Higher and more stable agricultural commodity prices are a necessary condition for the agriculture sector to become an effective force in the socioeconomic growth of the less and least developed countries. Higher and stable crop prices are therefore a necessary condition for the success of other development efforts such as export promotion, diversification, and the production of value added goods.

It is evident that the current strategy of trade liberalization—in and of itself—cannot deliver higher commodity prices.  Contrary to some conventional thinking, this policy failure is not only the result of the agricultural policies of OECD member states, but more importantly one of the fundamental structural characteristics of agriculture.

The main characteristic of agricultural production is that aggregate demand for agricultural commodities does not vary greatly according to price – people must consume food no matter how high the price, and there is only so much a person can eat, no matter how cheap food becomes.  At the same time, total agricultural supply does not significantly respond–in the short term—to lower prices because cropland in major producing countries cannot easily be moved in and out of production and has few alternative uses.  Furthermore, growth in supply tends to outpace the growth in demand due to investments in productivity.  This combination of factors, in a free market environment, tends to produce results characterized by structural oversupply and decreasing commodity prices.

An effective contribution of OECD countries to find a solution to chronic oversupply and the resulting low world prices for crops is to reduce the amount of cropland planted with food and feed crops.  In this context, the processing of crops into energy and other bio-products offers an unparalleled opportunity to address this imbalance.  The shift of cropland currently used in the production of food to produce bio-energy and bio-products from dedicated crops would reduce the gap between the capacity to produce food and what the market can absorb at reasonable prices.  The US and the EU spend over 20 billion dollars a year in direct support to their farmers.

Introducing incentive mechanisms to promote the growth of energy-dedicated crops could reduce production of traditional crops, increase their price and reduce or eliminate the need to subsidize them; farmers would rely mostly on income from the market as the main source of support.

The whole text can be downloaded here