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Agricultural Marketing Resource Center

International Perspectives on Food and Fuel

Agricultural Marketing Resource Center
August 2008

  Don Hofstrand
 Co-Director – Ag Marketing Resource Center
 Iowa State University
 dhof@iastate.edu

 

(Second in a series)

Last month we provided perspectives on the food and fuel debate from the viewpoint of U.S. consumers.  This article provides world perspectives on the debate.

When discussing food issues, we must preface the discussion with the understanding that food is the most personal of all consumer purchases.  We can do without or find ways to circumvent the need for most consumer products.  But the specter of not having enough food is a basic need and elicits an emotional response.  Although this specter is foreign to U.S. consumers, it is very real for millions of people around the world.

Dwindling Grain Reserves

Although grains used for biofuels have impacted world grain usage in recent years, the conditions for limited supplies and higher prices were already in motion.  Over the last ten years, world grain reserves have been dwindling.  As shown in Figure 1, world stocks-to-use ratios for wheat and coarse grains have fallen by half.  In 1998/99 we had reserves equal to 30% of a year’s usage (about 3.5 months).  While not large, these reserves could cushion the impact of a sudden disruption in grain supplies (e.g.widespread drought).  Also, these reserves were large enough to substantially dampen the price of grains.  For example, the Iowa average corn price in 1998/99 was $1.87 per bushel.  These low prices provided ample incentive for farmers to search for new uses for grains like biofuels to strengthen grain prices.  They also discouraged expanding grain production.


 
Source: Foreign Ag Service, USDA

However, grain prices were already on the way up, regardless of biofuels.  We had entered a period when grain usage outstripped production.  Non-biofuel grain usage was growing faster than production.  The deficit was covered by drawing down reserves.  Today’s world reserves are only 15 percent of a year’s usage, of which a significant portion is needed to smoothly transition from one year to the next.  So we cannot continue to cover the deficit by drawing down reserves.  The result is high prices that will ration existing supplies and stimulate future production.

While dwindling grain reserves and higher prices have an adverse impact on consumers, it has a positive impact on producers.  Around the world, 2.5 billion people depend on agriculture for their livelihood (FAO).  This is close to 40% of the world’s population.  So higher prices have both negative and positive implications.

Adverse Crop Events

We experienced adverse crop events at precisely the time when the world’s grain situation was most vulnerable to supply shocks.  Periods of low production can easily upset the delicate balance between surplus and shortage, especially when reserves are low.  Adverse crop events in 2007 were a driving factor in grain price increases. It was the second consecutive year of a drop in average yields around the world.

An overview of 2007 crop problems is shown below.

  • Australia – multi-year drought
  • U.S. winter wheat – late freeze
  • Northern Europe – dry spring & wet harvest
  • Southeast Europe – drought
  • Ukraine and Russia – drought
  • Canada – summer hot and dry
  • Northwest Africa – drought
  • Turkey – drought
  • Argentina – late freeze & drought followed by flooding in parts of the corn-soybean belt.


Food Hoarding

Most of the world’s grains are consumed in the country in which they are produced.  A relatively small amount is traded on the international market, as shown in Table 1.  However, if trade is disrupted, this small amount can have a significant impact on food distribution and prices, especially during periods of low reserves.

Table 1.  Percent of World Consumption from International Trade

  Percent Traded
Corn    12%
Soybeans 31
Wheat 18
Rice   7

Source: What’s Driving Food Prices, Farm Foundation, 2008

Although unknown in this country in recent years, it is not uncommon for countries to impose restrictions such as “export taxes” or “export embargoes” on agricultural commodities sold to other countries.  These restrictions become increasingly common when world shortages and high prices appear.  These policies are meant to discourage exports and keep food within the country for domestic consumers.  Essentially, the restriction means that “our citizens eat first”, if there is anything left over, your citizens can have it.

A prominent example is Argentina, a large producer of agricultural commodities such as soybeans.  Argentina already had a 35 percent export tax and in March its president, Christina Fernandez de Kirchner, increased the tax.  The decision led to riots and demonstrations by Argentina’s farmers.  In July the measure was narrowly rescinded by Argentina’s Senate.

These trade distortions can take many forms in addition to export taxes.  Below is a listing of policies that have recently been implemented by both exporting and importing countries due to high food prices and food shortages.

