Food prices buoyed by biofuel affect aid

Maize and wheat prices have shot up to their highest levels since 2000 in the past few months, according to the UN Food and Agriculture Organisation (FAO), which says an increased demand for biofuel production may keep prices above historic levels for the next 10 years and have an impact on food aid.

"Market prices for these commodities affect food aid," said Merritt Cluff, senior economist in FAO's commodities section. "Since budgets for food aid are largely fixed, and determined as part of a budgeting process, higher prices mean that less can be purchased."

The price of yellow maize doubled from an average of US$88 per metric tonne (mt) in 2000 to $177 per mt in February 2007, while the price of wheat increased from an average of $119 per mt in 2000 to $277 per mt in August 2007.

Temporary factors, such as droughts in wheat-growing regions and low stocks largely account for the recent hikes in farm commodity prices, according to the Agricultural Outlook 2007-2016, a joint report by the FAO and the Organisation for Economic Cooperation and Development (OECD), which works to promote democracy, good governance and the market economy.

But when the focus turns to the longer term, "structural changes are underway, which could well maintain relatively high nominal prices for many agricultural products over the coming decade".

Reduced crop surpluses and a decline in export subsidies are other factors influencing prices, as well as the growing use of cereals, sugar, oilseeds and vegetable oils to produce fossil fuel substitutes, like ethanol and bio-diesel. "This is underpinning crop prices and, indirectly through higher animal feed costs, also the prices for livestock products."

Expanding cereal use for ethanol production has led to reduced acreage planted to oilseeds, particularly in the US, in favour of maize, according to the Outlook. "In the US ... maize use for fuel production, which has doubled from 2003, will increase from some 55 million mt, or one-fifth of maize production in 2006, to 110 million mt or 32 percent" by 2016.

Decline in food aid

There has been a general trend indicating a decline in the use of maize as food aid by the US over the last five years, said Catherine Grant in her paper, Bio-fuels and Food Aid: The Impact on Southern Africa, produced for the Regional Hunger and Vulnerability Programme, which assists policy-makers and practitioners concerned with food security and social protection in southern Africa.

''The result is that food and energy now compete for the same stocks in these countries. The trend of high oil prices in 2006, combined with extensive support programmes for the biofuels sector, both had an impact on the diversion of increasing amounts of corn [maize] crops to ethanol in the US''

"In 2004 the US provided a total of 300,500 [mt] of corn [maize] as food aid, and in 2001 a total of 847,700 [mt] ... This decline mirrors, to a certain extent, the increase in the use of corn [maize] in the US for the production of ethanol."

Grant noted that the US and the European Union (EU) were leading the global trend towards greater biofuel production, but were still two of the biggest players in global food markets.

"The result is that food and energy now compete for the same stocks in these countries. The trend of high oil prices in 2006, combined with extensive support programmes for the biofuels sector, both had an impact on the diversion of increasing amounts of corn [maize] crops to ethanol in the US," Grant commented.

"There was no immediate effect on the amount of corn that was imported and exported by the US, but there was a considerable decrease in the amount donated as food aid."

Global effect

Cereal price fluctuations in the US, where maize is used to produce ethanol, also affect the world market, as has been the case with maize prices in South Africa, according to the latest USAID-funded Famine Early Warning Systems Network (FEWS-NET). Demand-driven maize prices are rising worldwide, and are expected to remain high for the rest of the year.

In dollar value, the price of white maize in South Africa has shot up by 186 percent in the last two years, from US$89 per mt in May 2005 to $254 per
mt in August 2007, according to Phumzile Mdladla, who heads FEWS-NET's Southern Africa office. "But demand for biofuel is not the only reason for the increase, it is a combination of factors: the drought last season, high fuel prices and an increase in demand."

Rising prices could also increase the number of food-insecure people, Grant pointed out in her paper, particularly in developing countries where people spent over 50 percent of their household budget on food.

However, Jean-Claude Mukadi, the livelihood emergency response manager in Southern Africa for World Vision, dismissed the inference as "too simplistic", as food insecurity could not be pinned down to any one reason.

"People could be food insecure for a number of reasons: the rains might have failed that year, people might not have got their agricultural inputs on time. If the rains are on time, livelihoods will improve, then affordability increases," he said.

Besides, an upward global food price trend might prove beneficial for small-scale farmers in the developing world, he added. "It could work both ways, couldn't it?"

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