pywong
3rd January 2009, 01:36 PM
http://www.aliran.com/index.php?option=com_content&view=article&id=802:global-food-crisis-a-review&catid=74:2008-9&Itemid=10
Global food crisis: A review
Friday, 02 January 2009 14:51
Governments must have the right to regulate markets to ensure a sufficient
supply of food at reasonable prices for everyone, says Subramaniam Pillay.
Food prices have increased sharply in 2007 and 2008. The prices of many
staple items such as rice, wheat flour, corn, cooking oil and milk powder
have more than doubled globally. Malaysia has not escaped from this crisis.
Prices here too have increased sharply. In addition to the above list of
items, in Malaysia, other staples such as vegetables, eggs, fish and meat
have much higher prices than two years ago. Though recently wholesale prices
have come down to some extent at the global level, we are not seeing the
positive impact of the reduced prices at the retail level here in Malaysia.
The price increase affects the poor more drastically as they spend a greater
portion of their income on food. Globally, chronic hunger and malnutrition
has increased sharply due to the food crisis. At the local level, not many
Malaysians face extreme hunger in spite of the rise in food prices. However,
on the margin, I am sure poorer Malaysians may be consuming less nutritious
food, which may result in some degree of malnutrition.
In this paper, we will examine the main causes for the increase in the price
of food; at the end of the paper, an outline of some possible remedies for
the food crisis will be provided.
Is there a physical shortage of food?
Usually, a rise in price is an indication of a shortage of that particular
product. However, in the case of food, there is sufficient food globally but
there are regional/national shortages due to droughts and other weather
problems. In many cases, even within countries there is enough food but the
poor are unable to have sufficient access to food due to higher prices. This
is true in many developing countries such as India and Brazil. The real
crisis then is the affordability of food and not the lack of food.
So why have food prices gone up so much?
There are several reasons that have been put forward to explain the rise in
food prices. Some have short-term effects while others have long-term
effects. There is also much controversy over the degree of importance of the
various factors. The list given below is not exhaustive and I am sure
readers can come up with additional factors.
(i) Bad weather conditions
A reason often given is that we have unusually bad weather in many parts of
the world occurring at the same time in 2007 and 2008. For example, the
agriculturally important Murray-Darling river basin in Australia experienced
one of its worst periods of drought in 2007. Australia is normally the
second largest exporter of wheat in the world after the USA. So production
and exports of wheat (and rice also) suffered, causing some impact on the
price of these two staple food items.
The severe cyclone in Bangladesh that occurred in 2007 also cut down the
production of rice - which meant that country had to import more rice than
usual. China has had unusually severe floods, droughts and exceptionally
cold winter this year which even disrupted the Chinese New Year holidays.
Due to this decrease in the supply of grains, world food stocks have dropped
sharply sending a signal to the commodity markets to allow prices to rise.
However, there are many other more important reasons for the price rise.
(ii) Food crops for use as fuel
A World Bank research paper has identified the use of food crops such as
corn (maize) and palm oil as bio-fuel as the main reason behind the rise in
price of food. This study argued that 75 per cent of the price increase
could be attributed to this single cause. According to many estimates, about
5 per cent of grains is now diverted to the production of bio-fuel globally.
In case you think 5 per cent is not a lot, it amounts to about 100 million
tonnes of grains per year.
Many developed countries (e.g. the USA and the European Union) heavily
subsidise the growing of food crops to produce ethanol which can be blended
with petrol to fuel motor vehicles. The American government has given
massive subsidies to farmers to produce corn for the bio-fuel industry. The
claim is that this makes America less dependent on foreign supplies of
energy. However, the subsidy for corn has reduced the land used for the
production of other food crops such as wheat and soya. So world prices of
all these crops have gone up sharply! This, in turn, has affected millions
of poor people all over the world in terms of their ability to have access
to affordable food.
According to an Oxfam report in June 2008, "rich countries spent up to $15
billion last year supporting bio-fuels while blocking cheaper Brazilian
ethanol, which is far less damaging for global food security."
