Friday, July 31, 2009

The Problem of Future Food Price

The civil unrest arising in a number of countries last year finds its origins in the sharp increases (approximately 75% in the U.S. since 2000)1 in food prices. It should be a concern that this unrest can be viewed as just a fraction of what could occur in the future if steps are not taken to solve the problem of increased food costs and food shortages. The economic slowdown reduced the severity of the price increase, but did not end them, instead simply pushing their consequences off of the front page. The growing concern is that the threat of food shortages and increased costs are trend driven, not event driven like temporary price spikes in the past as 6 of the last 9 years have seen consumption rates exceed production rates.2 In fact at the beginning of the 2008 harvest season world carryover stocks were only at 62 days, near a record low.2

Solving this problem is imperative from a humanitarian standpoint, an economic standpoint and a national security standpoint. Four separate elements play a role in the continuing relative escalation of food prices: increased oil and fertilizer price, climate change, land use division and changes in dietary demands. It can be argued that a fifth sub-cause, market manipulation, also plays a smaller role. Each of these elements plays a role in for both short-term spikes and the longer-term trend of food price increase and has its own cause and solution. The first element of influence, climate change, will not be addressed here because it is a problem unto itself and needs to be discussed in such context. However, it must be noted that crop failures due to changes in weather patterns have already occurred on a consistent basis and are continuing to occur in Australia and other typically high yield producing counties and it should be a concern that these past ‘supplying’ nations will eventually become future ‘demanding’ nations.1

The second element of influence, the dramatic rise in oil prices, is unfortunate because it has a very simple cause, but complex solution. The primary cause can be traced to the greater industrialization of China and India, which used 3.13x and 2.25x more oil in 2006 than in 1996 vs. only a 1.22x increase in use in the United States over the same time period.3 Make no mistake that the United States still consumes the most oil of any individual country, but the increased use in China and India place even greater demands on oil supplies and there is no reason to expect a significant decline in this demand in the future. Following one of the oldest and truest economic rules, when demand for a good increases, so shall price.

In addition to oil prices, another portion of the second element of influence is an increase in fertilizer price. Currently it is difficult to correlate a relationship between a rise in oil price and a rise in fertilizer price. Although fertilizer production is typically carried out through the Haber-Bosch process, which requires a considerable amount of energy, that energy is almost exclusively derived from natural gas not oil (approximately 33,500 cubic feet of natural gas is required to produce 1 ton of anhydrous ammonia fertilizer). Despite an inconclusive tie in to fertilizer price, higher oil prices do increase gasoline and diesel prices, which increase planting and harvesting costs as well as transportation costs, a significant component to the overall food cost.

Therefore, to survive or continue making a profit the farmers and agro-businesses need to increase their sell price, which in turn force suppliers like supermarkets to increase prices shifting the final burden to the consumers. If price increase is not a viable strategy (buyers refuse to pay), then the food will not be produced thus reducing the total amount of food in the available market, which will also influence market price. The resultant increase transportation costs are especially hard on exporters and food aid-based charities. In the case of the charities, the inability to purchase and/or transport food means that less food can be delivered to developing nations, which may lead to shortages there. Note that these increased costs from this element have greater influence in regions that utilize fertilizer and heavy machinery in agriculture.

The problem with the increase in oil demand and possibly later in fertilizer, depending on any agricultural strategy changes in Africa, is there is no easy solution; one cannot simply request that certain nations hedge their demand for oil, thus stifling economic growth. Also although there is a fierce debate regarding when the influences of ‘peak oil’ will actually begin to take affect, there is no debate that oil is only a limited resource and eventually demand will outpace supply. Therefore, oil alternatives need to be developed. Unfortunately those alternatives are still in their infancy and, despite their potential, are years away from being able to absorb a significant percentage of transport and/or energy demands fulfilled by oil, so relief from high oil prices is not just around the corner.

For example for years now biofuel has been the heir apparent substitute for oil in the transport sector. However, despite years of subsidies and research, food-derived biofuels have proven to have significant potential to be more detrimental than beneficial both to the environment and to food stocks.4,5,6 Cellulous biofuels have had some recent problems with fraud and overestimation of their ability to produce significant quantities of oil.7 Algae-based biofuels are still just getting started and have almost no real productive capacity at this point. Overall non-food derived biofuels have currently attained an average production rate of approximately 39-40 million gallons a year.7 Those production rates only account for approximately 0.00307% of the total world consumption of oil in 2006.3 It will be a long time before non-food derived biofuels are actually able to make a significant contribution to the world transportation/energy market. Adding insult to injury the political structure of the United States seems to refuse to strongly act on the available information pertaining to the net detrimental effects of producing biofuels from food based derivatives continuing to fund subsidies for the corn ethanol industry as well as provide purchase quotas.8

