What’s the issue?
Most countries, even those that are more than self-sufficient in food, rely on trade for some components of the diet.
The UK sources about one-third of all agricultural goods from overseas and even for items that can be produced domestically, the proportion is about one-quarter1. Some items (eg: fruit) are sourced almost entirely from overseas and overall food self-sufficiency has been falling over time1.
Dependence on imports is not a problem in itself, provided that supply is reliable. It makes economic sense to source food from wherever it can be produced most efficiently.
However, net importing countries, such as the UK, are reliant on the free flow of goods and the correct functioning of markets to obtain supplies at affordable prices.
Global trade has blossomed in modern times but free markets cannot be taken for granted.
Potential threats to trade include:
- Markets are sometimes manipulated for diplomatic or economic reasons. This can occur between nations or between trading blocs
- Manipulation can involve various tactics including discriminatory regulations, tariffs and subsidies
- Once initiated, market manipulation can spark “tit-for-tat” reprisals, including confiscation of property, interdiction of shipping and trade sanctions
- The World Trade Organisation has helped to reduce trade barriers over time but a rise in protectionist sentiment and diplomatic tensions could potentially throw this in to reverse
- As a response to sudden shortage, nations may impose export bans to protect local supplies. This would reduce global availability and drive up prices
- In some categories (eg: wheat), a few countries account for the bulk of the food released into global markets, making these nations strategically influential (as with the oil market)
- It is also possible to envisage import bans (eg: in order to protect domestic crops or animals against diseases)
- If global supplies of food, energy and other commodities tighten, nations may move to secure availability through bilateral trade agreements rather than global markets
- Individual businesses may take similar measures to secure their own interests (eg: vertical integration, long-term supply contracts)
- These measures could reduce the volume of goods available on the free market, driving up prices and increasing volatility
What risks does this present to individual food companies?
The most obvious risks to UK grocery businesses are:
- Availability – Goods required by UK businesses may become unavailable if they are subject to export bans or become diverted from the open market through bilateral trade deals
- Incorrect price – Market distortions may raise prices beyond the level in a properly-operating market (or, alternatively, prices could be set unrealistically low, which would reduce production incentives)
- Price volatility – Sudden swings in price can create unexpected financial pressures and uncertainty for businesses, reducing their willingness to invest and make long-term decisions
Other risks not related to market failure but worth noting here include:
- Product integrity – In a global market, where goods might change hands many times before reaching shoppers, it is more difficult to assure product integrity
- Reputation – If goods sourced internationally prove to have undesirable attributes (eg: produced via exploitative labour practices), the reputation of the UK partner may be affected
What’s been the story so far?
Over time, there has been a general trend towards international market liberalisation (eg: through the WTO).
The UK and most other major food trading organisations are members of the WTO and are therefore committed, at least in theory, to the concept of free trade.
In practice, many barriers to free trade remain, especially in food markets. The Doha trade round of 2011 was intended to correct at least some of these, but it is currently (2013) incomplete with little sign of progress.
Food markets around the world continue to be affected by:
- Agricultural subsidies (eg: for bio-fuel production)
- Anti-hoarding regulations
- Bilateral trade agreements
- Restrictions relating to currency policies
- Export controls
- Import controls (eg: taxes and tariffs)
- Price controls
- Regulations that present a barrier to free trade (eg: spurious quality regulations)
Of these, export controls are perhaps the most significant in the context of food security, since they can be introduced with little warning in response to unpredictable local supply shortfalls. An example is the Russian grain export ban implemented in 2010, after extreme weather resulted in a major production shortfall.
Russia contributes about 5% of all barley and 5% of all wheat traded worldwide2, with much of its export traffic going to the Middle East and North Africa. The Russian export moratorium therefore affected not only global prices but, arguably, global stability too.
The UK conducts most of its food trade within the EU1, which is a free trade bloc but significant quantities of food still come from outside the EU (eg: large volumes of wheat come from North America).
In 2013, the EU and US announced plans for a new bilateral trade treaty. It is not clear what might be included but, since food is a key trading commodity for both sides, it is likely to play a part.
A 2011 study by the US Dept of Agriculture suggested that bilateral trade agreements in agricultural markets resulted in a 34-93% increase in trade between participants ... but a 26-46% reduction in trade with non-participants3.
What can companies do to reduce their own risks?
Trade policy is usually decided via negotiation at government level rather than by businesses. However, you can hedge against risk, by:
- Diversified sourcing – Buying goods from multiple locations provides system redundancy and is also standard practice for many products because of the need to provide year-round availability
- Supply chain fortification – This comprises various activities including dedicated production arrangements, vertical integration, forward-buying and trading in futures
- Broadening production – Encouraging increased and diversified production within the UK (or any other country) would provide some protection from potential problems in the trading system although this must always be balanced against the need for efficient production, tracability and transparency
What can companies do to act responsibly?
- Ensure that any action you take to protect food security for consumers in one country does not compromise the security of people elsewhere. For instance, using the resources of a low income nation (such as limited water reserves) to feed a wealthy one can create ethical dilemmas that need to be managed sensitively
- Ensure that goods purchased from all sources are produced to equivalent ethical standards; otherwise they stand to be accused of encouraging market distortions
- Demonstrate sustainable sourcing practices, for instance through Fairtrade and equivalent schemes
Where can you go for more information?
1 Agriculture In The UK 2012, DEFRA
2 FAO Statistics, share based on average Russian export volumes for 2000-09
3 Reciprocal Trade Agreements, ERS USDA, April 2011
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