AoA talks won’t help farmers, economic development, says study

The WTO Agriculture Agreement and the ongoing negotiations under its aegis on reforming farm trade are based on flawed premises for they ignore the concentration of market power in the hands of large agribusiness corporations. Only when such realities of international agriculture are taken into account, says a recent NGO study, can the reform process bring about a fair trading system in this sector.

by Chakravarthi Raghavan

GENEVA: Unless it addresses the concentration of  market power in the transnational agricultural trade, the World Trade Organization’s Agreement on Agriculture (AoA) as now structured, and the reforms envisaged in the current negotiations, will not help farmers and broad-based economic development, according to a new report released by the Institute for Agriculture and Trade Policy (IATP).

The report, Managing the Invisible Hand: Markets, Farmers and International Trade, is authored by Sophia Murphy, the IATP’s Trade Director, and was produced by the IATP for the Canadian Foodgrains Bank. The full report can be found at www.tradeobservatory.org.

“Trade is an important development tool ... (but) is not an end in itself,” the report says in its introduction. “In fact the promotion of trade liberalization, particularly as structured in the current AoA, ignores basic elements of the world’s agriculture economy, specifically the concentration of market power by the TNCs [transnational corporations]. The AoA will not successfully move us towards the underlying development goals articulated at the creation of the WTO, until it addresses the market power and the question of the monopoly and oligopoly power. Governments must take the lead to ensure more coherence between trade policy and the fulfilment of development objectives.”

Underscoring the weaknesses of the AoA, the report argues that the agreement itself, whose structure is reflected in the current ongoing negotiations on agriculture, is “fundamentally flawed” since it ignores the basics of the world’s agriculture economy.

In the current negotiations for continuing the “reform process” in agriculture under the Doha work programme, WTO member governments will be discussing such issues as export subsidies, market access, domestic support programmes, food security and special treatment for developing countries.

But the view that the provision of market access and an end to all domestic support and export subsidies will resolve all the problems is fundamentally flawed. These reforms alone would not ensure the most efficient use of limited natural and genetic resources. Perhaps most concretely, market distortions would continue to disrupt developing countries’ agriculture.

It ignores the inelastic nature of demand and of supply, the political and economic weaknesses of most farmers, the vertical integration of the agriculture system, and the fact that “countries do not trade, farmers do not trade, only transnational agribusiness trades.”

Market power

Much of the writing and thinking that dominates international trade negotiations and discussions, Murphy complains, is premised on the notion of comparative advantage. In this theory, international trade is a tool to ensure efficient distribution of goods, allowing the lowest-cost producer to set world market prices - with the model seeing market barriers such as tariffs and unfair advantages such as subsidies as impediments to free flow of goods and thus to maximization of welfare.

But in the enthusiasm for open markets, the necessary role of public oversight tends to be overlooked or downplayed. “In the discussions at the WTO, trade expansion quickly becomes a proxy of development and economic growth. The WTO Director-General Mike Moore, along with many developed country delegations at the WTO, has adopted the language of development as the reason for global trade rules. However, a growing number of commentators have rejected this conflation of trade expansion and economic growth,” the report points out.

There are gaps between market economics and meeting basic human needs, and meeting effective demand for food is not the same as ending hunger and malnutrition. “The market cannot reflect the demand of consumers who do not have the purchasing power to be present in the market.”

“Until multilateral trade rules take account of the concentration of market power in transnational agricultural trade, they cannot manage an open and fair trading system,” says Murphy in the report.

“Agricultural trade rules need to take into account the rapidity of change in the whole agricultural sector, from seed production to food processing to retailing. The rules must allow countries, particularly the developing countries, the flexibility to block dumped agricultural products, protect food security and preserve the livelihood of low-income farmers.”

Ridiculing the view propagated that under free trade farmers will be price setters, the report points out that a handful of large grain companies - Cargill, Continental, Louis Dreyfus, Andre and Bunge - play a central role in the food system. The five, which in 1986, UNCTAD estimated, controlled 85% of the world trade in agriculture, remain dominant even now. Each company is present in dozens of countries across all continents. Their operations are also diversified. Cargill, for example, now owns a huge financial services unit, alongside its salt, steel, cotton, seed and fertilizer business.

For grain traders, profit is a percentage of sales, and higher prices are fine, particularly if the trader controls the supply of goods. But a high volume of sales at a lower price is also profitable. And the grain companies have a significant interest in keeping the barges, rail cars and ships they own busy. “Higher volumes may thus at times be more important to the companies’ bottomlines than higher prices.”

Neoclassical economists recognize that undue market power will undermine welfare, “but the WTO’s rules for agriculture ignore the presence of this potential for market distortion .... Unfortunately, debate at the WTO has overwhelmingly emphasized governments, farmers and, to a lesser extent, consumers. Companies are nowhere mentioned.”

“Vertical integration” in the food and agriculture sector of the US and the EU deserves international attention because it “overturns the assumptions that have impelled governments to embrace trade agreements and change their agricultural policy to increase dependence on imported food.”

To date, few corporate mergers or joint ventures have received public scrutiny outside the country in which they are headquartered, and this needs to change.

While supplies are increasingly global in their reach, consumers remain tied to local markets, and their purchasing power is measured in local currencies rather than in US dollars.

“International trade may increase the choice of products available to consumers, but will not necessarily deliver those products at low cost, especially in local terms. The decline in prices for commodities has not necessarily translated into cheaper food for consumers.”

To tackle some of the major ills brought out, the report advocates several revisions to the AoA, including:

   *  investigating and publishing the scale and scope of transnational agribusiness activities in the member states;

   *  evaluating the sources of market distortion, public and private, and discussing how best to address them;

   *  creating a WTO working group to discuss competition issues specifically related to agriculture.

Inelastic supply and demand

It should be taken into account that demand in agriculture is inelastic, and food is essential to life and should not be accessible only to those with purchasing power in the market.

There is also a relative inelasticity of supply in agriculture, and physical stocks are necessary to protect against weather-related production shortfalls, although the high costs of maintaining the stocks limit the private sector interest in this service.

Neither supply nor demand of food is as sensitive to price as most other products; people will spend everything that they have to avoid starvation, and once basic calorific needs are met, demand drops sharply.

Supply of many cereals comes once or twice a year at harvest time, even though people need food every day of the year. Supplies of basic grains cannot be timed to meet consumer demand; they must be stored against future need. And despite the increasingly sophisticated technology available to farmers in developed countries, weather remains an all-important and unpredictable determinant of supply and thus of price.

“This relatively inelastic nature of both supply and demand in agriculture complicates the operation of the market. Almost all governments, whatever their political persuasion, intervene in the market to ensure that most people are fed.”

The models used by governments to predict the outcome of the Uruguay Round AoA did not provide accurate results, Murphy points out. “They were wrong about the direction prices would take, wrong about who would get the increased exports and wrong about how farmers would respond to changes in support programmes,” she comments. “They failed to take into account these vital aspects of international agriculture. We need to go into the next round of negotiations better informed. In fact we must: the lives and livelihoods of millions of people depend upon it.”

Most agricultural policy is enacted in the name of farmers, and farmers are often the object of criticism of developed-country farm policies. However, farmers are the weakest link in the chain that brings food from the field to the table; they are price takers, dependent on highly concentrated industries for inputs and for sale of their products. Farmers in Mexico and the Philippines who depend on maize for their livelihoods do not compete with American farmers, but with the companies that export grain to their markets, and “companies that are the prime beneficiaries of US farm policy,” says the report. (SUNS5108)

From TWE No. 279 (16-30 April 2002)