A world agricultural bank? Economic Times: 26th April 2008

What does a country which has a foreign currency problem emanating from a fundamental balance of payments disequilibrium do? It goes to the IMF for assistance. What are the options for a country when it needs money for a development project? It goes to the World Bank, IDA or ADB for aid. What can a country which has a physical food problem do? It cannot look beyond probably imports which have their own limitations of being uncertain, besides carrying the ubiquitous threat of higher inflation being transmitted. Presently there is no way out for a country which has a shortage of food and cannot supplement the same with imports. The problem is more acute when the product is rare, like pulses which are grown by a few countries. This situation should sow the seeds of the idea of establishing a world agricultural bank (WAB) which can respond appropriately in times of crisis. The food situation today is serious. It is not that countries do not have money to buy food, but the way things are progressing, it may not be far off when there will be shortages throughout the world as production is just not keeping pace with demand. Presently, there may be no reason to panic as the higher prices are a reflection of stable or lower production and depleting stocks (which are still reasonable at the global level). Once this comfort disappears, there will be a problem for all countries. The ever increasing population, especially in the developing and underdeveloped world, is one part of the problem. The other threat comes from a more recent phenomenon — the emphasis on bio-fuels. The IMF has estimated that nearly 50% of the increase in food prices today can be attributed to the demand emanating from bio-fuels. Bio-fuels just sometime back appeared to be the panacea for the fuel problem (but hasn’t quite delivered as yet), and several countries (particularly Brazil and the United States) have diverted land to the production of crops like corn or soyabean. Two things have resulted. Shifting cultivation has led to a fall in production of other crops on account of this diversion, with wheat being the main casualty. Secondly, prices have started moving up perniciously for virtually all agricultural commodities across the globe, and this has both social and political implications. After assiduously encouraging the farmers to grow more of these crops, governments cannot do a U-turn now. Going back today universally to a regime of controls where such conversion of crops into fuel is possible, though not practical. Therefore, there is a need for an alternative, which is the WAB.
The WAB should be established by member countries which will have to contribute both equity capital as well as grains/oilseeds to the Bank. The Bank could choose the products that it would like to stock and can include those which normally are subject to production volatility. This would form a corpus which can be used to assist member countries in times of distress. The Bank on its part would be in the business of procuring products from the market at all times to build a buffer and would also be tapping all countries for surpluses. The prices at which procurement would take place could be the prevailing market price. The members can be allowed to buy a certain times their contribution or quotas (as was the case with the IMF at one time) as may be decided by the Bank at a predetermined price, which may be announced at the beginning of the year. This way, the prices would be lower for the member country than the prevailing market prices in times of a crisis. The Bank on its part would be rolling over stocks to ensure that there is minimal loss of the product on account of storage. The Bank could also carry out its own farming activity by either procuring land or leasing the same in different countries and growing the deficit crops such as corn, wheat, oilseeds, etc, so as to augment its own supplies. The business model would be quite straight forward. It would be a profit making institution which earns income from four sources. The first would be through the interest on base capital. The second would be on the difference between the purchase price and the sale price. The sale price would normally be higher than the purchase price, but at the same time lower than the current prevailing price so that the member country would be better off buying from the Bank than importing the same. The third would be interest on loans given to member countries for purchase of agri-products. The last would be a combination of hedging and trading activity. The Bank would need to hedge its own price risk and would have a trading desk whereby the hedge transactions are carried out. In fact, by its sheer size and possible clout, it could help to rein in price increases on the exchanges in times of global shortfalls. The creation of such an institution is a compelling need today on account of the proliferation of the twin issues of globalisation and food shortages. Rapid globalisation has transmitted these shocks across countries due to the strong trade links which has enveloped the regions. And both of them are here to stay. Therefore, rather than living with the vicissitudes of nature with a lot of stress, a solution can be had by this institution which will help in alleviating the situation. This, in turn, will help check global inflation, which appears to be driven essentially by three factors: food, fuel and minerals. By addressing the first issue, a lot can be achieved as it provides governments a lot of political comfort. Presently, individual countries are doing their best to build buffers which will help in the short term. The World Agricultural Bank will provide the balm for more countries in a sustained manner over the medium and long terms, which is what one should be looking at. The problem after all is global and is not localised