However, rich countries are trying to blame the weather and other factors
for the rise in price of food. According to a Wikipedia entry, "The German
Chancellor, Angela Merkel said the rise in food prices is due to poor
agricultural policies and changing eating habits in developing nations, not
bio-fuels as some critics claim." The Guardian (4 July 2008) has reported,
"President Bush has linked higher food prices to higher demand from India
and China."
The use of food crops for fuel is both an economic and moral issue. For
example, according to a Wikipedia entry filling a tank of an average
American car with bio-fuel is depriving a poor African person of his or her
annual supply of maize (corn), which is a main staple food there! Something
is seriously wrong in terms of priorities here.
(iii) The changing diet in rapidly developing countries
In rapidly growing developing countries such as China, India and Brazil, a
large new middle class is emerging. Though the vast majority of the
population in these countries remain poor, the growth of the middle class
has been impressive due to the sheer size of the population of these
countries. Their eating habits are changing. With increasing affluence, they
are consuming a bigger variety of food as well as substituting plant-based
food with more meat and dairy products. For example, between 1990 and 2005,
per capita meat consumption increased by 2.4 and 1.7 times in China and
Brazil respectively. During this 15-year period, consumption of milk in
China increased by three times. Eating habits in emerging countries are also
influenced by the rapid spread of Western fast food chains such as McDonalds
and KFC.
The problem with this change is that more grains are being used to feed
animals, which is not a very efficient way of producing proteins. For
example, it is reported that to produce 1 kg of chicken meat, 3 kg of maize
has to be used while the amount of maize required to produce 1 kg of pork
and beef is 5 kg and 8 kg respectively. These changes have a sustained long
term impact on the demand for food.
(iv) Speculation by commodity and hedge funds
Futures markets in agricultural products have long been used by both
producers and food processors to hedge against price instability. Though
there have been speculative activities in the past in these commodity
markets, it was limited. However, in the recent past, the low interest rate
regime that was prevailing in the USA has encouraged mutual funds, hedge
funds and even large pension funds to look for new places to invest to earn
higher returns.
Many market participants believed that there is going to be a long-term
increase in demand for most commodities due to the rapid economic growth of
large countries such as India, China, and Brazil. There is some truth to
this argument of a super bull market in commodities. With this belief firmly
intact in their minds, these funds began to invest heavily in the futures
markets which led to a sharp increase in the prices of major food and
non-food commodities. Thus it became a self-fulfilling prophecy. As the
price rose, more of these funds rushed into the market creating a huge
bubble. The prices of some metals increased by more than five times in three
years. At some point, the bubble had to burst as price increases were
unsustainable given the actual demand and supply of these products.
One of the first bubbles to break was in the wheat market. After reaching a
peak of $13.50 a bushel in February 2008, the price of soft red winter wheat
on the Chicago Board of Trade (CBOT) is now about $5.30 per bushel.
According to a BBC report, farmers responded to higher prices by planting
more of the crop, which is expected to lead to a bumper harvest this year
and next. The International Grains Council has projected a record world
wheat crop of 645 million tonnes in 2008/9. Other commodities also have had
similar downturns in the last few months. Closer to home, we have seen the
dramatic drop in palm oil prices.
Thus, those who went in early made a lot of money in commodity speculation
but those who joined the game late lost a lot. The sad thing is that these
speculative activities have led to a sharp increase in food prices which has
very little to do with real demand for food. As we shall see later, the
recent drop in wholesale prices in food commodities has not been accompanied
by a reduction at the level of the final consumer.
(v) Rise in price of crude petroleum
Another important reason for the increase in food prices is the hike in the
price of crude petroleum. Because of this, the cost of production in the
agriculture sector, especially, the cost of producing fertilisers has
increased sharply. The petroleum industry is the key source of raw materials
for producing the main type of fertilisers. An increase in the cost of
petrol and diesel has also led to increases in the cost of storing and
transporting food from producers to final consumers. It also has led to
increases in the cost of processing the food. Indirectly, the increase in
petroleum price also encouraged more switching of food crops for the
production of ethanol and bio-diesel. All these together have had a
substantial impact on food prices.
