cotton but other elements as well?
ZOELLICKWell, it's a good point. And one of the dangers when you reach a problem like this is that government policies, as opposed to helping, can exacerbate. And one that has made the problem worse is export ban. So countries want to try to keep the grain for their own people. That really adds to volatility and uncertainty for prices. And then a variation of that is -- while it's understandable that people may want to build national stocks -- that just adds to the demand, and, at some point, you start to get panic reaction in markets.
REHMDo you believe that the unrest that we've seen in Tunisia, in Egypt, now going on to other countries within the Middle East, have been affected by the short supplies or by stockpiling?
ZOELLICKWell, I think it's been affected, but I don't think it's the primary cause. I think the primary cause relate to some of the sclerotic political systems, in corruption, in nepotism, combined, in North Africa, with a youth bulge. So even though some of the fundamental characteristics of, like, maternal health and infant mortality were improving, you had a large unemployed population and people clearly fed up with the political system. But one of the reasons that, I think, this is an important issue today is those countries are going through something between transitions and revolutions. And that's where I'm most concerned about food now.
ZOELLICKEgypt had a subsidy of about -- for 85 percent of its people, very inefficient for bread. It's a big wheat importer. So as you look towards the process of change in Egypt or Tunisia, what could aggravate it would be some of these increase in food prices if people feel that their basic livelihoods are under pressure.
REHMI know that the finance ministers of the G20 economic powers are meeting in Paris this weekend. You've spoken about the need for transparency in food and commodity markets. What changes do you support?
ZOELLICKWell, I'll be at this meeting. It's the first meeting in the French G20 process that will end in a summit later in the year. The first point is, not surprisingly, finance ministers and central bankers often aren't looking at food markets, except as central bankers look at inflation. So I've been arguing you need to put food first. Then we actually can make this into an opportunity in that, for some smallholder farmers and others in Africa, we could actually focus on food security, increasing production and productivity over time.
ZOELLICKAnd the way to do that is you need to look all across the value chain, the property rights, the irrigation, fertilizers -- about half the product is lost on the way to market. In the near term, to deal with these volatility, I think the core idea is to focus on the most vulnerable. So we and others try to develop safety net programs for pregnant women, lactating mothers, children under 2 years of age, where you get the greatest nutrition focus. But then some of the things we talked about, if you're going to have export bans -- which I think are a bad idea -- for goodness' sake, don't have them for humanitarian purchasers.
ZOELLICKSecond, have more information about stocks. We have that in the developed world, not so much in the developing world. Long-range weather forecasting, which we're used to in the United States, could help us more in Sub-Saharan Africa to be able to head off some of these issues. And also, frankly, in some areas, like the Horn of Africa where infrastructure is weak and we know there's problems, maybe we do want to have some modest stocks. Normally, big stocks are expensive, and they degrade. But we're going to need a package of proposals to deal with the most vulnerable.
REHMZanny Minton Beddoes has a question for you.
MS. ZANNY MINTON BEDDOESYes. Mr. Zellick, I have a question about the G20 process and the question of speculators. President Sarkozy of France has said very prominently that he wants to have a reigning-in of commodity price volatility and a particular focus on financial speculation in these markets. I noticed that you didn't mention that. I wondered whether that meant that you don't think it's a priority, you think it's a misguided focus. And what do you think the G20 will do about this?
ZOELLICKWell, Zanny, as you probably know, there's been a lot of research on this topic, and it hasn't really drawn a clear connection. On the other hand, what people in markets do recognize is that what used to be sort of hard categories, like commodities -- whether it be food or other minerals -- now become an asset class that investors do shift to. So the exact connection, how it affects the prices -- these are a little bit uncertain. I think, at a minimum, the French are going to push for increased transparency in markets.
ZOELLICKThat's always a generally good idea. There are some steps in the United States on that as well. But I think the point I made to the French -- and they also recognize this -- is that that is probably not the core issue. It goes to some of the long-term supply and demand issues I've mentioned. And then how do you actually make markets work better and protect the vulnerable in the short run?
MR. DAVID LEONHARDTWhere would you put climate change on the list? I assume you would guess -- you would say it's more significant than speculation. But how important do you think it is in the recent run up of prices?
