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During the last year or so our newspapers and electronic media have been flooded with news of a crises. Within less than a year the price of oil rose from US$ 50 a barrel to almost US$ 140 a barrel. In parallel with this we were also informed about a food crisis, where the prices of some important agricultural commodities and food rose sharply; some were even doubled. During the last several months another crisis that haunted us was the world financial crisis.
Within a week, near its peak, the price of oil rose by more than US$ 40 a barrel. Now only within the last month we have witness a sharp drop in the price of oil from US$ 140 to the pre-crisis price of US$ 50 a barrel. This seemingly abnormal fluctuation in price can hardly be a reflection of the power of real supply and demand. How can this be explained? There is a general consensus that the main mechanism behind this phenomenon is not the real supply and demand, but speculation, facilitated by weak oil market regulations.
The food crisis as manifested in the rise in food prices was partly as a result of the rise in oil prices, and partly the prolonged drought in many parts of the world. Notwithstanding this rise, the recent decline in some agricultural commodity prices has been partly as a result of the sharp decline in oil prices and this year's relatively good harvest of some cereals. In other words, the food crisis could be indirectly related to speculation in the world economy. In fact some believe that speculation in commodity markets contributed to this crisis.
The financial crisis is also believed to have been influenced by speculation in complicated and sophisticated global markets. It was not until the world economy deteriorated that it was realized that some weak spots have gone unchecked by regulation. It is estimated that the market value of these speculative financial markets and derivatives, could go up to ten times the real value. At a macro level, many countries are now starting to go into recession. The direct impact of the crisis is that investments are slowing down. Companies are having difficulties financing their operations and beginning to lay off employees. General prices are rising, purchasing powers are declining, and in turn, consumption declines. This overall decline in aggregate demand will reduce demand for agricultural products and hence might depress prices of agricultural products even further.
What have we learned from these crises? First, they are all speculation-related phenomenon. Second, like any speculation-related fluctuation in the market, they last for a short period of time, with the exception of the financial crisis which some people believe could last longer through a deep and long recession. But then again, data indicate that since the great depression of the 1930s, for every business cycle recessions have been of shorter and shorter periods with a longer period of expansion. Thanks to the science of macro economic policy.
It is important to note the somewhat reactive responses of some countries to price changes could hurt farmers. During the sharp oil price increase, many countries in the world devised programmes and policies to promote expansion of biofuel crops such as palm oil, jathropa and other sources of gasohol crops. Following programmes and incentives by the government, we also witnessed some private companies considering venturing in this direction. This is true for developing and developed countries. For example the Bush Administration devised programmes to increase production of corn for convertion to gasohol. Indonesia observed government programmes involving many small farmers to increase production of cassava and jathropa. The decline in both oil and commodities prices within a one-year period, will now inevitably have an adverse effect on the farmers in the coming years, in particular small subsistence farmers.
How should countries respond, then, in terms of agricultural policies? Agriculture is a long-term investment. Its long gestation period and bulky and perishable nature necessitates policies to minimize uncertainties. For many developing countries agriculture's role as defender of food security, a source of livelihood for the majority of the population, the sector that hosts the majority of the poor, and as an economic powerhouse, calls for long-term planning and strategy for agriculture. This includes attention to land and water constraints, low investments in rural infrastructure and agricultural research, expensive agricultural inputs relative to farm-gate prices, and better adaptation to climate change.
To conclude, it is important to avoid short-term reactive responses to sudden changes in any economic variable. Instead, agricultural development needs a long-term perspective.
Written by Togar Alam Napitupulu, Senior Economist, UNESCAP-CAPSA, Bogor, Indonesia. |
