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Food markets and their regulation

Published online by Cambridge University Press:  22 May 2009

Gary L. Seevers
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A food regime not dominated by one or a few entities, without governmental policies separating national markets, and with free access to information would result in a single, integrated global food market. Such a hypothetical market would contribute more than the current system to efficiency and stability, although it would not necessarily be superior from an equity standpoint. Such a global food market does not exist. This is primarily because government regulation separates individual national markets. Residual international markets, shaped by the domestic and trade policies of major buyers and sellers, exist for major commodities. In the international grain market the United States is preponderant, but American policies in recent years have prevented the US from playing a dominating role. Furthermore, futures trading provides an open reference price. Consequently, the international grain market more nearly approximates “ideal” market features than many other international markets. An expansion of public markets and futures trading, by the United States and other countries, could enhance the effectiveness of international food markets in serving goals of efficiency, stability and security of access.

Type
Section III Economics, Politics, and the World Food System
Information
International Organization , Volume 32 , Issue 3: Special Issue: THE GLOBAL POLITICAL ECONOMY OF FOOD , Summer 1978 , pp. 721 - 743
Copyright
Copyright © The IO Foundation 1978

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References

1 Bergsten et al. discuss “seven criteria against which to judge the effectiveness of any international economic system: efficiency, growth, full employment, income distribution, price stability, quality of life, and economic security.” Bergsten, C. Fred, Keohane, Robert O., and Nye, Joseph S. Jr, “International Economics and International Politics: A Framework for Analysis,” International Organization, (Winter 1975): 26–36Google Scholar.

2 The word “price” will be used as a shorthand for the overall terms of exchange. The specifics in an actual transaction might also include financing, shipping arrangements, contingency clauses, and other terms which together with price determine how attractive the transaction is to buyer or seller.

3 The observation that few markets are perfectly competitive—or that some are becoming less competitive, or that others are cartelized—is sometimes used in support of government accepting more responsibility for market performance. A more useful concept may be “workable competition” which is a judgmental concept about the degree of competition. Indicators of competition include: the degree of concentration among buyers and sellers, the ability for new competitors to challenge existing firms, the openness of the price-making process, and the receptivity to technological (cost-reducing) advance. A promising line of research would be to apply this concept to international food markets where little careful analysis has been done of market performance. An index might be developed which would rank international food markets according to the degree of competition. Under the workable-competition concept, the relevant policy question becomes: would the benefits of more government regulation designed to improve market performance more than outweigh the various costs associated with additional regulation?

4 Several major historic experiences with controls are summarized by Lacy, Mary G., “Food Control During Forty-Six Centuries,” Scientific Monthly (06 1923Google Scholar).

5 The argument in favor of government grain reserves depends largely on the fact that there is not a global grain market; government regulation causes national markets to be separate from one another. Although the more actual grain markets deviate from a single global market, the greater the justification for government reserves. This does not, in my view, mean there is a strong case for extensive government reserves even under the existing non-global grain markets. For one reason, one of the presumed costs of instability is overstated. It is argued that instability reduces efficiency by increasing risks. However, risk results from divergence between anticipated outcomes and actual outcomes, not from fluctuations in actual outcomes per se. The futures markets provide one important way to remove divergence for producers, merchants, and consumers by hedging.

6 Any attempts to improve equity toward the extreme goal of equalizing food received by everyone would have to take account of their impact on the cost of producing food. Redistribution measures within the food system usually also raise average production costs, resulting in less total food availability. Provision of food-aid is an example. Pure redistribution measures include general and unrestricted foreign aid which operates outside the food system itself. Technical assistance provided to food-deficient countries, if effectively administered, would be a measure that would improve equity and presumably also improve efficiency.

7 I am using the word regulation loosely to mean both a policy and the means of implementing the policy. A more precise meaning would be only the “means-of-implementing.” In matters of domestic agricultural policy, the means-of-implementing has traditionally been called programs. Regulation usually has referred to a subset of programs, e.g., regulation of meat inspection, or regulation of commodity futures trading, or regulation of chemical food additives. I shall use regulation in a more general way.

8 Health regulations are an important form of national food regulation. One can distinguish between legitimate regulations (i.e., intended to protect domestic animal, plant, or human health) and regulations established for the purpose of discriminating against foreign products. The impact on food markets can be significant in either case. For instance, the US prohibits imports of fresh meat from Argentina to prevent the spread of hoof and mouth disease. As a consequence, Argentina exports large quantities of meat to Western Europe, some of which would otherwise flow to the United States.

9 The influence of exchange-rate regulating is demonstrated by the recent US experience. As the dollar became progressively over-valued prior to the depreciation that began in August 1971, US food exports were indirectly regulated because they were priced artificially high abroad. Likewise, food imports into the United States were stimulated by an indirect subsidy. It seems clear that the dollar's depreciation has played a role in altering and tightening the US food situation since 1972. For an analysis of the consequences, see Schuh, G. Edward, “The Exchange Rate and US Agriculture,” American Journal of Agricultural Economics, Vol. 56, No. 1 (02 1974): 1–13CrossRefGoogle Scholar. It is less clear, however, to what extent the dollar's rather abrupt depreciation contributed to the essentially concurrent worldwide tight situation, as compared with USSR purchases, crop shortfalls and business cycles.

10 See World Food Council, “Food Trade, Report by the Executive Director,” Paper No. 42 (Rome: 03 30, 1977), p. 14Google Scholar.

11 Johnson, D. Gale and Schnittker, John A., US Agriculture in a World Context: Policies and Approaches for the Next Decade (New York: Praeger Publishers, 1974), pp. 1–5Google Scholar.