ZOELLICKWell, you know, this is, again -- climate change models are still very complex, so you can have some conditions where you might have additional drought. People estimate whether the effects on some of the storms that affect some of the production, whether it be, you know, the cyclones in Australia. There's clearly one dimension. I think -- what I try to do is look over the longer term and try to do some estimates of how this will affect things -- for example, is seed variety or the need for different types of water policies in countries. So, I think, while it's an element, you know, there -- it could also be, in some parts of the northern hemisphere, a positive. So I find it best not to get this is a scare tactic. But, instead, let's try to analyze what we do know and how we need to adapt to it.
REHMAnd David Orden.
MR. DAVID ORDENYeah, I just wanted to interject early in our discussion and ask you to comment on the -- the issue of biofuels and what you might call still long-term supply control. So the biofuels, of course, are continuing to grow as a part of food use. And part of that demand is very inelastic and not very price-responsive, especially given the way policies are set, and that's putting some pressure on the market. So there's that issue I thought you might want to comment on, and there's also some possibilities of bringing more land into production. The United States still has 30 million acres in its conservation reserve, so we have some policy space to respond to this high-price environment if we need it. I thought you might want to comment on it.
ZOELLICKWell, on biofuels, there's, obviously, different types. And, I think, the sooner one can move to the second generation and you move away from some of the food stocks, the better off we'll be. In the case of the United States, it now devotes about -- it had a 31 percent of the corn output last year went to biofuels. It's projected to be about 40 percent this year. There's clearly a connection with energy prices. As oil prices go up, you'll have more move to that. I think one of the problems with the biofuels policy today is you got an odd mix. If you want to have more biofuels, why would you have a high tariff at the same time that you have a requirement to use it in the subsidy?
ZOELLICKSo that combination just needs to be considered and reviewed.
REHMBob Zoellick, he is president at The World Bank. Thank you so much for joining us.
ZOELLICKGlad to be with you.
REHMAnd short break. Right back.
REHMAnd just before the break, David Orden, you were asking Bob Zoellick about biofuels. Talk about your concerns about the relationship between biofuels and the rising cost of food, other basic commodities.
ORDENOkay. Well, Diane, as you know, in 2008, when we had to have this discussion of sharply rising food prices, there was quite a heated debate about how important the shift towards the biofuels was at that time, a lot of discussion about what it can contribute. We know now that it did contribute to the rising prices, but that it's a better way to think about why prices shot up in 2008 than to blame one specific dimension, is to recognize that a set of dimensions came together that made stocks very tight. And when stocks are very tight, food prices become very volatile. When stocks are stronger, prices can -- the markets can absorb more shocks. But when stocks are tight, prices become very volatile. And biofuels were a part of that because we're shifting in a massive way into biofuels.
ORDENNow, we have a situation where, as President Zoellick said, we -- the biofuels market ties agriculture much more closely to energy prices than it has been. It's always been tied because energy is an important input into agricultural production. But, now, it's tied on the demand side as well, where, with high oil prices, it's going to pull food into fuel production. That's going to happen no matter what government policy is if oil prices are high enough. But our government policies -- one -- provide some tax credit. So that pushes the price of corn up for any given price of oil.
ORDENAnd, secondly, the mandates -- if you impose mandates like countries are doing -- that mandate says you're going to use grain for biofuels no matter what the price is 'cause you have a mandate that a certain amount of the energy has to come from biofuels. And that makes that demand very inelastic, and that pushes all the adjustment pressure on the part of market...
ORDEN…that's left for the foods. And that's a concern of creating more volatility in the food markets within -- in an intransient, if you will, biofuels policy.
LEONHARDTThis isn't our main topic today, but it's worth pointing out that this is the core argument for carbon tax or cap and trade. Because, if we had a price on energy, what would happen is, as the price of these biofuels went up, people would be going to other forms of alternative energy. And, instead, using these mandates creates exactly the problems that David is talking about.
REHMOne of the things that we've noted is that the Chinese have begun eating more meat. How is that affecting the worldwide picture, Zanny?