(vi) Impact of IMF/World Bank policies on supply of food in poor countries
When a country faces a severe financial crisis and it does not have
sufficient financial reserves to cope with it, then it is forced to go to
the IMF for financial aid. Before granting loans to the country, the IMF
will insist on the implementation of a number of "free market"
conditionalities one of which is the removal of subsidies for farmers in
poor countries. This results in lower production of food crops and in some
countries and an increase in non-food crops such as cut flowers and fibre
crops. However, the poor in those countries cannot afford to buy the now
higher-priced food resulting in extensive hunger and malnutrition. The irony
is that the rich countries are still continuing to subsidise their already
well-to-do farmers. This is a stark example of the hypocrisy and double
standards that poorer countries face in international economic
relationships.
(vii) Reduction in farmland acreage
Rapid urbanisation and industrialisation has led to the conversion of
fertile farmland in many developing countries to be used for factories and
housing. A local example is the conversion of vegetable gardening land in
Tanjong Tokong in Penang Island to luxury apartments. In addition, many
countries face a loss of soil fertility due to pollution from industrial
activities, soil erosion and water depletion. Thus, total output of food
declines just when the rising middle class tends to consume more food.
(ix) Lack of competition at the middle level of the food chain
Another important reason for the rise in food prices is the domination of
the agribusiness industry by some large multinational firms. For example,
three companies (Archer Daniels Midland, Cargill and Bunge) control the
world's grain trade! Monsanto has a 60 per cent share in the world seed
market! Nestle, General Foods and Unilever dominate the downstream market in
food products.
With the market power they have, these firms are able to pass on most if not
all the increase in raw material prices to the consumer. However, when raw
material prices drop, consumers do not benefit as these firms pocket the
difference. They are able to do this because there is no real competition in
the market place given their monopoly power. Lower food prices means lower
profits for them, which they will resist! They can and do manipulate prices
so that they can earn higher profits. For example, both Nestle and Unilever
announced higher profits for the third quarter of this year. The reason
given was higher selling prices of their products did not affect the volume
of sales and thus profits increased handsomely. This is why with the recent
drop in wholesale prices of commodities, we do not see a decrease in food
prices at the retail level. For example, coffee beans price is down, but
Nescafe price is still high! So coffee farmers get less income, but Nestle
earns higher profit.
So what can be done?
We need to discuss and come up possible solutions to the food crisis both at
the global and local level. Here are some observations to assist in this
process..
(i) Bring down food prices
We can try to bring down the price of food by
. reducing the cost of production through subsidies for agricultural
inputs.
. reducing the market power of global food companies.
. regulating commodity speculation.
. using other non-food crops on marginal land for bio-fuel.
. Encouraging and educating the public to consume less resource-intensive
food
~ by eating more soya and dhal and less meat for protein.
~ by eating less processed food and substituting it with more natural
food.
(ii) Increase the purchasing power of consumers
In the final analysis, a small country such as Malaysia cannot be
self-sufficient in food. Therefore, it is important that citizens have the
purchasing power to buy food. We can
. provide direct food aid to the poor.
. improve the human capital of and provide opportunities for every
individual so that he or she can be economically more productive, and thus
earn enough.
. ensure more equitable economic growth so that there is less disparity
in income;
~ thus, even the less well off in such societies will have enough
resources to buy food.
~ we cannot have the trickle-down economic growth model that leaves
substantial number of people in many countries too poor to afford food for
themselves.
(iii) Ensure that availability of adequately nutritious food is a basic
human right
Food cannot be treated like any other commodity. It is one of the most basic
needs for human existence. It is the responsibility of governments to ensure
sufficient food for everyone. Thus, governments must have the right to
regulate the appropriate markets to ensure a sufficient supply of food at
reasonable prices.