The original idea for biofuels was to replace a non-renewable resource with a renewable resource; however, in the zeal to christen a new fuel and energy option, especially those derived from food stock staples such as corn and soybean, the inherent problems with biofuels were ignored and have become the third element of influence. Not only does biofuel production from food sources lead to improper deforestation due to land clearance in effort to make more land available for cultivation, it also reduces the prospective food supply. Thus, instead of providing the necessary foundation for reducing oil use, this strategy increases pollution by releasing the carbon stored in the newly cut-down trees and removes food from the supply chain leading to price increases.

This is not to say that biofuels cannot be useful, but only if derived from the proper source material. For example Brazil and other nations have already demonstrated that high quality biofuels can be derived from sugar cane and beets, crops that are not utilized as a staple food crop.9 In addition algae should be able to supply an ample amount of biofuels at some point in the future. So the solution to the influence of the biofuels as a price modifier of common food staples would be to change the base derivative of the most biofuels that are currently produced to more diverse sources. A powerful first step would be to end all subsidies supporting the synthesis of biofuels derived from food sources such as corn, soybean, wheat, etc. and instead redirect these funds to focus on improving the technology behind biofuels derived from sugar cane/beets, algae and cellulous.

The fourth element of influence, dietary change, is similar to the cost of oil in that the origins of the problem are easy to understand, but the ability to generate a solution is difficult. In the past most third-world societies, including China and India did not have thriving middle-classes, instead were divided into rich and poor classes with much of the population on the poor side. Being poor, most individuals could only afford certain food staples, mainly corn, rice and other low priced grains and a one-in-a-while meat dish. With increasing earning power in these developing nations, especially China and India, a new middle-class has formed that can afford more expensive food items, including high quality meat products. With more people able to and partaking in meat consumption the demand to supply that meat increases as well. Therein lies the source of the problem. Siphoning off grain products from the supply chain for use as feed for cattle and other meat-providing animals is problematic as well as controversial.

There is debate over how many pounds of grain are actually required to product 1 pound of meat. Most of the discussion surrounds the production of beef with the common contention that it takes 16 pounds of grain to produce 1 pound of beef. However, it is unlikely that this number is correct because some to most (depending on who you talk to) of the food consumed by livestock consist of items that would not be consumed by humans in the first place. In contrast to the 16 pound estimation, it is not surprising that the pro-meat lobby proposes that this number is as low as 0.3-2 pounds of grain per pound of beef. The correct estimate is probably somewhere in the middle, 5-10 pounds of grain per 1 pound of future beef, but it is probable unreasonable to try to generate a single average number because of all of the variables involved in meat production. That said, despite the meat lobby’s contention, it is extremely likely that it requires more than 1 pound of grain to produce 1 pound of beef. Another issue that most do not address is there is little research on food consumption requirements for chickens and pigs, which also place additional stress on food stock, although such stressors are smaller than that of cattle.

There is no easy solution to this problem because similar to oil it is unreasonable to forcibly select and/or limit food options for a group of people. Instead the best possible solution may be to develop alternatives to these foods that do not require the resource expenditure. For example, a new formula for a product like Spam that rival certain meats in taste, which could be produced without utilizing grain stocks would reduce the demand for cattle and other animals reducing the strain on supply lines. Another option has been to produce certain meat products in vitro, but right now prospects for cost-effective and significant quantities of in vitro meat do not look promising, although this may change in the future.10,11 Overall this problem will require that adaptation neutralize the detriments associated with increased demand instead of relying on command and control procedures.

The potential fifth element of influence, the practice of price speculation in the global commodity markets, is exceptionally sad because it is the most correctable and easily controlled element of influence. It is interesting, although not surprising that individuals would have the gall to allow people to starve in order to make money, especially when most of those involved already have a significant amount. The subsidies and tariffs that riddle global trade in agricultural commodities are frequently unregulated, too complex and self-serving. Although there would be a lot of crying from ‘free-market capitalists’ it seems imperative to foster a special set of rules for food-based commodity markets in times of dramatic price increase to lessen the probability of the occurrence of famines in the future, reducing the probability that these famines are driven by a lack of food, not a lack of access to it. Note that speculation should not be viewed as a main cause of price increase, but a meaningful influencing factor.

