Saturday, September 29, 2007

Oncoming starvation in the third world thanks to drought, biofuels and low grain stocks.

The Age, Melbourne, Australia

IN THE 1970s it was "stagflation", the simultaneous combination of economic stagnation and high inflation. Now, in the noughties, we have "agflation" — price inflation of agricultural products, especially grains and related foodstuffs. Just last week, while announcing the Federal Government's aid package to drought-hit farmers, former deputy prime minister and Nationals leader John Anderson warned of a global food shock.

"This comes at a time of unprecedented concerns globally of very low grain stocks. It is not beyond the realms of possibility that we will see a food shock in the next few years," said Mr Anderson. "We talk about oil shocks. We have gone on assuming that the supermarket shelves will always be loaded … this affects everyone from the farmers right through to those people who are dependent on countries like Australia to feed them."

It's a neat analogy. In the 1970s there was stagflation and oil shocks; in the 21st century, agflation and food shocks. Nor is it confined to Australia. "Bread leads the big food price hike" was the headline in London's Sunday Times earlier this month, detailing the doubling of grain prices and the flow-on from that: more expensive bread, pasta, noodles, barley and, because animal feed is grain-based, more expensive meat.

The Independent was even more bearish, headlining "The fight for the world's food": "Population is growing. Supply is falling. Prices are rising. What will be the cost to the planet's poorest?"

With agflation, economists are blaming the rocketing economies of India and China on the demand side; on the supply side, drought in the world's breadbaskets — possibly driven by climate change — and diversion of grain into biofuels in the United States are the main culprits. "As these two forces combine they are setting off warning bells around the world," said The Independent. "It has even revived discussion of the work of the 18th-century British thinker Robert Malthus. He predicted the growth of the world's population would outstrip its ability to produce food, leading to mass starvation."

Terry Sheales, from the Australian Bureau of Agricultural and Resource Economics, said all grain-producing countries — Australia, Canada, the US and Europe — had suffered drought, cutting output. At the same time importers, such as Egypt, had placed early orders, spiking demand.

"The wheat situation is very serious, as you can see from how prices have escalated. They're about 30 per cent higher compared to last year," said Dr Sheales. "Stocks at the start of the year were pretty low, around 117 million tonnes, (and) overall the expectation is that stocks will be run down further."

Wheat supplies have hit a 26-year low, pushing prices to a record $US9.16 ($A10.35) a bushel last week. Despite the drought, an Australian crop of 13 to 14 million tonnes is tipped, which is better than last year.

The high price is a mixed blessing for farmers: those whose crop has withstood the drought will do very well, those without a crop won't having anything to sell.

But consumers are suffering, their plight worsened by shortages of other grains. The US decision to encourage biofuel made of corn has sent prices of that crop rocketing to $US157 ($A177) a tonne. That in turn has prompted farmers to grow corn at the expense of other crops, including soybeans, pushing up their price as well.

"We haven't had this emphasis on producing biofuels before. That's a new important added factor in the world grains market," said Dr Sheales.

Monash University economist Robert Brooks said: "A number of the large agricultural producers have been in drought conditions for a long time (but) the question that's triggered a lot of the agflation concern is … fuel substitution."

Agflation was, however, "a new term for something that's gone around a bit". "Agricultural prices and production goes through cycles at different points in time … the extrapolation from that — the old Malthus stuff — has been proved wrong many times."

John Freebairn, of Melbourne University, said the American policy of encouraging biofuels was "rather stupid". "It's taking corn and wheat and sugar away from food so the price gets ramped up on consumers, and burning biofuels creates nearly as much greenhouse gas as burning petroleum."

But no economist The Sunday Age spoke to thought there was a looming catastrophe. Markets tend to be self-correcting, as high prices induce suppliers to produce more and encourage consumers to look for substitutes. "We went through this in the mid-'70s, where we had a big boost in prices and then prices went down again, especially in real terms," said Dr Sheales.

Professor Brooks said: "Most of the previous Malthus-style predictions have been proven wrong by significant technological improvements in agricultural production. GM (genetically modified) crops are just a continuation on a theme that's run for a long time. Anything that leads to a technological improvement in agricultural production deals with supply-side issues."

Nevertheless, according to the United Nations' most recent food report, of the world's 6.7 billion people, a billion are undernourished. The UN has two hunger objectives, the World Food Summit Target and the Millennium Development Goal, which aim to halve the number of undernourished people to 500 million by 2015, from a world population of 7.4 billion. How much of a hurdle will agflation be?

If climate change really sets in, said Professor Freebairn, "it is going to require big changes in the way we organise food production". But that was not necessarily a problem. "The technological potential (of GM) is quite enormous (and) if food really went expensive we'd shift from resource-intensive meat products and become more fruit and vegetable types."

The major obstacle to feeding the developing world, he said, remained political and not economic. "If you look at China and India, I think you can be optimistic… if you look at Africa and Latin America it's easy to be pessimistic. They're just not going to get their economic house in order."

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