Grain$ of truth

Updated (8/3/11) news links at end.

Early Warning had a post recently decrying the proposed emergency policy of the Spanish Govt. to increase the biofuel content in their petrol.  One follow up post  then used US data for ethanol production to extrapolate the impact of US production to global food prices.  Thus linking the unrest in North Africa and around the gulf states with the increased cost of food due to biofuels (as indicated by corn ethanol).  But root causes of the increased cost of food are more complex than that.

Stuarts prime beef seems to be with the corn to ethanol conversion: many authors have argued that the conversion efficiency is poor - but it is probably the final act of a greater tragedy. Outside of the Americas, is corn a primary human staple? Even within the US its prime function seems to be as energy source for feed lot produced beef and a major ingredient in the US staple of fast foods (including supermarket ready meals).

While I agree that biofuels may be problematic, lumping all cereal crops together and then assuming that because 40% of US CORN production is going to ethanol that that is the cause of the rise in food prices seems to overly and dramatically simplify the issue.

Various international agencies have pointed out that the rise in GLOBAL food prices is a complex issue, with different causes in different regions.

The Overseas Development Institute has a report out that says (my emphasis added):

Rising food prices: Cause for concern

Policy conclusions
Food prices have been rising since the early 2000s • but spiked in early 2008. Even if they start to decline later this year, the next ten years will see food prices at levels above those seen in the early 2000s, thanks to higher energy costs, demand for biofuels, growing demands for staples as populations grow, and for higher value foods, such as livestock products, as incomes rise.

• Prompt assistance is needed for countries facing surging food and energy import bills and for low-income households

• Low stocks threaten the functioning of agencies such as the WFP and prompt calls for land to be switched back into food production, from biofuels throughout the OECD, and from “set-aside” in the EU.

• In the medium term, economic and agricultural growth can offset the damage, but this will require more determined efforts to boost food production.

• Beyond action, a better understanding is needed of the 2008 price spike, to ensure that such events are rare. Increased variability of weather from climate change makes future price spikes more likely. If more can be learned from the current shock, then dealing with future ones may be easier.

Why have food prices risen so much in recent years?
The prices of staple foods on world markets have fallen substantially in real terms over the last 50 years, with wheat in 1999 at less than a quarter of its 1950 price. Since the early 2000s, however, food prices have been rising. Within the 12 months up to early 2008, the FAO food price index rose by 57%. The causes of these price rises are both short- and long-term.
The former include, above all, low harvests in some exporting countries — notably Australia where drought has hit wheat production — against already low world cereal stocks. Speculation in commodity prices by investors looking for a better option than stocks and shares may also have contributed. Some countries, alarmed by mounting prices, have imposed taxes, minimum prices, quotas and outright bans on exports of staples that have exacerbated world price rises.

The oil price rise also feeds through to the demand side: once oil prices rise above US$60 a barrel – it is currently well over $100 – most forms of biofuel compete with oil and gas, so that foods may be diverted to energy production. This is reinforced by targets in both USA and the EU, and by subsidies to refiners in the USA.

The main effects will of course be on the poor (US not included) where 1/3rd to 1/2 of household income may be spent on food. However the higher food prices may also stimulate reinvestment in farm production, which in lower income countries is labour intensive, thus partially offsetting the effects through increased employment. Thus this report suggests that, yes, biofuels have an impact, but that low harvests, speculation and “panic” (ie restricting exports) all played a part. The politically motivated farm subsidies of the US are a particular problem.

Offering partial support for the corn to ethanol effect on raising prices, a Congressional Research Report on primarily the US food price situation back in 2008 noted:

Food Price Inflation: Causes and Impacts

Summary

U.S. food prices rose 4% in 2007 and are expected to gain 3.5% to 4.5% in 2008.
Higher farm commodity prices and energy costs are the leading factors behind higher food prices. Farm commodity prices have surged because (1) demand for corn for ethanol is competing with food and feed for acreage; (2) global food grain and oilseed supplies are low due to poor harvests; (3) the weak dollar has increased U.S. exports; (4) rising incomes in large, rapidly emerging economies have changed eating habits; and (5) input costs have increased. Higher energy costs increase transportation, processing, and retail costs.