BEDDOESWell, I think it's worth separating out the very short term and the kind of longer term secularized. The interesting thing about China is it actually is not a big importer or exporter of food product. And so, at the moment, it is not, in fact, the case that China's increased demand, per se, is a big player in the short term increases. But, clearly, in the longer term, the fact that people in China and, indeed, other emerging economies are eating more meat means that the demand for food -- for grains is going up.
BEDDOESBecause the more grain you convert into meat, the more grain you need than if people were eating grains, per se. So it's definitely part of a kind of the longer term trend. But I think to sort of figure out what's going on with prices, I try and divide them into longer term impacts on supply and demand, short term impacts, and then I have a kind of third category of things that are irrelevant. And in the longer term one, I put things like people getting richer in the emerging world, eating more meat-intensive diets -- that's the demand side.
BEDDOESOn the supply side, the yield -- and David knows this much better than I do -- but the pace at which yields are improving for many of the world's grains has slowed quite dramatically. We had the Green Revolution in the 1960s. Yield increased very dramatically. That has been slowing somewhat. And so we have a kind of relative slow down on the longer term supply side. On the -- in the short term, the weather plays a huge role. Last year, it was droughts in -- it was storms in Russia. This year, it's fears of a drought in China, which could actually make China very pivotal in prices this year because China is the biggest producer of grains.
BEDDOESAnd, if suddenly they have a huge drought, they will need to -- they will have a very big shortage. And then in my kind of irrelevant category -- and I'm being somewhat facetious here -- but, basically, I would put speculators, which was why I asked President Zoellick that question. I think there's a whole load of misguided focus on the role of financial markets and speculation in commodity prices, which plays, perhaps, a small role in short term volatility, but really is irrelevant to the broader picture.
ORDENWell, I'm not sure quite where to take off. And I would agree that I -- I think, maybe we ought to look at the current situation in relation to 2008 and maybe make the statement that this sense of crisis shouldn't be as severe this time. Oil prices -- at least at the moment -- oil prices are higher than they have been but lower than they were in 2008 by quite a bit. We don't have -- well, the dollar has been relatively stable. The rice markets are in pretty good shape right now. So -- and the world is more aware of these issues. I mean, that is one of the responses to the 2008 -- which caught everyone off guard. We had a -- literally, a whole generation -- 25 years -- where the issue in world agriculture was prices being low, and the international battles were about whether the big subsidizing countries were driving prices down.
ORDENA whole generation -- maybe half of the listeners today -- that whole lifetime was in that environment. So 2008 caught, if you will, the world's agricultural profession a little bit off guard.
ORDENWe're more aware now of the risk of high prices. We're more geared up to try to address some of the short term and long term issues. We're more geared up to try to moderate the pressures for things like export bands or lowering of tariffs by big importing countries, which also increases demand right at a time when the world markets are tight -- has the same effect as an export ban essentially in increasing price volatility.
LEONHARDTI think it's really important to separate this into sort of a rich world and developing world -- two different stories. So in the developing world, as Bob Zoellick said, people spend a huge portion of their budgets on food. So it is much more difficult for them if food prices go up. Also, much of the developing world is growing very quickly -- China, India, other countries -- and so they're -- because they're growing quickly, there's a huge demand for labor. And so it is very easy for the increases in food prices to translate into broader inflation because workers see their own bills going up. So they're more likely to demand pay increases. And because there's so much competition for them, employers may have to give those wage increases. And so you can see this feeding into inflation.
LEONHARDTIn this country, first of all, food is not a huge portion of our budget. So, for most Americans, the increase in these food prices is not oppressive. And, second of all, our economy remains incredibly weak. We have extremely high unemployment. We've had virtually no job growth now for the last eight months. Maybe it's about to pick up. But what that means is that, even if workers do start to demand pay increases, they may not get them. And so, at this point, to me, the evidence that we're on the brink of some sort of inflationary spiral, given how high unemployment is in this country, is very weak. I do think we're going to see potentially some inflationary spirals in other countries.
REHMSo, Zanny, to what extent or at what point might other governments see the need to take steps to adjust interest rates, for example?
