Has agriculture been a winner in the economic downturn?

Bill Vorley's picture
Blog by 
Bill Vorley
14 June 2010

While the downturn has hit many economic sectors hard, have farmers prospered?

Crisis and prices
First, the backstory. The start of the global financial crisis in 2007–2008 overlapped with a dramatic increase in prices of agricultural commodities such as wheat, maize and soy. Between 2006 and 2008, average world prices for cereals doubled or tripled. This price rise was especially significant as it came after two decades of real price declines in major agricultural commodities. Drivers were an increased demand for biofuel ethanol in the US, higher global demand and changing diets, weather and low stocks, magnified by market speculation and export restrictions.

From mid-2008 world prices for food staples fell back from peak levels, though they generally remain well above the pre-2008 levels. Another set of mainly tropical commodities - tea, cocoa, coffee, sugar and cotton – have bucked this trend, and seen strong rallies in 2009-2010.

The spike in the price of staples fed rapidly through to food prices, with the UN Food and Agriculture Organization’s (FAO’s) food price index rising by 27 per cent in 2007. The resulting food price crisis was felt particularly by the urban poor, as well as the rural poor who do not produce enough food for their own household needs.

Random harvest
But were farmers the winners? Had years of declining prices for agricultural commodities actually given way to an upturn for producers?

This is a somewhat vexed question. It’s true that mainstream agriculture linked to global markets was not such a bad place to be in the global financial crisis. Producers of staples did quite well. US farm incomes set record highs in 2007 and 2008. But high input costs (fertilizers, energy) took the edge off that, and with lower commodity prices led to sharp declines in 2009 – down 38 per cent in the US on 2008 and 12 per cent in the European Union.

The story at the economic margins was far more mixed. FAO data show how difficult it has been for farmers working in ‘inefficient markets’, particularly in sub-Saharan Africa, to respond to higher grain prices. These farmers don’t have the means (credit, availability of seeds and fertilizers, access to markets, infrastructure) to increase production. Smallholder agriculture is much more complex than a pool of entrepreneurs waiting for signals to invest.

Southern exposure
Meanwhile, small-scale farmers producing high-value products for global markets have found themselves highly exposed to the economic downturn. These farmers are usually the last to know when an economic tsunami is moving up the value chain, until suddenly credit has dried up and orders have been slashed. A case in point is José Julián Mux Calicio, a farmer producing export vegetables in the village of Paraxaj in the municipality of San Juan Comalapa in Guatemala.

In a video produced for the IIED-Mainumby-Hivos programme on small-scale producers and globalisation, José explains how the crisis has slashed prices and forced him to reduce his cropping area. The trader describes how the demand in the US for export products fell abruptly, causing a domino effect on him and also for the farmers.

A bigger slice
Ironically, distortions are also found in the highly concentrated markets of North America and Europe, where retailers have a tight grip on some markets such as dairy and fruits & vegetables. For all practical purposes, producers wind up with a single buyer, who can control their costs under these conditions, and can ensure that they will have a docile group of suppliers.

Their ability to extract greater profits than would be expected from an open, competitive market is an expression of buyer power, evident in the ability of UK retailers to capture an increasing slice of the retail value of products such as milk

Market distortions in Europe have become entrenched to such an extent that policy makers are making direct appeals to retailers in times of low producer prices. Take the new agreements between France’s major food retailers and the government, in which the supermarkets have agreed to exercise ‘margin restraint’ during periods of crisis in fruit and vegetable production.

Future imperfect
The world is probably heading into a period of greater volatility in food prices. The ability of farmers to benefit from those higher food prices – from Ethiopia to the UK -- depends on the efficient functioning of markets. Attention must remain focused on the unfinished business of rural development, to improve infrastructure and availability of credit, inputs and market information, and build producer organisations.

But there is also a thorny priority for policy makers in the North to regulate buyer power and reduce the leverage that the food industry giants have over their suppliers. Until then, whether in a period of recession or economic growth, the story of agriculture will be, to paraphrase Prof Richard Levins of the University of Minnesota, one of non-farmers learning how to make money from farming.

About the author

Bill Vorley's picture