Although the cost of commodities such as corn or wheat are a small part of the final retail price of most food products, they have risen enough to have an impact on retail prices. Generally, price changes at the farm level have a diminished impact on retail prices, especially for highly processed products. The impact of higher food prices on U.S. households varies according to income.

Lower-income households spend a greater portion of their income on food and feel price hikes more acutely than high-income families. Higher food costs impact domestic food assistance efforts in numerous ways depending on whether benefits are indexed, enrollments are limited, or additional funds are made available. Higher food and transportation costs also reduce the impact of U.S. contributions of food aid under current budget constraints.

From this we should remember that generally “commodities such as corn or wheat are a small part of the final retail price of most food products”. Note also the effect attributed to the currency situation in the US – the effect of the deflating dollar.

In 2008 the OECD put out a note on the same issue:

Rising Food Prices CAUSES AND CONSEQUENCES

EXECUTIVE SUMMARY [edited]
• Recent steep price increases of major crops (cereals, oilseeds) were triggered by a combination of production remaining somewhat below trend and strong growth of demand.

• A low and declining level of stocks has added to the price rise, as has probably a significant increase in investments in agricultural derivative markets.

• The OECD-FAO Agricultural Outlook expects prices to come down again, but not to their historical levels. On average over the coming ten year period, prices in real terms of cereals, rice and oilseeds are projected to be 10% to 35% higher than in the past decade.

• The acute price hike adds to inflationary pressures in developed countries. Poor consumers in developing countries, and food importing developing countries overall, will have to spend an even higher share of their limited income on food.

Introduction

The causes of this price spike are complex and due to a combination of mutually reinforcing factors, including droughts in key grain-producing regions, low stocks for cereals and oilseeds, increased feedstock use in the production of biofuels, rapidly rising oil prices and a continuing devaluation of the US dollar, the currency in which indicator prices for these commodities are typically quoted. This turmoil in commodity markets has occurred against the backdrop of an unsettled global economy, which in turn appears to have contributed to a substantial increase in speculative interest in agricultural futures markets.

Tight market conditions for essential agricultural commodities pose policy challenges for national governments as well as for international organisations. In order to take the right policy decisions, we need to understand what caused the current price spike, what the implications may be for prices and price volatility in the future, and how various countries and members of society may be affected. This note aims to improve this understanding and thereby to contribute to sound policy formulation.

So, its complicated, but it’s not all down to biofuels.

Other sources about the more recent price rises also note that speculation has been a significant factor in the increases.

Speculation behind global commodity price rise different version at Speculation behind global commodity price rise

Food Price Spiral: Causes and Consequences

High food prices: Cause and Result

Finally, I just want to point out that many of the countries in the Arab World experiencing turmoil (partially) as a result of these increased prices have one other thing in common. They all have currencies that are either:

1. directly pegged (or nearly so) to the US dollar,
2. are neighbors or close trading partners with countries with fixed dollar exchanges, or
3. have currencies that are not traded.

The following have (had?) a direct peg; Eritrea, Lebanon, Qatar, UAE, Suadi Arabia, Jordan, Bahrain. Egypt had periodic revaluations along with Oman, Kuwait and Tunisia had rigid currency controls. That a large number of countries in the region have a pegged or fixed exchange rate to the $US and the major commodity of the region is traded in $US means that other commodities will be more expensive to import in these countries.

So, if you need to buy grain valued in falling US dollars and your currency is pegged to (or otherwise controlled by) that currency, or your own currency is also falling OR you can’t easily convert your currency to buy US dollars AND speculators are playing the market…  What then for local food prices?

On the other hand, if your currency was not affected in this way, and appreciated against the $US, then food from the US would have become cheaper.

Which could explain the US sourced apples and oranges in the supermarkets of the provincial Indonesian city in which I currently reside!

However the cost of rice has increased, not becuase of corn feed cows or biofuels, but for the simple reason that the heavy rain (and flooding) in Indonesia has cut production.