BEDDOESWell, many emerging economies have already started raising interest rates. I think David points to a very important difference between the rich world and the emerging world. But in the emerging world, food prices are much, much more important, and they play an important role in two ways. First of all, because people spend so much of their income on food -- and it's, you know, 50 percent or more in some developing countries -- the increase in food prices has a very massive immediate effect on people's living standards. And so governments in many countries feel it important to subsidize basic foods.
BEDDOESYou know, the Egyptian government subsidizes bread. That prevents price signals working because people continue paying the same amount, but, therefore, they don't kind of consume less. But it also increases the cost of the government's budget. Imagine if wheat prices go up. That means that the basics -- the amount that the government has to pay for the subsidy goes up. So it hurts their government finances. So there's a kind of big political question. Should they allow prices to go up? Or should they cushion consumers?
BEDDOESAnd then for the central banks in these countries, David has it exactly right. You know, these economies, in many cases -- look at China, look at Brazil -- that are roaring along. They're in a completely different situation than the economies in the rich world. And so there's much greater chance that these food pressures translate into ongoing inflationary pressures, and so they have been raising rates. But, actually, their monetary conditions are still really pretty loose, much looser than they were, for example, in 2008. And so I suspect there will be more interest rate rises, more tightening to come there.
REHMBut, now, with the idea of subsidizing the price of bread, for example, are farmers making out better because they're getting more money?
ORDENYeah, the effects of food prices on poverty are very complicated. I mean, it's very heterogeneous, both across countries and within a country. Higher prices are helping some rural countries and rural people in a lot of countries with higher incomes. Cotton farmers in Pakistan or Egypt are benefiting, if you will, from the higher prices. Egypt, as a country, in fact, is getting some help with the high wheat prices from the high cotton prices, the high oil prices because it is more fortunate than some in having some of those products to export.
ORDENSo it's very complicated. When Bob Zoellick talks about how many millions of people have been pushed into poverty by the high food prices recently, high energy prices, it's a net number. So there are millions of people who are coming out of poverty with higher food prices, and then there's another group of populations going in. And the net effect, in the World Bank estimation, is that has had a net negative effect because of the urban populations.
REHMI want to ask about what's happening here in the United States. While -- Zanny, as you say -- people here in this country may not be as affected by higher food prices, they are indeed affected by higher gasoline prices. And the connection there between gasoline prices and food in the form of corn, you've got an awful lot going on there.
LEONHARDTYou do. And the combination of gas prices and food prices can be quite difficult for a lot of American families. I mean, it is yet another reminder that our energy policy is problematic, right, because we do not want to be so subject to the rises and falls in energy prices, both for political reasons and for economic reasons.
REHMBut we are feeling those increases in prices at the gas tank. You were talking about differences right here in Washington a little earlier.
LEONHARDTYeah, I had a very funny experience this weekend. I saw a station in downtown Washington -- to the extent that there's such a thing as downtown Washington -- where gas was more than $4 a gallon. And that same day, I was up in suburban Rockville -- eating some fabulous Szechuan food -- and the gas was just a little bit above $3 a gallon. And so -- I mean, these are half an hour apart. And so you see that -- you know, as David was saying, there's all kinds of variation. There's variation within country. There's variation even within region.
ORDENIf I can come back to this -- just to take a little bit of issue with you, David -- we do -- you know, one of the reasons to have concern right now is we do know that historically there have been periods where volatile food and energy prices have been resulted subsequently in inflationary periods. Now, it takes behavior to monitor the authorities to accommodate those high prices, but we've seen that happen before. That has not -- I thought, in 2008, there was some risk that we were going to go into a stagflation period where the high oil prices and high food prices would lead to both inflation in the United States and slow down economic growth.
ORDENThe financial crisis and the recession were so severe that we didn't get the inflation at the time. And we haven't gotten it yet as of today. But we're not out of the dynamics that that whole 2008 period kicked off yet, and we won't know for another five years what the full implications that will be.
REHMDavid Orden, he is senior research fellow at the International Food Policy Research Institute, and he's professor of agricultural and applied economics at Virginia Tech. And you're listening to "The Diane Rehm Show." We're going to open the phones now, 800-433-8850. To Hebron, Ill. Good morning, Phil. You're on the air.
