A labourer works at a rice mill in northeastern India last week.JAYANTA DEY
The prices of food and other commodities have been rising recently, renewing concerns about food security. But what does this term actually mean? The use of the word 'security' suggests an absence of risk, but what sort?
Traditionally, the risks to the food supply have been the potential bad states produced by nature: bad weather or disease. And the traditional solution to these risks has been the development of markets. Without access to markets, a poor harvest leads to starvation. But if food can be imported, then a poor harvest simply means a trade deficit in agricultural products. This is an old lesson, and one that many today seem to have forgotten: self-sufficiency is a risky strategy. Subsistence farmers lead one of the most miserable existences known to humanity.
There are other risks, of course. Self-sufficiency has been seen as a form of self-insurance against possible disruptions to trade routes, especially in war. Indeed, the quest for self-sufficiency has often led to the conquest and annexation of key suppliers. Happily, these sorts of considerations have receded in importance in recent years, if not entirely disappeared.
Markets don't make those supply risks disappear: they transform them into price risks. One way of hedging against the fluctuations in prices is to make use of financial market instruments such as futures markets, options and other derivatives. Contrary to popular myth, these markets do not cause volatility. Instead of taking their chances with the spot market, buyers and sellers can make plans in advance using agreed-upon prices. The risk is passed on - at a known price - to third parties. In jurisdictions that forbid such markets, the swings in prices and quantities are generally higher.
Another way is to make use of cartels and price-fixing: our milk marketing boards are a classic example. These arrangements offer lower price volatility, but at the cost of higher average consumer prices. Cartels' defenders often argue that they offer 'security of supply', but what they really do is secure large incomes for their members. They offer little protection against bad weather or disease.
How does the current context fit into this discussion of food risk? As far as I can see, it doesn't: the term 'food security' is a misnomer. The major force behind the increase in food prices can be explained by the fact that over the past few decades, hundreds of millions of people have moved from wavering on the margins of survival to now being in a position to buy more and better food. This is a trend that can only be welcomed.
Nonetheless, there is a downside in the form of higher prices for lower-income families whose incomes have not increased so dramatically. But the remedy for this is not lower food prices. High food prices are a signal to farmers to increase production. Artificial price caps will send the signal to reduce output, which will only make the problem worse.
Instead, the focus at the local level should be on providing low-income families with the extra income they will need to deal with higher food prices. And at the global level, governments should work to strengthen and deepen the markets that are still the best protection against food risk.
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