UPDATED

Climate change, biofuels threaten food security-FAO (Reuters)

MILAN/ROME, March 7 (Reuters) - Climate change bringing floods and drought, growing biofuel demand and national policies to protect domestic markets could drive up global food prices and threaten long-term food security, the United Nations said.

High and volatile food prices are a growing global concern, partly fuelling the protests that toppled the rulers of Tunisia and Egypt this year. The aftershocks have been seen across North Africa and the Middle East from Algeria to Yemen.

Periods of price volatility are not new to agriculture, but recent price shocks triggered by extreme weather and increasing use of grains to produce energy have caused great concern, the U.N.'s Food and Agriculture Organisation said.

The growing influence of commodities markets and "counter-productive 'beggar-thy-neighbour' policy responses (to high prices)...may exacerbate international market volatility and jeopardise global food security," it said.

FAO warns on oil as world food prices hit record (Vanguard)

Global food prices hit a record high in February, the United Nations said on Thursday, warning that surprise oil price spikes induced by Middle East unrest would impact already volatile cereal markets.

David Hallam, Director of FAO’s Trade and Market Division said further jumps in the oil price could have an impact on food markets, which have seen benchmark U.S. wheat prices surge 60 percent in the year to March.

“Unexpected oil price spikes could further exacerbate an already precarious situation in food markets,” Hallam, said in a statement. Oil prices recently hit 2-1/2 year highs, nearing records set in 2008, with markets spooked on concern that North African and Middle East unrest would choke key supplies.

Food, food, everywhere and not enough to eat (Malaysian Star)

In 2008, surging food costs sparked protests and riots in more than 30 countries; this year, many commentators believe this has aggravated the political turmoil in Tunisia and Egypt.

Many media reports have blamed food price hikes on climate change and Asia’s increasing wealth.

It is true that severe droughts in Russia and China and floods in Australia, Europe, India, and Pakistan have affected crops.

And yes, the other reason touted – often by the Western world – for rising food costs, Asia’s increasing wealth, might be borne out by the fact that increasingly affluent consumers in China and India are eating more meat; 7kg of grain are fed to cows to produce 1kg of beef for human consumption, thus diverting supplies of corn and wheat from feeding people to feeding livestock.

But climate havoc and meat-eating are just part of the explanation. Olivier de Schutter, the United Nations Special Rapporteur on the Right to Food, underlined at a media briefing in September that while the “initial sparks” of food price hikes may have been caused by such issues of supply and demand, the deeper reason is speculation on food commodities by powerful investors, such as hedge funds and investment banks.

For instance, he noted that in July 2010, Armajaro, a London-based hedge fund, purchased US$1bil (RM3.06bil) worth of futures contracts for 241,000 tonnes of cocoa, equivalent to almost all the cocoa in Europe’s warehouses!

“That such hoarding is permitted in this day and age stretches belief,” said De Schutter.

The article explained that, following heavy lobbying by banks, hedge funds, and free market politicians in America and Britain, regulations on commodity markets have been steadily abolished in the past decade. Contracts to buy and sell food items were turned into “derivatives” that could be bought and sold among traders who have nothing to do with agriculture. In 2006, driven by the US sub-prime mortgage banking disaster, banks and traders around the globe stampeded to move billions of dollars into “safe commodities” such as food.

While Prof Fatimah agrees that such speculators are one cause of price hikes, she points out that there is another cause: the diversion of over 100 million tonnes of corn (one-third of the entire US crop!) from satisfying human hunger “to satisfying the thirst for fuel” for vehicles in developed economies (corn is used to make ethanol, a biofuel).

According to Prof Fatimah, this demand for biofuel was “politically created” worldwide through government subsidies.

http://www.trueknowledge.com/q/list_currencies_pegged_to_the_dollar

http://www.ehow.com/about_4675892_what-currencies-pegged-dollar.html

http://en.wikipedia.org/wiki/Egyptian_pound

http://en.wikipedia.org/wiki/Tunisian_dinar

http://en.wikipedia.org/wiki/Fixed_exchange_rate

http://en.wikipedia.org/wiki/Category:Fixed_exchange_rate