PHILGood morning, Diane. I'm speaking to you from the entrance to an 800-acre farm that I have some influence in, and I'd like to give your guests a few facts. Since our corn crop came up last June, it has risen 98 percent in value in the silos where we hold the grain, so our prices have doubled in what we get for a crop. Our expenses have all gone through the roof also. When we harvest this crop, we have almost $1 million worth of machinery sitting along our driveway that we auger the grain into semis and that sort of things. I will also tell you, where this farm is -- we've been here for 25 years, and we have never ever seen wheat grown in this neighborhood. We are now in a wheat belt.
PHILThese farmers are betting that the wheat price is going to go up and going to keep going up, and they'll say that. The other thing I'd like to tell you is we deal quite a bit with some people in the commodity industry that know a little bit about it. And they often tell us they have a lot of customers and they sell their product to their (word?) to a lot of people who wouldn't know an ear of corn if we stuck it in their hand and wouldn't have any idea what to do if we hid it in the bushel of corn. They have no reason to be involved in that market, and they have no interest in ever owning that product. They're just speculating and making investments.
BEDDOESWell, first of all, thank you for that.
REHMThat was quite a story.
BEDDOESThat is a story. I feel...
BEDDOESI feel kind of vaguely qualified to answer 'cause I also grew up on a farm. I'm a farm girl who grew up in the northwest of England on a Shropshire farm. And I do know a bushel of corn -- although we don't call them bushels there -- and I know the difference between wheat and oats. But, I think, I do have to differ with you a little bit on the role of speculators. It's true that they have no idea what a -- what wheat looks like, what corn looks like, but they do, actually, facilitate the kind of market-making process.
BEDDOESAnd there isn't -- there really isn't that much evidence that increased financial investment in commodities is increasing volatility. There is some at the margin, but it isn't broadly. It's kind of blaming the messenger. It's not -- it's the underlying supply and demand conditions that are really what's driving it. But I have this discussion often with my father, who doesn't believe me either.
ORDENIt's also good that you called because the positive supply response of American and other farmers, like yourself, is what is going to solve this high-priced food situation. You can't create food into -- you just can't wish it into existence. It's not a videogame as you well know. We need people like you out there responding to these high prices. That's what helped bring prices down after the 2008 price burst. Prices were still good and strong in 2009, but the world was a lot calmer with the corn price at $4 or $5 than it is when it's up in six and seven. So that response, you're -- you and your neighbors getting out there and producing it, that's what going to help bring this volatile market back into a less volatile environment.
REHMTo Elkhart, Ind. Good morning, Randy.
RANDYHi. With corn being about 15 percent water when it's dried, does the millions and millions of bushels via export make any difference to the level of, say, the Great Lakes? For -- I mean, we import gasoline for our farm implements. I'm sure that makes some increase in the price of oil.
REHMAll right. And, David Orden.
ORDENWell, that's a complicated question to ask -- answer. Corn, of course, is not the most water-intensive crop. Rice is a much more water-intensive crop for production. Sugar cane is a much more intensive crop for production. So you're raising an important issue, that there is concern especially with -- in combination with climate change of the world's water resources being short. Right now, we think about energy prices being short, but a lot of people think water is the real constraining resource in the long run.
REHMAnd that water will become the new gold.
ORDENWell, it's going to become more scarce. And it's going to have to be managed more carefully than governments have in the past.
REHMDavid Orden of Virginia Tech, and you also have here in the studio, Zanny Minton Beddoes of The Economist magazine and David Leonhardt of The New York Times. Short break, and we'll be right back.
REHMAnd as we talk about food prices, what's happening around the world, how inflation may enter into it, here's a question from Judy in Grants Pass, Ore., who says, "My husband and I are listening to your panel discuss everything is a cause of the food shortages, including how many angels are on the head of a pin, without ever mentioning the word that seems verboten these days -- overpopulation. It is an astonishing omission." David?
