Proliferation of Bipartite Free Trade Agreement Distorts the World’s Food Commodity Markets

Abstract

Wonder how we fix a price for wheat or soybean? This role is played by the world’s commodities exchange and markets where amount of supply intersects with amount of demand to discover a price for a commodity. Such an arrangement persists till the inception of the World Trade Organisation in 2001 where it is possible to enter into bipartite (country to country) free trade agreement. Such agreements may have clauses that afford preferential trade arrangement in food commodities such as fresh vegetables and grain products. Specifically, with the proliferation of such bipartite free trade agreements, it is possible that countries can choose which countries to buy and sell food products. This is in stark contrast to the open bidding systems enshrined in the commodity exchanges. Hence, current world food market is distorted with two parallel systems operating in tandem: (i) bipartite free trade agreement, and (ii) open bidding on food commodity exchanges. Current observations are that these two antagonistic systems are not operating in equilibrium, and there are severe distortions and disequilibrium in the overall food supply system that impacts on how food is priced, and whether there is a good correlation between food price and food quality. The latter is of utmost importance in a market- based pricing of food where higher quality food should command a higher price. Any divergence from the above will seed severe economic externalities in other sectors of an economy such as the processed food market, national health, and economic productivity of a country. It is perhaps staggering that a simple pro-country welfare preferential free trade arrangement to buy food from another country can translate into severe economic disequilibrium in the wider economy through mis-pricing of food, and distorted correlations between food price and food quality.

Keywords: food price, food commodity market, price discovery, free trade agreement, open bidding market,