Deep concern is sweeping global agriculture markets as an extensive drought has lowered expected crop yields among major producers of grain, corn, and soy. In the United States, the Institute for Agriculture and Trade Policy (IATP) predicts this summer’s drought to result in “catastrophic” crop yields and predicts that up to $40 billion in crop insurance will be paid out to farmers for their losses. Significant reductions in this season’s production is further complicated by the World Bank’s description of global food reserves as “alarmingly” low .

Global food markets are dictated by a handful of major exporting nations, whose own domestic trade regulations can drastically alter global food prices. American production highlights the importance of single nations for international supply: for example, the Midwest provides over half the corn and more than two-fifths of soy supply worldwide. Additionally, corn exporters in South America and Ukraine are facing droughts, as well as the major grain exporter, Russia.

Given the constricted wheat and corn supply in these drought-ridden exporting nations, developing countries have scrambled to increase their reserves. In early August, the Mexican government – the world’s second largest corn importer – purchased 1.5 million tons of corn. Coupled with the weakest corn crop in five years, such fervent demand has caused prices to increase by 50% in June and July.

Net importers have no recourse in setting domestic policy to control for fluctuations in supply. Instead, they must appeal to international organizations. South Korean President Lee Myung-bak recently called upon G20 leaders to increase their efforts in stabilizing global food prices. Rapidly rising costs of staple foodstuffs like grain and corn will exacerbate existing food shortages in many African countries and create new ones in the Middle East and India. Riots are predicted to follow such shortages, as occurred during food crisis in 2007-08; the combination of hunger and violence will be highly destructive to economic progress in developing countries.

Jim Harkness of the IATP asserts that the challenge of feeding the world’s population is not a question of production capacity (agricultural technologies are well equipped to keep up with demand), but systemic problems in national and international policies and markets. In particular, Harkness notes that the original promise of bringing prosperity to agricultural producers and maintaining stable food prices through free trade has been unfulfilled by international organizations like the World Trade Organization.

Lessons from prior crises

In the aftermath of the food crisis of 2007-08, the IFPRI found several causal factors of rising food prices that mirror those in 2012. Inclement weather, high energy prices, and depreciation of the U.S. dollar have plagued markets as of late. An additional factor – trade shocks following export restrictions – has recently reentered the discussion. In a 2010 report entitled “Reflections on the global food crisis,” the IFPRI suggested improving the functioning of markets and trade by “promoting freer trade in agricultural commodities.” The study examined analyses of the 1972-74 crisis and found that “free trade regimes were a potentially viable alternative to large international grain reserves.”

In promoting policies of free trade, both the IATP and International Food Policy Research Institute (IFPRI) have criticized the WTO for failing to prevent export restrictions that result in food price volatility. This year’s crisis has served to perpetuate this troubling economic trend.

The Russian paradigm

On August 17, Russian Prime Minister Nikolai Fyodorov officially rejected plans for the implementation of an export ban on grain this season. He noted that the country’s agricultural industry would retain its original expectation for production of 75 – 80 million metric tons of grain. Given the analysis by the IFPRI, such an export ban could have had the potential to raise prices and further strain global food reserves. Indeed, the nation’s mere deliberation over the prospect of the ban caused an increase in global grain prices, beyond that already induced by drought elsewhere.

A September meeting of the Asia-Pacific Economic Cooperation (APEC) group will see Russia unveil a plan for expanding its influence in the Pacific. The development of a “Far East Grain Corridor” will move 10 million tons of grain into Asia by 2020. With this project, Russia is making a concerted move towards a freer system of trade by loosening restrictions and administrative costs. The business advisory council of APEC has in mind “the goal of an integrated Asia-Pacific economy” that actively deters “protectionist responses” to such events as food crises.

Intersection of economic and food crises

Oil prices are very high in the U.S. and Europe, which compounds the negative effects of rising food prices. The IFPRI study states that “oil prices in particular will have a pervasive effect on a country’s vulnerability to the current crisis through their effect on exchange rates, foreign reserves, transportation costs, and domestic inflation.” Reliant as the agriculture market is on the price of energy and transportation, the slow and hesitant process of remaking the energy sector in these regions essentially ensures poor and instable infrastructure for the agricultural sector.

With the fiscal challenges facing both the U.S. and Europe no closer to reaching a resolution, the effects of the drought and the resulting rise in food prices will likely have a regressive impact on the poor who will experience the greatest percentage increase in income spent on food. Amongst Eurozone countries that provide social welfare assistance, increased food prices will result in greater spending for such programs. This is troubling for countries like France, whose public debt equals 89% of GDP and has implications for entitlement programs in the United States.

Legislative action and inaction

U.S. agricultural legislation has hit an untimely bout of turbulence in 2012 as Congress has been unable to pass a complete Farm Bill. To provide temporary relief to farmers suffering from the drought, the House passed an emergency bill granting $383 million in loans to agricultural producers. The full version of the Farm Bill as drafted by the Senate provides for the largest amount of funding for the Supplemental Nutrition Assistance Program (SNAP), commonly referred to food stamps, $77 billion per year. The adequacy of those funds to meet the nutritional needs of the program’s participants is threatened by increased food prices. Further, the bill has yet to be ratified by the Republican controlled House and projected to make cuts of $4.5 billion to the SNAP funding.

Complications of the bill’s delay include prolonged uncertainty about crop subsidies and insurance for farmers and livestock producers, who rely upon the fixed information of the Farm Bill in making decisions about pricing and supply. Additionally, the Farm Bill includes funding for global emergency initiatives that provide nutritional support for 27.5 million people worldwide. Just as rising food prices will reduce the potency of SNAP funding for domestic aid, foreign aid will similarly suffer.

The consolidation of agricultural production into a few major exporters necessarily generates an intricate web of international trade relations. In light of the economic control that these economies wield over importers, it is important to note that the exporting nations can also effect significant policy changes beyond those of international bodies. Russia looks to be on track towards liberalizing the discourse about trade regulations, which may in turn mitigate the impact of future crises. The U.S., however, seems to heading another direction entirely, given the inability of the legislative branch to allocate resources and set policies for one of the world’s largest food producers.