Crops hit by drought and biofuel policy: another food price crisis? By Brigit Busicchia

Not so long ago, things were looking good. The UN’s Food and Agriculture Organization (FAO) had announced on the 5th of July that the FAO food price index had been falling for the third consecutive month and that in May of this year the index had been at its lowest since September 2010. But the optimism may be short-lived.

The adverse weather of continuing drought in the USA and in particular in most of the major corn-growing regions, is bringing volatility back on international food prices, an untenable situation for world food security and in particular for developing or emerging economies.

Droughts hitting crops

According to the statistics services of the United States epartment of Agriculture (USDA), by the end of last week 45 per cent of the US corn and 35 per cent of soybean crops had been rated of very poor condition, the worst US crop result since 1988. Wheat is the next crop to be affected but if rainfall comes (as forecasted by the USDA) this may ease the tension a little. While the rain forecast may be too little too late for the corn and soybean crops, the fate of wheat has yet to be decided.

On the other side of the planet, Russia has had to re-align its forecast of wheat production, also caused by drought conditions. But so far, the Russian government has not banned wheat exports as it did in 2010.

The fluctuation of commodity prices on international markets reflects the volatile nature of agricultural markets. Corn and soybean are now trading 30 per cent higher than what they were only a month ago.

Biofuel demand driving crop prices higher

US federal ethanol mandates (requiring fuel distributors to use a certain amount of ethanol each year) have played an important role in the increase of corn prices. The US policy has driven an artificial demand for corn. When first introduced in 2005, ethanol production accounted for 5 per cent of the demand for corn. Today about 40 per cent of the US corn production is used for biofuels.

The mandatory increased production of ethanol has had a large impact on corn prices because of the fixed nature of the demand. In a free market environment, if the price of a commodity goes up, demand goes down, naturally re-adjusting the price signals. But the ethanol mandates require the same amount of ethanol to be used irrespective of corn prices.

Are we entering a new food price crisis?

There is little doubt that the liberalisation of trade and investment (understand financial speculation on agricultural commodity markets) are key ingredients for turning any large supply shocks into a world food crisis.

The global restructuring of the agri-food business has led to the depletion of international stocks since the beginning of the millennium. Large precautionary inventories commonly held by governments and private grain dealers (to absorb supply shocks) were allowed to shrink as everyone had come to believe that countries suffering crop failures could always import the food they needed.

As a result, whilst international cereal stock levels corresponded to about 110 days of consumption in the late 1990s, by 2007, these had dropped to only 50 days, sacrificing food reserves for corporate “food security”. The forecast for 2012 is that world cereal stocks represent about 70 days of consumption.

The domino effect is in operation. High corn prices are putting pressure on other agricultural commodities as well. Wheat, soybeans and other crops are now being used as feed substitutes to corn, pushing their prices even higher.

The global wheat supply and demand has tightened recently and Australian wheat growers may well cash on it and pick up a large slice of the upside trend.

Complex international markets

On the other hand, it is unlikely that the Australian corn producers will benefit greatly from the rise of international corn prices. In fact, the 2012 Australian maize production (similar to the 2011 crop) will be around 350,000 tonnes, a sufficient quantity for the national 320,000 tonnes domestic and feedstock usage.

The soybean situation is different as the bulk of the international production comes from the USA, China, and Brazil with Australia being a net importer to an annual value of $100 million.

One important outcome of these long-term structural adjustments is that most countries and in particular developing and transitional economies have suffered significant degradation of their agricultural sectors and are no longer self sufficient.

The loss of national food self-sufficiency compounded with low global stock-levels provides a favourable environment for what some scholars refer to as a “perfect storm”, a situation for which the dangerous combination of different developments, in this instance supply shortfalls combined with low stock-levels, leads to an unavoidable state of crisis.

International agricultural commodity prices have many pressure points. Obvious ones range from growing demand for food to poor harvests caused by climatic events. But some of these pressure points are not as visible, but are as powerful. Government policy is an example. It is likely that the US federal policy on biofuels is felt all over the world from Japan to African countries when importing corn.

The productivist logic underlying the restructure of the international agri-food system has widened the gap between the “haves’” and the “have not”. Whilst Australian wheat growers may be enjoying the rising demand for wheat today, the euphoria may not be shared by the Egyptian people who rely largely on imported wheat to complement their diet.

The food price spikes of 2007/2008, 2010/2011, and a possible 2012, occurring in short succession make clear that not enough is done to ensure that enough food is accessible and available for all.

Brigit Busicchia of Macquarie University is affiliated with the Sydney Food Fairness Alliance.

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