ORDENThe world population is growing, and it's already been mentioned in the long run demand context. This is going to create an increased demand for food, particularly when countries move into an income category of sort of $5 to $10 per capita income a day, which a lot of lower-income consumers are moving into that category. That's sort of the range of income where, as your income grows, your demand for food, better quality diet, more grain to feed the livestock that's going to provide the meat, more vegetables, more dairy products. That's where there's a big increase in demand for food. As your income goes up higher, you start demanding other products, and your increase in demand for food dampens down.
REHMBut get back to the basic. How is the world's population -- and some would argue overpopulation -- going to affect, not only, as David says -- David Leonhardt, the demand for food, but the price of food?
LEONHARDTI don't think the world is overpopulated. I mean, you could fit -- this comes Ed Glaeser's book on cities -- you could fit the entire population of the world into the state of Texas and yet -- and let everyone live in a townhouse. So the world is a vast, vast space. Nearly every...
REHMWhere do you get that, David Leonhardt?
REHMThat really is shocking to hear.
LEONHARDTYeah, the book is called "Triumph of the City." I just read it. And it's quite good, quite interesting. It's also worth keeping in mind -- I mean, nearly every major city in the world is less densely populated than it was a century ago. It's also worth keeping in mind that people have been predicting doom from overpopulation, literally, for centuries. And so what has instead happened is that human ingenuity -- the ability to produce more food as we need more food -- has always kept pace or more than kept pace, in the long run, with population. I don't think we're now at a fundamentally new tipping point for that. But I do think it's possible that the economic growth in the developing world is going to make food more expensive.
LEONHARDTBut it doesn't seem to me that we're on some -- the brink of something that is qualitatively new that would mean that we can no longer feed the world the way we always have, even as it has grown.
REHMHere's an e-mail from Chad who says, "Farm subsidies were originally intended to guarantee a steady food supply without wild swings in food prices and uncertainty of production capacity. Do these subsidies still serve this function? Have they become unnecessary? Or do we still need them? Can the system be improved?" Zanny.
BEDDOESThe system could certainly be improved. I've long been skeptical that farms subsidies really serve their purpose. I think the combination of high tariffs, subsidies, export bans, all the other kinds of policy interventions into the market actually cause more problems than they solve. And if you look at -- I mean, take sugar, for example. One of the most distorted markets in the world, where you have huge tariffs, huge subsidies completely distorting production, means that the amount that's traded is relatively small.
BEDDOESI think we would be much better off with letting the free market work. By that, I mean having fewer subsidies, having lower tariffs, having the ability to trade across borders, giving people the kind of certainty that you get from a market mechanism. Now, there is often an argument made that you have to have a sort of a more regulated system for food because, otherwise, prices will be too volatile. I actually think that what we're seeing now is the kind of unfortunate consequences of misguided policy.
REHMInteresting because Billy in Winston-Salem notes that the price of sugar has risen, almost doubling in the past couple of years. He asks what is the cause of this and what role tariffs do play. David.
LEONHARDTWell, this comes back to the point David earlier. It's true that -- I agree that, in the long term, there's a race between supply and demand. And it's not clear that we don't have the capacity to produce the amount of food we need to feed a growing population, a rising income population. But we are now at our third or fourth year of quite a movement off the trend of falling agricultural prices in real terms, and we had a, you know, three or four-year period -- a fairly long period of high prices. So we're in, you know, something of a (word?) here. Agricultural subsidies -- if you go along back in history, agricultural subsidies were introduced -- in the United States, at least -- in the 1920s.
LEONHARDTAnd the call for them came because the period 1910 to 1914, before World War I, was a period of high agricultural prices. And agriculture thought that's the way prices should be, high agricultural prices relative to non-agricultural prices. Those -- what are called parity prices -- should be maintained for many, many years. Farmers argue we need to return to the parity prices of that golden era, 1910 to 1914. Instead, what we got was a century of falling agricultural prices as new technologies came along. And the subsidies were brought into place, in part, to moderate that adjustment process where millions of people came off the land in the United States and moved into urban areas.
REHMSo have we now reached the point where those subsidies ought to fall by the wayside?