Despite all of the information presented above, there is a lingering question. The elements that influence food price seem to only have limited influence on the agricultural infrastructure of the developing world, instead these elements have a much more significant influence on food price in the developed world. In fact four of the five influencing elements (if market speculation is included) do not appear to have direct influence on prices in the developing world.

When looking at the increase in oil, fertilizer and transportation prices none of those increases should have a meaningful direct impact on local markets in various African or Caribbean countries. Most of the developing nations in these regions are not prominent volume exporters (most exportation is high value low volume cash crops) or are not so climate variant that food must be transported over long distances between regions. Instead in these countries most of the food is produced and consumed locally. Therefore, excessive transport costs are somewhat immaterial to local farmers in these countries. Fertilizer is also in short supply, so fertilizer price fluctuations have almost no influence on price. For example China uses 1296 pounds of fertilizer per hectare of cultivated land vs. only 15.9 pounds of fertilizer per hectare in Kenya and Kenya is one of the more prevalent users of fertilizer for crop production.12

The situation is similar when considering the influence of food-derived biofuels in developing nations. Due to insignificant oil consumption in most of these countries when compared against the consumption rates of more developed countries there is limited motivation for conversion of some of the planted crop from food consumption to biofuel synthesis. Therefore, a very small percentage, if any, of the food grown in these countries is utilized in the synthesis of biofuel in-house.

To suggest that food prices in the developing world are significantly influenced by changes in dietary consumption seems questionable in that most of the people that are starving in the world today live in the developing world. Also despite globalization, there has not been enough economic development in most of the developing world in recent decades for a new large number of individuals to make new dietary choices. Therefore, with the exception of China and India, it is highly improbable that a greater demand for meat products in the developed world has driven any considerable price increase. Finally commodity markets are underdeveloped in most developing nations to the point that it is extremely unlikely that they would have any significant influence. Overall the only one of the above five factors that could have direct influence on the price of food in a developing country is global warming (reduction of water tables, shorter and/or more inconsistent growing season, greater insect infestations, etc.)

There are two possible explanations for the price increases seen in 2008 affecting the developing world due to the limited influence of the above price influencing elements. First, the price/cost ratio in developing countries is much higher than it is in developed countries. Such an explanation could be valid in the context that developed countries typically have more safeguards, both political and market-based (more competition) to ward against radical price increases even when production costs increase. Second, the price of food in developing nations is influenced by these factors indirectly by their influence on prices in developed nations. However, such a circumstance could only come about in a significant way if the level of food aid donated to these countries was significant enough that it represented a meaningful percentage of the eventual supply. In order better identify which of the above explanations have greater influence, if any influence, it is imperative to address the role and structure of food aid, which will be discussed in the next post.

1. Caldwell, Jake. “Food Price Crisis 101.” American Progress Institute. May 1, 2008.

2. Brown, Lester. “Could Food Shortages Bring Down Civilization?” Scientific American Magazine. May 2009.

3. “International Energy Outlook 2009.” Table A5. World Liquids Consumption by Region, Reference Case, 1990-2030. Energy Information Administration. May 2009.

4. Crutzen, P.J., et, Al. “N2O release from agro-biofuel production negates global warming reduction by replacing fossil fuels.” Atmos. Chem. Phys. Discuss. 2007. 7: 11191–11205.

5. Fargione, Joseph, et, Al. “Land Clearing and the Biofuel Carbon Debt.” Science. Feb 2008. 319(5867): pp. 1235-1238.
6. Runge, Ford, and Senauer, Benjamin. “How Biofuels Could Starve the Poor.” Foreign Affairs. May/June 2007.
7. Borrel, Brendan. “Biofuel Fraud Case Could Leave the EPA Running on Fumes.” Scientific American Magazine July 2009.

8. Clayton, Mark. “High Gas Prices and Politics Push Companies toward the ‘Holy Grail’ of Biofuel: Cellulosic Ethanol. Christian Science Monitor. June 4, 2008.

9. Biofuels for Transport: Global Potential and Implications for Sustainable Agriculture and Energy in the 21st Century. Worldwatch Institute. 2007. pp 8-16. ISBN 978-1-84407-422-8

10. Edelman, P.D., et, Al. “In Vitro Cultured Meat Production.” Tissue Engineering. May/June 2005, 11(5-6): 659-662.

11. Bittman, Mark. “Rethinking the Meat-Guzzler.” New York Times. January 27, 2008.

12. Vitousek, P.M, et, Al. “Nutrient Imbalances in Agricultural Development.” Science. June 2009. 324(5934): pp. 1519-1520.

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