The world has yet to descend into an anarchic series of food-related riots, as some feared it might. Crop prices have eased, but this is no time for governments to rest on their laurels. Writer Charlie Corbett.
The world is running out of food. Or so you might have believed during the first half of 2008. Escalating food prices led to at least 40 riots in developing countries by June and it was commonly believed that the world had moved into a new era of high demand and constrained supply. Whereas real food prices fell 75% between 1974 and 2005, according to data from The Economist, between 2005 and 2008 real food prices increased by the same amount.
Such was the gravity of the situation, the world’s leaders congregated in Rome in early June to discuss the options for maintaining world food security. The director-general of the United Nation’s Food and Agriculture Organisation (FAO), Jacques Diouf, addressed an audience composed of leaders and policymakers from the four corners of the earth.
He warned that food production would need to double over the next 40 years if it was to supply a world population currently standing at six billion but expected to rise to nine billion by 2050.
Global agriculture, especially in the world’s poorest countries, has suffered from a chronic shortage of funds. According to Mr Diouf, from 1980 to 2005 aid to agriculture fell by 58% and agriculture’s share of official development assistance fell from 17% in 1980 to 3% in 2006. Combined with high-income growth in emerging economies, the use of crops for biofuels, rampant speculation on commodities markets and historically low stock levels, this underinvestment has left the world facing a bleak future. As it stands, 862 million people do not have adequate access to food and this figure could soar if something is not done about food supply soon. In the words of Mr Diouf: “What is important today is to realise that the time for talking is long past. Now is the time for action.”
Just a blip?
That was in June. By September, when The Banker went to press, a new picture had emerged. The prices of staple foods such as wheat, rice and maize had dropped considerably. In July, the FAO food index dropped to a six-month low, while the FAO cereal index was down 6% from the previous month and 8% below its peak in April. Added to that, world cereal production in 2008 is forecast to leap 2.8% to a record 2180 million tonnes. The International Grains Council now expects a record wheat crop this year, 9% bigger than last year. The doomsday scenario of June 2008 seems to be a long way off. The predicted escalation of food-related violence across the developing world has yet to materialise and it would seem, to some at least, that food prices might have reverted to their long-term downward trend. Many are now asking: ‘Was the first half of 2008 merely a blip?’
High food prices have solved high food prices. In this scenario, the market has solved the problem. The price spike encouraged farmers to bring more land into production and consequently production soared and the problem of food scarcity eased. Not everyone, however, is convinced by such a simple analysis.
Alex Evans, a non-resident fellow at New York University’s Centre for International Co-operation, believes it is dangerous to take this view.
“This is just a lull and not a resumption of the status quo,” he says. “It is an opportunity for policymakers to think about long-term action to deal with higher food prices. The biggest mistake they can make is to heave a sigh of relief.”
New world order
For Mr Evans, who is leading a Chatham House initiative to advise governments on how to deal with global food prices, the world is entering a new era of sustained high prices. He believes the fundamentals behind this year’s spike in prices were driven by demand that will only increase over time.
Abdolreza Abbasian, secretary of the FAO Inter-governmental Group on Grains, agrees that high prices are here to stay.
“Crop prices have come down from record levels and will be lower than last year, but not a lot,” he says. “The volatility hasn’t gone away. The linkages with financial markets and the energy sector are making any sort of a prediction on future trend in prices almost impossible.”
The world is facing new challenges on both the demand and the supply side. Critically, it is the growing middle class in China and India that are not only eating more staple foods, such as wheat and rice, but also changing their dietary patterns. Increasing incomes lead to more meat-rich diets, which in turn use up far more resources. It takes 10 kilos of plant protein, for example, to produce just one kilo of animal protein. This statistic, if taken on a global scale, has huge implications on how much food will need to be produced in order to satisfy demand.
It is the rapid take-up of biofuels, however, which many believe is the fundamental driver behind high food prices. A recent report from the World Bank concluded that 65% of the rise in prices has been due to biofuels and factors related to their rapid increase in demand for feed stocks. Western governments’ attempts to mitigate high oil prices by pouring resources into the production of crops for biofuels has deprived the world of millions of tonnes of grain that could have fed people, not cars.
In the US, 30% of the nation’s maize harvest now goes to ethanol plants – 12% of the global maize total, according to a report from the FAO. Similarly in Europe, 60% of the rapeseed grown goes towards producing biodiesel. Farmers across the world have been setting aside land that could have produced grain to feed people, and instead produced crops for fuel. This has also had a devastating effect on global stocks of staple crops.