LEONHARDTWell, the subsidies are down now because prices are high. In fact, now, the subsidies are driving up prices -- the subsidies to biofuels are driving up prices. The subsidies -- and this is one main point we may want to come back to -- a very common behavior of authoritarian regimes were giving their people very little economic freedom, very little personal freedom who are not delivering a robust economy and strong economic growth and rising living standards. One of the ways they maintain that authoritarian regime is to say, but we will give you low-cost food.
LEONHARDTAnd in that environment where those regimes are keeping the economy from growing robustly and keeping that freedom from taking place, you need that crutch of that low-priced food. Now, you get to a period, like now, where world prices have risen. It's much more difficult for those authoritarian regimes to pay to keep those prices low. In Egypt, for example -- as we've pointed out -- 80 percent of the people are receiving a food subsidy. Egypt is not an absolutely poor country. It's a lower-middle income country. That's a huge percent of the population to be getting that food subsidy. But, given the lack of robust growth in the economy in general, in a sense, people became dependent on those subsidies.
REHMAll right. Let's go now to Medford, Mass. Good morning, Tim.
TIMGood morning. My question has to do with that -- with some of the presumptions about government intervention in food markets and whether it's good or bad. I know that Mr. Zoellick, in his piece in The Financial Times titled it "Free Markets Can still Feed the World," and it was a call for putting food first. But I think there's a huge disconnect there. I mean, free markets have yet to feed the world, so, can still feed the world, is really a non-sequitur with the experience of the past.
TIMAnd, in fact, the World Bank's own policies have led to the dismantling of the agricultural capacity of a number of developing countries. When Mr. Zoellick calls at the end for policies that can put food first, he notes, not first in his list of reforms but last, that we need to invest in the agricultural capacity of developing countries so they can produce more of their own food. That really doesn't happen only via following the free market. That's why, for example, in the World Trade Organization negotiations, there's general agreement that there should be a special category called special products that allows developing countries to provide added protection for sensitive food-producing sectors.
TIMAnd that's because imports can, in fact, disrupt and overwhelm local producers and local markets. And it seems a really important disconnect to get past that, in part, the problem we have today in developing countries is that their food-producing capacity has been undermined precisely by free trade policies that have reduced their capacity...
TIM...in favor of imports.
BEDDOESWell, I'm not sure that I agree in aggregate that the problems in developing countries are driven, you know, largely by the freeing of trade or the world-imposed -- well, bank-imposed policies. But, I think, you do raise an important question when you say that one of the things we need to focus on now is investing in the agricultural capacities of developing countries. We need, if you will, a kind of a new green revolution. We need to have something that encourages the investment in seeds, in bioseeds and all of that to boost supply.
BEDDOESAnd I would submit that higher prices -- the market mechanism -- is actually one way to do that. If you have higher prices, you will get more investment on the supply side. And, I think, therefore, allowing market signals to work is a very important part of the solution to this problem.
REHMZanny Minton Beddoes of The Economist, David Leonhardt of The New York Times and David Orden of Virginia Tech. And you're listening to "The Diane Rehm Show." We'll go on now to New Iberia, La. Good morning, Mark. Thanks for joining us.
MARKSame to you. Yes. My question that I'm calling is the very important reason for eating organic foods and all this overpopulation talk about Monsanto trying to save the world with their GMO Roundup Ready alfalfa seeds and their GMO beets this spring. I'm sure they're going to be planting them. And I don't think it's a good idea for the environment because the roundup they're going to be spraying is not good for the ecosystem.
REHMAny comments? Zanny.
BEDDOESWell, I think by bringing up organic foods -- and I would add, too, that the kind of move in this country towards small foods, smaller producers -- you raise a really important question, which is that, I think, in richer countries -- and this is something that's particularly you can see in Europe, too -- we have the luxury of wanting to do that. We have the luxury of saying, we'd like to have meat that's -- comes from organically-raised animals that, you know, scatter out in the fields that are not in horrible, nasty battery factories. But the truth is that, in emerging economies, I think, they don't have that luxury. And the productivity of agriculture is, I'm afraid, higher when you use fertilizers, when you have more intensive farming methods.
