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July 26, 2002
Rio + 10 Series: Report Finds Fundamental Flaws in WTO's Agreement on Agriculture
    by William Baue

An Institute for Agriculture and Trade Policy report argues that the Agreement on Agriculture fails to account for agri-business' monopoly over global agricultural trade.


Agriculture, one of Kofi Annan's five focal points for the World Summit on Sustainable Development, recently has not been an area of major concern to social investors, at least in the U.S. For example, in the 2002 proxy season, only eight of more than 150 shareowner resolutions concerning social issues addressed agriculture. It is not that social investors are overlooking agricultural issues; they simply cannot influence the predominant companies. A recent report critiquing the World Trade Organization (WTO) Agreement on Agriculture (AoA) noted that five privately owned companies (Cargill, Continental, Louis Dreyfus, Andre, and Bunge) control up to 90 percent of global grain trade.

The report is entitled Managing the Invisible Hand: Markets, Farmers and International Trade. It argues that the AoA, which is the primary trade agreement governing global agricultural trade, is "fundamentally flawed." While the AoA focuses on the distorting effects of national policy on global agriculture markets, it essentially ignores the distorting influence exerted by transnational agri-business over world agricultural markets, according to the report. Furthermore, the report states that the vertical integration of these agri-businesses allows them to control the entire agricultural cycle from seed to market, a fact overlooked by the AoA.

"Until multilateral trade rules take account of the concentration of market power in transnational agricultural trade, they cannot manage an open and fair trading system," writes the report's author, Sophia Murphy. Ms. Murphy serves as director of the Trade and Agriculture Program at the Minneapolis-based Institute for Agriculture and Trade Policy (IATP).

The AoA is premised on standard economic theory, from Adam Smith's notion of the "invisible hand" to David Ricardo's concept of comparative advantage. The latter theory posits that balance in the world market is achieved by each country concentrating on its most competitive products. However, the control of global agricultural markets by a few companies essentially blocks supply and demand equilibration from taking place. Companies, not markets, now control price, the report argues. The transnational nature of agri-business companies erases the counterbalancing effects of competition among countries. And companies' vertical integration seals off many of the transactions between the field and the store from market forces, according to the report.

"Agricultural trade rules need to take into account the rapidity of change in the whole agricultural sector, from seed production to food processing to retailing," Ms. Murphy writes.

The report graphically illustrates how wheat prices have remained constant over the past quarter century, while retail bread prices have risen threefold. Vertically integrated companies such as Cargill capture all of the profit from this increasing differential between the price of raw material and final product, as it owns all the intermediary processes. Meanwhile, farmers continue to receive 1975-level prices for wheat while the AoA curbs national subsidies in the name of controlling global market distortion.

The report cites several other agri-business practices that distort global agricultural regulations. For example, while international trade considerations significantly influence the agricultural regulations in individual countries, most food remains close to home. Only a very small percentage of production of wheat (17 percent), coarse grain (11 percent), and rice (6 percent) trades in the global marketplace. The vast majority of agricultural products are consumed in the country where they are grown.

These multiple modes of global agricultural market distortion by transnational agri-business remain unaddressed by the AoA. Ms. Murphy identifies one potential reason for this blind spot.

"The wealth and size of the transnational agribusiness[es] also make them politically powerful," Ms. Murphy writes. "[A] former Cargill Vice-President, Dan Amstutz, drafted the original text of the WTO Agreement on Agriculture while working at the United States Trade Representative's office--and later returned to the grain trade."

 

 
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