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Growing Food Crisis As Bio Fuel Subsidies Undermine Free Markets

disclaimer: image is for illustration purposes only
by Martin Walker
Washington (UPI) Feb 27, 2008
The announcement by Josette Sheeran, executive director of the U.N. World Food Program, that the globe's main provider of food aid may have to start rationing is not just bad news for countries like Afghanistan and Ethiopia that depend on its supplies.

It's grim news for everybody. The global economy is just about coping with the subprime crisis, the fall of the dollar and oil at $100 a barrel. But the inflationary surge in food prices could prove to be the final straw.

Wheat prices hit $24 a bushel this week in the futures markets, having been $3 a bushel four years go. That dwarfs the rise in oil prices.

This problem has been coming for some time, driven by three separate factors. The first is overall population increase. The second is that emergent economies like China and India are climbing up the prosperity chain and demanding more meat protein, which takes eight times as much land to produce as vegetable protein. The third is that short-sighted government subsidies for biofuels are eroding the amount of crops available for eating.

Sheeran says the immediate problems are rising food prices and a lack of funds for the U.N. body to buy food aid, while demand from poor countries is increasing. Her statement echoes earlier warnings from the U.N. Food and Agriculture Organization that the soaring cost of grains and cereals was becoming "a major global concern."

"In some of these developing countries, prices have gone up 80 percent for staple food," Sheeran said, adding her agency's budget was soaring by millions of dollars a week. "If food is twice as expensive, we can bring half as much in for the same price and the same contribution."

This problem is not going to be easily resolved because the world faces the double threat of a long-term trend of rising demand in conditions of tightly constrained supply. There are already limits to the availability of arable land and severe pressures on water supplies, and climate change seems to be exacerbating both. The world is heading into a perfect storm.

The price movements tell the story. Soybean prices in the United States have jumped from $5.72 in 2004 to $10.60 now. Wheat sold for $3.01 a bushel in 2004 and is now over $7.50, with prices for March delivery being quoted at $10.50 a bushel. Spring wheat prices were trading last week at $18.

Joseph Glauber, the U.S. Department of Agriculture's chief economist, noted last week that wheat prices had previously moved from $3 to $5 a bushel without major pain for consumers. "But now the wheat price has jumped to nearly $20 a bushel."

World grain reserves are at their lowest levels since records were first kept back in 1960, and the U.S. stockpile had not been this low since 1948.

This is already having important political effects around the world. Pakistan has reintroduced food ration cards, an unpopular and crisis-driven move that has contributed to the unpopularity of President Pervez Musharraf and helps explain his party's recent stinging electoral defeat.

Egypt has extended its own food rationing system, and the Indian government is straining to maintain its food price subsidy system as costs soar. China and Russia are imposing price controls, and Argentina and Vietnam are reducing supplies to the world market through rationing and higher export taxes.

"India has a deficit of oilseed, a deficit of many pulses and now a deficit of wheat -- all the major staples are now getting hit by the demand-supply gap," B.C. Khatua, chairman of the Forward Markets Commission, which regulates futures trading for food commodities, warned this week.

The market should adjust, spurring more planting and more production in response to higher prices. Last week's annual outlook conference of the U.S. Department of Agriculture reported that U.S. farmers were cutting their plantings of cotton and sugar in order to take advantage of the higher prices for wheat, corn and soy. Wheat production is projected to soar 13 percent to 2.33 billion bushels as farmers expand planting for the grain by 6 percent.

But markets worldwide face severe constraints from government manipulation of prices. Sometimes, like the U.S. subsidies for biofuels, this is done with the best of intentions, to cut U.S. dependency on imported fossil fuels. But government action can have severe effects.

The European Union, for example, sharply restricts the use of new genetically modified crops, which many agricultural scientists see as the technological way forward. Genetically modified organisms can be tailored to grow on marginal land and survive drought, to need less fertilizer or to survive saltwater flooding.

William Doyle, head of the world's biggest fertilizer company, Potash Corp. of Saskatchewan, sounded the alarm last week by using the word "famine." With world grain stocks at their lowest since records were first kept, Doyle warned: "If you had any major upset where you didn't have a crop in a major growing agricultural region this year, I believe you'd see famine."

It was just such an upset that led to this week's jump in the wheat price to $24. Kazakhstan had announced a freeze in grain exports.

"We keep going to the cupboard without replacing and so there is enormous pressure on agriculture to have a record crop every year. We need to have a record crop in 2008 just to stay even with this very low inventory situation," Doyle added.

There are few easy choices. GMO crops remain controversial. And while one fast way to increase food production would be to increase the acreage under the plough in countries like Brazil, that would also mean further erosion of the rainforest and tougher environmental problems in the future. Food prices look set to keep on rising, and unless the World Food Program gets significant new funds the world's poor are set to get even hungrier.

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