  • Export Bans -  Ukraine, Serbia, India, Egypt, Cambodia, Vietnam, Indonesia, Kazakhstan
  • Export Restriction (quantitative) – Argentina, Ukraine, India, Vietnam
  • Export Taxes – China, Argentina, Russian, Kazakhstan, Malaysia
  • Eliminate Export Subsidies – China
  • Reduced Import Tariffs – India, Indonesia, Serbia, Thailand, EU, Korean, Mongolia
  • Subsidize Consumers – Morocco, Venezuela

The long-term implications of export restrictions are negative to the world’s consumers and world agriculture.  It distorts trade in agriculture commodities at the precise time when there should be no distortion.  It greatly increases the vulnerability of poor countries that are net food importers.  It penalizes long-term agricultural development and growth in exporting countries.

Commodity Price Impact on Food Budgets

Although notable exceptions exist, most hunger situations are not caused by an actual shortage of food.  Rather hunger is caused by the financial inability to buy food.  So how do high food prices this impact the food consumers in low-income, food deficit countries?

As we discussed last month, the average U.S. consumer spends only 10 percent of his/her disposable income on food (although food expenditures for low-income consumers are substantially higher).  And the food the consumer buys is highly processed, packaged and often ready to eat.  So, of the money spent on food, only 20 percent goes to farmers for producing basic commodities like wheat, milk, meat, etc.

The situation is much different for consumers living in low-income, food-deficit countries.  An illustrative example is shown in Table 2.  Half of a consumer’s disposable income may be spent on food.  And this is primarily for staples (basic commodities).  People in developing countries tend to buy basic staples and prepare them rather than buying processed/prepared food.  In our example, 70 percent of their food expenditures are for staples compared to 20 percent in high income countries.  If the prices of staples increase by 50 percent, the amount of disposable income spent by consumers in high income countries will only increase by one percentage point, going from 10 percent to 11 percent, or a 10 percent increase ((11 – 10)/10).  However, the amount spent by consumers in low income countries increases by 18 percentage points, going from 50 percent to 67.5 percent, or a 35% increase ((67.5 – 50)/50).  So, people in low income countries, who already spend a disproportionately large amount on food, are the hardest hit by increased commodity prices.

Table 2.  Impact of Higher Commodity Prices on Food Budgets *

  High-income Countries Low-Income Food-Deficit Countries
Base Scenario    
   Income $40,000 $800
   Food Expenditures $4,000 $400
       Food Cost as % of Income 10% 50%
     
Staples    
   Staples as % of total food spending 20% 70%
   Expenditures on staples $800 $280
     
50% price increase in staples    
   Increase in cost of staples $400 $140
   New cost of staples $1,200 $420
   New total food costs $4,400 $540
       Food Cost as % of Income 11% 67.5%
     
Percent increase in food cost 10% 35%

*  These are illustrative food budgets that characterize the situations for consumers in high- and low-income countries.
 
Source: Based on information from Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices/WFS-0801, July, 2008.  Economic Research Service, USDA.

Future Demand Growth

The demand for grains will continue to grown in the future.  One of the driving factors is expanding world population.  From 2000 to 2005, world population grew by more than the entire population of the United States.  As shown in Table 3, 85 percent of the growth occurred in Asia and Africa.  The population of Europe actually declined.  So, most of the growth is occurring in developing countries.

Table 3.  World Population Growth (2000 to 2005)

  Million Percent
Asia 238 62
Africa 92 24
Latin America 38 10
Northern America 16 4
Oceania 2 1
Europe -3 -1
Total 383 100

Source: Wikipedia

In combination with population growth, the expanding world “middle class” is demanding high value food products that put additional demands on world agricultural production.  A future article titled “China on a Western Diet” will address this topic.

The Impact of Biofuels

A reason commonly given for the current high world food prices is the diversion of cropland acreage away from food production to energy production.  In the U.S. ethanol is made from corn.  As shown in Table 4, U.S. corn acreage increased substantially in 2007 from its 2003-06 average.  The majority of those acres were taken from soybean production.  In 2008, corn acreage retreated and soybean acreage rebounded to its 2003-06 level.

Corn and soybeans are used primarily for livestock feed.  For example, only about 10 percent of U.S. corn production is processed directly into food products.   Most is fed to livestock that are mostly consumed by high income consumers.  However, U.S. feed corn prices have driven up food corn prices in Africa and Mexico, where corn goes directly into the human food chain.  Moreover, soybean oil is an important staple in the Far East.  In China, almost everything is cooked in soybean oil or other vegetable oil.