12 I would classify regional trading blocs such as the European Community as a modification of national rather than multilateral regulation. In 1974, trade among members of the EC, the Latin American Free Trade Association and among centrally-planned economies accounted for 14.7 percent of total agricultural trade.

13 The proposals for NIEO are discussed in Gosovic, Branislav and Ruggie, John G., “On the Creation of a New International Economic Order,” International Organization, Vol. 30, No. 2 (Spring 1976): 309–39Google Scholar.

14 The pros and cons of this conclusion have been discussed byBergsten, C. Fred, Krasner, Stephen D., and others in Foreign Affairs during 1974Google Scholar. Also, see the following for a derivation of economic conditions and the application to selected commodities. Dyne, Carl Van “Commodity Cartels and the Theory of Derived Demand,” KYKLOS, vol. 28 (1975): 597–611Google Scholar.

15 Martin, Edwin M., comments, in Wallace, Don Jr, and Escobar, Helga, eds., The Future of International Economic Organization (New York: Praeger, 1976)Google Scholar.

16 In periods when either consumers or producers are “protected,” separation regulations retard achievement of the low-cost (efficiency) production objective. When stability is a problem, the same regulations shift “shocks” to those without separation regulations. In either case there are costs. When international grain prices rose above internal EC prices in 1973–74, they were no longer interfering with efficiency but their actions to maintain internal stability compounded instability elsewhere.

17 Based upon information from Foreign Demand and Competition Division, Economic Research Service, US Department of Agriculture.

18 This was not necessarily true in the past when surplus stocks were present. For a discussion of wheat pricing during an earlier period, see McCalla, Alex F., “A Duopoly Model of World Wheat Pricing,” Journal of Farm Economics, Vol. 48 (08 1966): 711–29CrossRefGoogle Scholar.

19 Improving the Export Capability of Grain Cooperatives, Farmer Cooperative Service Research Report 34, US Department of Agriculture, 06 1976, pp. 22–23Google Scholar.

20 The price may be set when the sale is initially made. These fixed-price sales normally account for a majority of US exports. Under a typical fixed-price sale, an exporting firm might sell 200,000 tons of corn to an importer for $2.85 per bushel delivered at a Gulf port in 90 days. The exporter might obtain price protection (i.e., hedge) by buying corn futures at the Chicago Board of Trade. Then when the exporter purchased actual corn for this shipment, the hedge would be removed by selling corn futures. However, in many sales, the price is not established when the transaction is consummated. Instead, provisions are made for fixing a price at a later date. In sales where an absolute price is not set, the price usually is based upon a particular month's price on a futures exchange in Chicago, Minneapolis, or Kansas City. This is called “basis pricing.” For example, a Japanese firm may have agreed to buy 200,000 tons of wheat from a US exporter (with specified grade, quality, and delivery provisions) at $. 10 per bushel over the December futures price in Kansas City. The Japanese firm then would have the option of requesting a price at its convenience. At this time, the US firm typically would buy futures contracts, thereby hedging itself against subsequent changes in cash wheat prices. When it bought wheat for this shipment, the firm would sell futures (lift its hedge). The Japanese importer has selected its time to price, and the US exporter has used the futures market to reduce risks of price changes between the time it has a fixed-price sale and when it purchases wheat for this shipment. Actually, each side has several other choices.

21 Most P.L. 480 “sales” are handled just like commercial sales once the US government and the recipient country have reached a financial agreement. This agreement covers the commodity to be purchased, the total dollar amount to be provided, and the repayment terms. Usually a quantity to be purchased is stated in the agreement but this presumes a specific price. It is the total dollar figure which is binding and the recipient country has an incentive to get the best possible deal. American food-aid thereby is a transfer mechanism of dollar commitments (to be spent to purchase food); the actual food is transferred like commercial sales. Responsibility for effective and low-cost procurement rests with the recipient country.

22 In addition to providing the function of competitive price discovery for the market as a whole, a properly-operating futures market provides a risk-transfer mechanism. This function reduces costs of handling and merchandising the commodity. Futures markets provide economic benefits but they also are subject to distortions and manipulations which interfere with the pricing and risk-transfer function. The primary justification for their regulation has been to ensure that futures prices accurately reflect anticipated supply and demand at that time. The economic benefits and operation of futures markets are poorly understood. For example, while 14.6 billion bushels of soybeans were traded at the Chicago Board of Trade in 1974–75 crop year futures, only 33.2 million bushels were delivered on these contracts (less than one percent of the total traded). The total deliveries equaled 2.7 percent of the US 1974–75 soybean crop—though in many cases the same soybeans may have been delivered more than once, and all of them subsequently were sold for commercial end use. The futures market is not intended or used as a separate cash commodity market. Rather, the futures market is auxiliary to the cash market and helps the cash market operate more efficiently. The possibility of delivery is, however, an absolute necessity to insure a linkage between cash and futures prices; otherwise futures could become a separate and artificial market and serve no economic purpose. In certain cases, “selling” or “buying” in the futures markets is the most suitable marketing channel.

23 See Goldberg, Ray A. and Austin, James E., “Multinational Agribusiness and Global Food Problems,” paper presented to the meetings of the American Political Science Association (Chicago: 09 2, 1976), pp. 6–8Google Scholar.

24 Ibid.

25 See Improving the Export Capability of Grain Cooperatives (pp. 17–19) for brief description of each firm. The only publicly-held firm is Cook Industries, Inc., which entered the grain business about a decade ago, and in 1977 ran into serious financial difficulties and began to curtail its grain business.