BEDDOESAnd so, I think, we have two very different visions for the future of agriculture. And the one -- the kind of organically-oriented one is one that I think is a luxury of the rich. And, I think, where there is a problem, that if the rich world tries to impose that on others -- and I think, for example, the Europeans are, you know, kind of not only shooting themselves in the foot, but I think it's a problem for the rest of the world if there is a sense that, for example, genetically-modified foods are sort of tainted as some, you know, with some label of being Frankenfoods and being terrible when, in fact, I think they are probably an important part of the solution here.
LEONHARDTTo the extent that we are worried about overpopulation and we are worried that demand for food is outstripping supply -- as David mentioned, which it could be now -- we need to try to think about two things. One, our policies that would deal with population growth. Those happen to be, in many cases, policies that we should want to do anyway. They are things like education, educating girls, public health. Those all have an effect on population growth. And the second thing is increasing the supply of food. And some of the ways to do that are quite harmful.
LEONHARDTThey involve a lot of pollution. Other ways to do that are new and can seem scary, but there isn't yet evidence that they are harmful. And from what I have seen -- and I'm not a food expert, a genetically-modified food expert -- from what I have seen, there isn't much evidence yet that genetically-modified foods are harmful. And so it seems to me that they are exactly the kind of thing, as Zanny's saying, that we want to be pursuing in an effort to feed more of the world's people.
REHMAnd to Elizabeth, Ind. Good morning, Karen.
KARENYes, hi. I would like to make a comment and ask a question. The guests, to me, are minimizing the true cost and impact on an individual or a group that experiences hunger. I worked as a therapist for young children for many years. And the devastation -- the most devastating event to a child was not physical abuse, was not traumatic events. The most traumatic was to be hungry, and it was almost impossible for them to overcome. And this is true of Holocaust survivors. And this is true, also -- I recently saw -- I just saw a documentary on POWs tortured in Vietnam, but hunger remained.
KARENIt's personal, and it can't be spun. And it can't be addressed in the business terms that they're using, which I remember is -- a business term of opportunities are operating in silos. If -- when there's a population that's hungry, to say biofuels or speculation or, you know, agribusiness will profit, I think is wrong. Nobody will profit. And I'd like them to address the secondary fallout when you allow, in the markets or in politics, a large group of people to go hungry.
ORDENI think it's a good point for us to come back to (unintelligible) because we are in a situation where, in this coming year, while we wait to see how this year's harvest come out and whether we can -- the supply response is big enough to move us back to a situation of lower agricultural prices and more stable markets, there's going to be a great humanitarian need for food assistance. And there are people who are suffering from the high prices and will need aid to avoid the long-term health effects of malnutrition.
REHMAnd here's a follow-up to that from Nancy who says, "The U.S. as the rich world? What about the 25 percent of people living on the poverty line and unemployed? These people continue to be ignored as we discuss food and other topics in our country." David Leonhardt.
LEONHARDTThere are two issues here. And it's sort of hard to keep them in mind at the same time, but, nonetheless, they're both true. We are in the midst of a very difficult period, economically, in this country. It's why I don't think the Fed should be thinking about raising interest rates to deal with inflation that we don't yet see. Instead, I think, the Fed should be concentrating on keeping interest rates low in order to get more people employed. There's a direct trade-off there. So the writer is definitely right about that.
LEONHARDTBut when we talk about the U.S. being a rich country, it's worth keeping in mind that even poor people in this country have a standard of living that's above the standard of living of most of the world. We're not saying that's not a problem. We're not saying we don't -- we should be very aggressive in dealing with that. We're just saying that, when you think about the impact of rising food prices, the main impact isn't -- in the world is not on Americans. It's not even on lower income Americans. It's on people who are living on $1 a day, $2 a day, $3 a day.
REHMDavid Leonhardt, he's a columnist for the New York Times. Zanny Minton Beddoes, economics editor for The Economist, formerly an economist at the IMF. David Orden, he's at the International Food Policy Research Institute and at Virginia Tech Institute. Thank you all so much.
LEONHARDTThank you, Diane.
REHMAnd thanks for listening all. I'm Diane Rehm.
ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture and Monique Nazareth. The engineer is Tobey Schreiner. Dorie Anisman answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our e-mail address is email@example.com. And we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.
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