The Cutting Edge

Unsurprisingly, the media has started talking about the possibility of a food crisis. Whether that happens depends not only on how long the drought lasts and how much damage it does to crops but on how far its impact spreads to other markets, whether there are further supply shocks and how countries react to the price movements.

In 2007-08 governments tended to react in a disorganised and erratic manner, which often accentuated global price rises, as was the case with the imposition of export restraints. Often the measures were not even effective in meeting the objective of stabilising domestic prices, as they often led to panic buying and hoarding.

Given all this, governments should be cautious, especially considering that high prices are not necessarily negative. Attractive producer prices will be needed in the coming months to entice producers to embark on a much needed increase of crop cultivation, especially in the southern hemisphere.

Some governments will be called to take a number of steps to alleviate the impact of the situation on the poorest consumers, for example through the targeted distribution of food at subsidised prices, increased reliance on non-commodities crops such as roots, tubers, and beans, and assisting small producers to get better seeds and other basic inputs. Over the longer term, strategies to increase local production and self-sufficiency should be implemented.

Fortunately rice supplies in 2012 are plentiful and rice prices stable, but they could also be driven higher by increasing prices of other cereals. Rice market stocks were also not problematic in 2007-08 but prices nevertheless increased dramatically. A lack of transparency and unco-ordinated unilateral actions by importing and exporting countries and media coverage all contributed to creating panic.

With world prices of cereals rising, the competition between the food, feed and fuel sectors for crops such as maize, sugar and oilseeds is likely to intensify. One way to alleviate some of the tension would be to lower or temporarily suspend the mandates on biofuels. At the moment, the renewable energy production in the US is reported to have reached 15.2bn gallons in 2012, for which it used the equivalent of some 121.9m tonnes or about 40 per cent of US maize production. An immediate, temporary suspension of that mandate would give some respite to the market and allow more of the crop to be channelled towards food and feed uses.

The US drought leaves global markets highly vulnerable to any further supply side shocks. While the current situation is precarious and could deteriorate further if unfavourable weather conditions persist, it is not a crisis yet. Countries and the UN are better equipped than in 2007-08 to face high food prices, with the introduction of its Agricultural Market Information System, which promotes co-ordination of policy responses.

However, risks are high and the wrong responses to the current situation could create it. It is vitally important that any unilateral policy reactions from countries, whether importers or exporters, do not further destabilise the situation.

The writer is the director-general of the Food and Agricultural Organization of the UN.