Table 4.  U.S. Planted Acreage of Major Crops

  Thousand Acres 
  2008 2007 2003-06
Corn 1/ 87,327 93,600 79,910
Soybeans 74,533 63,631 74,042
Wheat 2/ 63,457 60,433 59,097
Rice 3/    2,895    2,761    3,148

1/ Represents 59% of world corn acreage
2/ Represents less than 10% of world wheat acreage
3/ Represents less than 1% of world rice acreage
Source: USDA

The basic staples of many poor countries are grains that can be consumed directly like wheat and rice.
Although world wheat price increased substantially in 2007 and early 2008, it was not due to the encroachment of corn for U.S. biofuels production.  As shown in Table 1, U.S. wheat acreage actually increased in 2007 from the 2003-06 average, and increased again in 2008.  However, in the absence of corn for biofuels production, wheat acres may have expanded more or the actual expansion may have been achieved at lower wheat prices.   Moreover, the need for expanded corn acreage in the future will place continued pressure on wheat acreage and the wheat price need to main existing acreage.

The small U.S. rice acreage is on land that is not designed for the production of traditional grains.  The threat of substitution is limited.

On a worldwide basis, about 35 million acres of land were used for biofuels in 2004.  This is about one percent of total arable land.  The Energy Information Administration predicts this will increase to 2 to 3.5 percent by 2030.

While the biofuels industry (U.S. and worldwide) is a contributing factor, it is not the only cause of rising world commodity food prices.  The precise impact is difficult to assess.  In next month’s article we will attempt to provide some comparison scenarios of food supplies and prices if the biofuels industry did not exist.

Solutions

Most of the popular press reports about the food and energy situation focus on actions we can take to solve the situation immediately.  However, if we are to be successful, we must also take a holistic and long-term view of the situation and implement policies and programs that will impact the long-term causes of the problem.  Below we address the situation from a short-, intermediate- and long-term perspective.

Short Term
There is no good short-term solution to the situation we face today.  Many of the programs and policies we implement today will not produce results until the intermediate and long term time periods.  However, if you are one of the millions without enough to eat, solutions that provide help next year or in the next decade provide little comfort.

Programs that provide immediate food aid and other assistance are required to meet the current needs.  However, these programs need to provide assistance without competing with the local agricultural sector.  If the problem is the high price of food rather than an actual shortage of food, buying food locally at world prices and providing it to residents at a discounted price provides food for local residents while supporting local agriculture.  Conversely, bringing in food staples from outside competes directly with local farmers and impedes the country’s ability to be self-sustaining in food production in future years.

Intermediate Term
Higher agricultural prices stimulate farmers around the world to increase production.  This is a powerful force that is often neglected in discussions about the current food situation.  The payoff from using better seed varieties, more fertilizer and other production inputs is magnified when grain prices are high.

However, this will not impact today’s situation.  At least one production cycle is required to increase production.  And this assumes that farmers have access to production inputs and the money to purchase them.  So, programs that provide access and funding are important for increased production in the coming years.

Moreover, policies that limit commodity price increases within countries must be avoided.  Developing countries are under pressure to limit price increases in an effort to ease the domestic short-term situation.  However, high prices are necessary to stimulate increased domestic production.  So, short term programs and policies need to be designed that provide immediate food assistance without depressing or limiting prices.

Long Term
Increased funding for agricultural research and education is the long-term solution to the situation.  New seed varieties, new and improved production inputs, better cultural practices, increased knowledge of how to apply these practices, and an array of other research efforts have the ability to significantly increase world agricultural production.

Although research programs are of little value in the short-term, their cumulative impact over five, ten or more years can be enormous.  However, the challenge will be great.  The combined forces of:

  • continued world population growth,
  • increased demand for higher quality food by the world’s expanding “middle class”, and
  • the need to provide both food and fuel,

require careful monitoring by the international community and substantial worldwide investment in agricultural research and application.  And this agricultural expansion needs to be done in a sustainable manner while adapting to the impacts of climate change on the world’s agricultural production capacity in the near term and mitigating climate change in the long term.

References and Further Reading

Issue Report: What's Driving Food Prices? - Farm Foundation, July 2008.

Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices/WFS-0801, July, 2008.  Economic Research Service, USDA.

Rising Food Prices and Global Food Needs: The U.S.Response, Congressional Research Service, May 2008.

Rising Food Prices: Policy Options and World Bank response
, World Bank, 2008.

Implications of Higher Global Food Prices for Poverty in Low-income Countries, World Bank, April, 2008.

Impact of High Food and Fuel Prices on Developing Countries—Frequently Asked Questions. International Monetary Fund
, April, 2008.

The High-Level Conference on World Food Security: the Challenges of Climate Change and Bioenergy,  Food and Agriculture Organization, June 2008.

Biofuels and Sustainable Development, Executive Session on Grand Challenges of the Sustainability Transition, May 2008.

 

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