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FOOD: Biofuels make a comeback as prices rise
An increase in the price of a staple cereal triggers a domino effect in grain markets
JOHANNESBURG, 18 April 2011 (IRIN) - The combination of higher fuel prices and increased biofuel production, a main driver of the 2007/08 maize
price hike, is back in the news because stocks are at their lowest levels in 30 years in the US, the world's largest exporter.
Maize prices have more than doubled since April 2010, said Abdolreza Abbassian, secretary of the Intergovernmental Group on Grains at the Food and Agriculture Organization (FAO). An increase in the price of a staple cereal triggers a domino effect in grain markets as people opt for cheaper alternatives.
Higher food prices since June 2010 have forced an additional 44 million people into hunger, the World Bank noted in a new report
2010 ended with food prices at their highest since 2008. In January 2011, IRIN looked at
whether the world was headed for another crisis but experts thought price escalation had not yet hit the benchmark for a crisis as recorded in 2008, when global supplies of all staple grains were affected.
Christopher Barrett, a food expert who teaches development economics at Cornell University in the US, said maize stocks in the US were "down to less than six months' consumption”.
Are we in a crisis?
No, say the experts, but their level of concern has gone up a notch since January. High crude oil prices, a weak US dollar, widespread unrest in the oil-producing regions of the Middle East and North Africa, and the situation in Japan, where damaged nuclear reactors raise demand for conventional fuel while the threat of radiation exposure decreases food supplies, are not a recipe for price stability any time soon. "The next few months will be critical," said Abbassian.
Crude oil prices surged by 10.3 percent in March and were 36 percent higher than at the same time in 2010, the World Bank noted in its Food Price Watch for 2011. "These oil price increases impact the price of food - a 10 percent increase in crude oil prices is associated with a 2.7 percent increase in food prices in the World Bank Food Price Index."
Crude oil is maintaining prices well above US$100 per barrel, which they last reached in the 2007/08 food price crisis.
High fuel prices mean that more maize, vegetable oil and sugar cane are used to produce biofuel. The US Department of Agriculture (USDA) in its World Agricultural Supply and Demand Estimates report
, released in April 2011, reported that the use of maize to produce ethanol rose from 31 percent of total maize output in 2008/09 and would reach a projected 40 percent in 2010/11.
High fuel prices also mean more expensive farm inputs such as energy for irrigation and transport, and other production costs. The World Bank said maize prices had increased in Tajikistan, Azerbaijan and the Kyrgyz Republic in the past year, reflecting increased transport costs from Kazakhstan.
Abbassian said US-made maize ethanol could possibly compete with high petrol prices without any subsidy in the long term, which was "worrisome." He was also concerned about tight maize supplies in China, where production was affected by weather conditions in 2010. There was also uncertainty about the level of Chinese imports in 2011.
Stocks of other staples, "in particular, wheat and soybeans… haven't seen nearly the same draw-downs," Barrett said. "Production has been pretty good in South America, and thus far the USDA reports that indications in the US for the 2011 harvest are good, so the supply-side issues are mainly inadequate growth in yields to keep pace with demand."
Abbassian pointed out that in the first week of April 2011, wheat prices were 84 percent higher than in the same period in 2010, whereas the price of rice was up by only six percent.
Are developing countries affected?
Although it takes time for global price hikes to be transmitted to domestic markets, the impact is determined mostly by local conditions.
Poor rains in the Horn of Africa have seen the price of white maize rise in Kenya, Somalia, Uganda, the Democratic Republic of Congo (DRC) and Benin, with the biggest jump - 80 percent - in Mogadishu, the Somali capital, between January and February 2011, and a year-on-year increase of 340 percent compared to the same period in 2010.
Production uncertainties pushed up global rice prices by 18 percent between June and December 2010 and led to large importers increasing domestic stockholdings, said the World Bank. Prices have been coming down in countries like Bangladesh and Mozambique.
In West Africa, depreciation of the CFA franc against the US dollar drove up prices by 10 percent to 20 percent since March 2010 until January 2011, according to FAO.
Conflict in Côte d'Ivoire has disrupted supplies of processed foods such as dried milk, sugar and vegetable oil to the landlocked countries of Burkina Faso, Mali, and Niger, making these commodities more expensive, the World Bank said. Prices were rising in Sudan, Ethiopia, India and Colombia, and the impact of high wheat prices was also being felt in Mongolia, which depended largely on imports.
On the upside, high prices have encouraged farmers in the European Union (EU), Russia and Ukraine to plant more wheat, resulting in bigger harvests in 2011. "But if you have another bad weather spell [like the drought in Russia in 2010] we could be facing a crisis," said Abbassian.
What should countries do in the meantime?
Countries that buy most of their food should monitor import tariffs and reduce rates to keep prices low, suggested Barrett. "In many countries, a domestic currency naturally strengthening against the [US] dollar will already be serving that anti-inflation purpose, although pushing the exchange rate as a means of stemming inflation is a dangerous strategy because of likely consequences for their agricultural and other tradables (e.g., the light manufacturing and tourism) sectors."
Abbassian said countries should have had enough time since the last crisis in 2007/08 to contemplate safety nets. "If not, start putting a strategy in place now."
Barrett noted that higher market prices for staple cereals gave farmers and countries an opportunity to invest in upgrading irrigation and other improvements that could bring long-term benefits.
The World Bank focused on what Arab countries, the largest net cereal importers in the world, could do to reduce costs and found that logistics contributed substantially to the price of imported wheat. For instance, vessels carrying wheat routinely wait up to 10 days before they unload cargo. The Bank suggested improving capacity and upgrading infrastructure in ports to lower costs.
In times of unforeseen crisis - floods, unexpected disasters affecting production - countries should take steps to protect themselves from the large margins between the contracted price and the delivery price, so that they do not pass on a price shock to the local markets.
The Bank suggested that small regional humanitarian reserves be set up in disaster-prone, infrastructure-poor areas, such as the Horn of Africa, to meet emergency needs quickly.
The US Agency for International Development (USAID), aid arm of the US government, the world's largest food aid donor, has a warehouse in Djibouti, in the horn of Africa, where food aid is prepositioned
for possible emergencies in Africa and Asia.