“In the past, if you produced more crops than you needed, they could be easily stored. Today they would go to biofuels,” says Mr Abbasian. “It is a black hole that will remain so long as oil prices remain above $100. This means that the more you produce, the more will go to biofuels. You can no longer say ‘just produce more’. The US and EU have created this new industry that will take all the excess.”
Jim Rogers, a veteran investor and commodities specialist, has serious concerns about global stocks of grain. “The number of hectares devoted to wheat farming has been declining for 30 years and inventories are at the lowest level for decades,” he says. “We’re burning a lot our agricultural products in our fuel tanks now – this problem is far from over.”
Not everybody, however, is in total agreement that biofuels are the root of all crop scarcity evils. Nancy Roman, director of communications and public policy strategy for the World Food Programme (WFP) in Rome, is sceptical.
“There seems always a desire to vilify someone. We acknowledge of course that biofuels are one of the demand factors and that at the margins it has had an impact on price, but I personally have tried to resist the temptation to make them the big bogeyman,” she says. “It’s very important that people in the world trying to solve one problem don’t get pitted against those people trying to solve another problem.”
Supply shock
Whatever the opinion on the impact of biofuels, one thing is clear: the world will need to produce far more food than it currently produces in order to feed a growing population. What makes today’s food crisis different to those of the past is that record demand has come at the same time as unprecedented challenges on the supply side. High energy prices, combined with land degradation, scarce water supplies and increasingly erratic weather conditions, has meant it is becoming harder and harder to produce crops and maintain yields. This is not only true in the developing countries of Africa and Asia, but also in developed markets. Australia, as an example, is in the throes of a drought that has lasted almost seven years. Oil prices, although cooling of late, are still at historically high levels and the price of fertiliser was up 160% in the first two months of 2008. Decades of underinvestment has also meant that farmers across the world simply do not have the infrastructure or technology to increase supplies to meet ever growing demand.
“High prices have reached a critical challenge point for us,” says the WFP’s Ms Roman. “They had been climbing gradually for five to six years and the world was not alarmist. But they began to accelerate rapidly in the summer time [2007]. We needed an extra $750m just to reach the same number of beneficiaries.”
Export ban
This year’s emergency conference on World Food Security in Rome was a reflection of world governments’ realisation that something must be done now. Initial reactions to high food prices were knee-jerk and only made the situation worse. An FAO survey of 77 countries found that 55% of them used price controls to reduce the transmission of global prices to the domestic market. Although such a policy helps people in the short term, it is an unhealthy long-term option. Urban rioting might be allayed for a short time, but price controls stymie market influences and prevent local farmers from benefiting from high prices. It does not encourage them to produce more crops. It also has a potentially devastating impact on the fragile economies of less developed countries, sending them even further into debt.
The FAO’s study also found that 25% of the countries it surveyed used export bans. Again, such a solution might alleviate short-term domestic pain, but in the long term it only leads to yet more price volatility. Ukraine, Vietnam, Russia, India and Kazakhstan, some of the world’s biggest exporters of staple foods, all initiated export bans earlier in the year. Less crops trading freely on the world market inevitably leads to higher prices.
The Philippines is a case in point. The world’s biggest importer of rice, it was hit harder than any other country when rice prices hit $1000 per ton in April this year. Export bans in Cambodia, Egypt, China, India and Vietnam meant it was unable to secure the rice it needed from international markets. This forced the government to further subsidise the price of rice to low-income urban populations, bringing the total cost of rice subsidies in 2008 to $1.3bn. For a country as poor as the Philippines, such a policy only exacerbates an already deteriorating financial position.
Sub-Saharan Africa faces a similar predicament. The continent of Africa imports 22% of world cereal supplies and yet exports just 3%. The FAO estimates that its total food import bill could rise by up to 40% this year to $169bn. Africa also contains some of the most politically volatile states on the planet. The majority of food riots earlier in the year were started by impoverished urban African populations. Governments in Africa are therefore faced with a stark choice: allow the market to decide the price of food and risk social upheaval, or enforce price controls, which could cripple a fragile economy.
And yet despite these problems, many believe Africa could provide a solution to the world food crisis. Stéphane Oertel, an associate director for Africa for the World Economic Forum, believes that high food prices act as a huge incentive to African governments to revitalise their agricultural sectors through much-needed investment in technology and infrastructure.
