Rome meet fails to define the cause of current food crisis

Written by ASHOK B SHARMA | Updated: Jun 19 2008, 01:08am hrs
Global food prices are expected to rise further as world leaders failed to take concrete actions to reverse the trend. The recent dip in wheat prices by between $10 and $80 a tonne and the weakening of rice export quotations are not enough indications to bring cheer. This appears temporary and is driven primarily by the reports of a good harvest and favourable outlook for the next crop.

Maize prices remaining volatile in the background of the continued strengthening in the global energy market and further increase in ocean freight rates, however, raise concerns about the futures market behaviour. The International Grain Councils projection of the increase in global wheat production to 650 mt in 2008-09, up by 46 mt over the previous year and increase in carryover stocks to 131 mt may bring in some confidence to meet the projected demand of 632 mt.

But this expectation may be short-lived. According to International Grain Council (IGC) the increased global grain supplies will almost entirely be absorbed by the rising use, especially to make ethanol. More wheat and barley will be used for feed in the place of maize and sorghum, which would be used more for producing bio-fuel. The worlds total grain production is projected to increase to 1,712 mt and the IGC taking into account the alternate uses of grains has increased the consumption demand to 1,714 mt.

More serious concern is the projected fall in global maize production by 14 mt. It would be 763 mt against the consumption demand of 786 mt. Industrial uses of maize, particularly for ethanol will total 199 mt, up by 30 mt over last year. Earlier, the IGC projections, however suggested that use of grains to make ethanol would rise by 31% to 124 mt.

The IGC report of May 30, 2008 noted: World ethanol output continues to increase, the rate of expansion likely to slow only slightly in 2008-09, despite reduced credit availability, high plant construction costs and strong grain markets. Soaring crude oil prices will support the profitability of the industry regardless of official production incentives.

It is unfortunate that in the high-level conference on world food security that concluded in Rome on June 5, the world leaders failed to clearly define the causes of the current food crisis and formulate concrete measures to contain it. The impact of bio-fuel programme was on the agenda and the estimates of its impact on food security was earlier provided by the International Monetary Fund which said that it contributed 15% to 30% to food price increases. The International Food Policy Research Institute (IFPRI) has estimated that bio-fuel programme contributed 30% to global food price rise.

The UN secretary-general, Ban Ki-moons call for international guidelines for bio-fuel production was not taken up seriously. Rather, Brazil and the US came out aggressively against those tried to link bio-fuel programme with the present food crisis. The Brazilian president, Lulz Inacio Lula da Silva said: It is frightening to see attempts to draw a cause-and-effect relationship between bio-fuels and the rise of food prices. It offends me to see fingers pointed out against clean energy from bio-fuels, fingers soiled with oil and coal.

Brazil now ranks second in ethanol production next to the US. It has produced fuel ethanol on a large-scale for more than 30 years from molasses and subsequently from sugarcane juice. Brazilian experience on use of ethanol blended gasoline dates back to 1930s, but it was in 1975 that Brazilian Alcohol Programme (PROALCOOL) was created aiming at partially displacing gasoline in private transport. The programme was initially heavily subsidised by the government.

Later in the 1990s, subsidies were reduced after the deregulation of the sugar industry. Recently, Brazil launched a programme for extracting oil from crops to be used as bio-fuel. Equally aggressive was the US in the UN food security summit. The US agriculture secretary, Ed Schafer strongly defended the bio-fuel programme and said it contributed only 2% to 5% to a predicted 43% rise in food prices.

Apart from the bio-fuel programme which has diverted food crops for fuel and in some places the non-food crops have displaced food crops from cultivation, there are other factors like manipulation and holding of stocks by a few corporate houses in trade which have contributed to the food crisis. The food summit failed to formulate measures for controlling the activities of these few players. The subprime crisis, meltdown in the global equity market, monetisation of financing and liberal interest rate caused a shift in investment to commodity markets.

There is ample evidence of the boom in global commodity markets that helped a few players corner huge profits. The net income of Monsanto for three months ending February 2008 more than doubled to $1.12 billion from $543 million in the same period in 2007. Its profits increased from $1.44 billion to $2.22 billion. Cargills net income soared by 86% from $543 million to $1.030 billion and that of Archer Daniels Midland soared by 42% from $363 million to $517 million.

Index-fund investment in grain and meat increased almost five-fold to over $47 billion in the past year according to the Chicago-based AgResearch Co.