A Private Sector View of Food Security & Price VolatilityMalcolm Bailey

May 2014

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Components of food security

Production efficiency

Open trade environment Food safety

Managing price

volatilityNutritional

security

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Trade policy settings can have significant implications for food security and price volatility

Source: Worldtariff.com

Note: Tariffs are MFN or outside quota rates as appropriate. Specific and compound rates have been converted to ad-valorem at an assumed SMP price of USD 4,000 per tonne

EU export subsidies

Argentina export bans

India export bans

0%

50%

100%

150%

200%

250%Ca

nada

Japan

Mexico

USA

Tariffs on skim milk powder

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Use of food stocks as a policy tool is a costly and inefficient approach to food security

Diversion and leakage of below poverty line (BPL) public distribution stocks, India

Source: World Bank Report (2011) – Social Protection for a Changing India

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Policies such as export subsidies suppress price signals, impacting investment in agriculture

1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103

109

115

0

1,000

2,000

3,000

4,000

5,000

6,000

EU Export Restitution Oceania - WMP Dutch - WMP

WM

P Pr

ice

(USD

/t) EU export restitution subsidy in effect

Export restitution suspended

Impact of the suspension of EU Export Restitution on international WMP Price

EU export restitution subsidy

reinstated

Impact of EU export subsidy on WMP price

Source: Fonterra analysis

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Price volatility remains an issue affecting dairy products

Commodity Dairy Prices

Source: USDA Oceania Series

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Jan-05

Apr-05

Jul-0

5Oct-05

Jan-06

Apr-06

Jul-0

6Oct-06

Jan-07

Apr-07

Jul-0

7Oct-07

Jan-08

Apr-08

Jul-0

8Oct-08

Jan-09

Apr-09

Jul-0

9Oct-09

Jan-10

Apr-10

Jul-1

0Oct-10

Jan-11

Apr-11

Jul-1

1Oct-11

Jan-12

Apr-12

Jul-1

2Oct-12

Jan-13

Apr-13

Jul-1

3

USD

per m

etric

tonn

e

Butter Cheese SMP WMP

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But dairy is not alone in experiencing price increases and price volatility

Price Index Trends for Agricultural Raw Materials, Metals, Crude Oil

0.00

50.00

100.00

150.00

200.00

250.00

300.00

Jan-

00Ju

n-00

Nov

-00

Apr

-01

Sep

-01

Feb-

02Ju

l-02

Dec

-02

May

-03

Oct

-03

Mar

-04

Aug

-04

Jan-

05Ju

n-05

Nov

-05

Apr

-06

Sep

-06

Feb-

07Ju

l-07

Dec

-07

May

-08

Oct

-08

Mar

-09

Aug

-09

Jan-

10Ju

n-10

Nov

-10

Apr

-11

Sep

-11

Feb-

12Ju

l-12

Dec

-12

May

-13

Oct

-13

Mar

-14

Inde

x Va

lue

Agricultural Raw Materials Index Metals Price Index Crude Oil (petroleum), Price index

Source: IMF Commodity Price Indices

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Dairy price volatility has been driven by a range of factors

Volatility

Dairypolicy

Strong demand fordairy across Asia

Foreign exchange rates

Supply shocks,i.e. weather, disease

Competing usesfor grains

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Price risk management tools are needed to ensure that global food markets function effectively

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Summary

• Food security is a major, global, challenge for the 21st century• A function of farming efficiency and of efficiency in moving food from areas of

abundance to areas of need• Food security is also influenced by the trade environment• Trade policy settings such as export subsidies can have a major impact on

food security, suppressing price signals and impacting investment in agriculture

• Rising price volatility in food remains an issue, and such trade policy settings can also negatively impact price volatility on the international market

• Market-based price risk management tools and responsive pricing signals (like GDT) are important for managing the inherent volatility in agricultural markets and ensuring that global food markets function effectively.

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Thank You