“The international food crisis impoverishes the average African farmer while strengthening his position in the food value chain where he used to be chronically and structurally disadvantaged,” he says. “This position could be further strengthened if there was a consolidation of Africa’s agricultural sector, which is typically dominated by myriad small farms not easy for investors to bankroll.” (See comment by Paul Collier, page 122).
The answer to consolidating Africa’s farmers could lie in what some see as a controversial form of neo-colonialism coming out of the east. China has invested billions into developing Africa’s mineral and oil resources sector for its own ends. Now it seems that it plans to do the same for food. China faces huge pressures on its food supply from a growing population and flourishing middle class. Although it is currently a net exporter of rice and self-sufficient in wheat, the government knows this situation cannot last. According to some reports, the Chinese government is encouraging domestic companies to buy up farmland in foreign countries, particularly Africa and Latin America, to help guarantee food security. It is not alone. Libya is reported to be negotiating terms for wheat production in Ukraine, and Saudi Arabia has expressed an interest in investing in agricultural projects in developing countries.
Work together
International co-operation is at the heart of any long-term solution to high food prices. But it is easier said than done. The recent breakdown of the World Trade Organisation’s Doha Development Round of trade talks in July, over the issue of agricultural protectionism, is testament to the difficulties of aligning domestic political issues with international concerns over food security.
The FAO suggests a dual approach of short-term emergency relief for the world’s poorest, combined with massive investment in technology and infrastructure over the longer term.
“The focus for the longer term must be on generating and enabling farmers to apply sustainable technologies for agricultural intensification that will continue to meet the food needs of future generations in the face of rising population, high demand, tightening availability of land and water resources and increased risks associated with climate change processes,” says a recent FAO briefing paper.
Climate change and man’s impact on the environment is another huge area of debate when it comes to solving the food crisis. For New York University’s Mr Evans the story is not just about increasing yields but developing more resilient crops that are more sustainable.
“Agriculture is potentially one of the biggest contributors to global warming and land degradation,” he says. “It is responsible for between 17% and 32% of greenhouse gas emissions, depending on the counting methodology used; and agriculture is responsible for 70% of global water use.”
Ultimately, the solution to food scarcity lies in governments investing more in agriculture. More needs to be done to research the impact of genetically modified crops on the environment, and huge sums need to be spent on developing effective infrastructure to distribute food from those who have it, to those who need it most.
“It is a sector that has been neglected for 30 years so there is a lot to put back on track,” says Mr Abbasian. “Perhaps we need a few more of these price shocks to wake up governments.”
The WFP’s Ms Roman is sanguine on solving the problem of food scarcity. “The technology necessary to feed the world is already there – we just need the political will. One of the positives of accelerated food prices is a renewed policy emphasis on producing food,” she says. She also points out that despite the huge number of undernourished people in the world, great leaps and bounds have already been taken towards helping the hungry.
“It can be tempting to assume that not much progress has been made because that 862 million number [of people going to bed hungry] seems stubbornly high, but I was surprised to realise that in the 1960s roughly 37% of world’s population was hungry [according to FAO statistics] and over the decades that figure has fallen to 17%.”
For Mr Rogers, the global food crisis provides more opportunities than dangers. For him, the solution to high prices is indeed high prices. “If you let market prices go up then [farmers] would produce a lot more. Why become a farmer if you can’t make any money out of it?” he says. “Farming has been a horrible business for the past 30 years – you may now find that farming will be a good business for the next 30 years. You see all these 29-year-olds driving round the City of London in their Maseratis, but you don’t see any 29-year-old farmers in Maseratis. Ten years from now you’re going to see farmers driving Maseratis and guys in the city going out to the fields trying to work out how to grow crops.”
WHAT CAN BE DONE?
Solutions
- Increase investment in agricultural infrastructure and technology.
- Reduce biofuel production.
- Eliminate food export bans.
- Discourage price controls.
- International co-operation to cut tariffs.
Policy choices
- The Chinese government is encouraging domestic companies to buy up farmland in foreign countries, in particular Africa and Latin America.
- In May, India banned all futures trading in rice, wheat, dhal, chickpeas, potatoes, rubber and soya oil for a minimum period of four months.
- Kazakhstan recently lifted a ban on all wheat exports that had been in place since April.
- Russia has drawn up a new food security law under which prices will be set for seven staple food items and domestic production encouraged.