Conclusion
Based on the discussion above, we can make the following conclusions:
. The food crisis has been caused by both structural and short-term
factors.
. The right to food is a basic human right.
. The government has the important responsibility of ensuring an adequate
supply of nutritious food for all citizens.
. Governments should have the right to regulate the players in the food
industry.
. The public too must play a role by reducing their consumption of
resource-intensive food.
-------------------------------------------------------------
Subra delivered the above as the keynote address at the Global Food Crisis:
A Malaysian Response Forum.
Global food crisis: A review
Friday, 02 January 2009 14:51
Governments must have the right to regulate markets to ensure a sufficient
supply of food at reasonable prices for everyone, says Subramaniam Pillay.
Food prices have increased sharply in 2007 and 2008. The prices of many
staple items such as rice, wheat flour, corn, cooking oil and milk powder
have more than doubled globally. Malaysia has not escaped from this crisis.
Prices here too have increased sharply. In addition to the above list of
items, in Malaysia, other staples such as vegetables, eggs, fish and meat
have much higher prices than two years ago. Though recently wholesale prices
have come down to some extent at the global level, we are not seeing the
positive impact of the reduced prices at the retail level here in Malaysia.
The price increase affects the poor more drastically as they spend a greater
portion of their income on food. Globally, chronic hunger and malnutrition
has increased sharply due to the food crisis. At the local level, not many
Malaysians face extreme hunger in spite of the rise in food prices. However,
on the margin, I am sure poorer Malaysians may be consuming less nutritious
food, which may result in some degree of malnutrition.
In this paper, we will examine the main causes for the increase in the price
of food; at the end of the paper, an outline of some possible remedies for
the food crisis will be provided.
Is there a physical shortage of food?
Usually, a rise in price is an indication of a shortage of that particular
product. However, in the case of food, there is sufficient food globally but
there are regional/national shortages due to droughts and other weather
problems. In many cases, even within countries there is enough food but the
poor are unable to have sufficient access to food due to higher prices. This
is true in many developing countries such as India and Brazil. The real
crisis then is the affordability of food and not the lack of food.
So why have food prices gone up so much?
There are several reasons that have been put forward to explain the rise in
food prices. Some have short-term effects while others have long-term
effects. There is also much controversy over the degree of importance of the
various factors. The list given below is not exhaustive and I am sure
readers can come up with additional factors.
(i) Bad weather conditions
A reason often given is that we have unusually bad weather in many parts of
the world occurring at the same time in 2007 and 2008. For example, the
agriculturally important Murray-Darling river basin in Australia experienced
one of its worst periods of drought in 2007. Australia is normally the
second largest exporter of wheat in the world after the USA. So production
and exports of wheat (and rice also) suffered, causing some impact on the
price of these two staple food items.
The severe cyclone in Bangladesh that occurred in 2007 also cut down the
production of rice - which meant that country had to import more rice than
usual. China has had unusually severe floods, droughts and exceptionally
cold winter this year which even disrupted the Chinese New Year holidays.
Due to this decrease in the supply of grains, world food stocks have dropped
sharply sending a signal to the commodity markets to allow prices to rise.
However, there are many other more important reasons for the price rise.
(ii) Food crops for use as fuel
A World Bank research paper has identified the use of food crops such as
corn (maize) and palm oil as bio-fuel as the main reason behind the rise in
price of food. This study argued that 75 per cent of the price increase
could be attributed to this single cause. According to many estimates, about
5 per cent of grains is now diverted to the production of bio-fuel globally.
In case you think 5 per cent is not a lot, it amounts to about 100 million
tonnes of grains per year.
Many developed countries (e.g. the USA and the European Union) heavily
subsidise the growing of food crops to produce ethanol which can be blended
with petrol to fuel motor vehicles. The American government has given
massive subsidies to farmers to produce corn for the bio-fuel industry. The
claim is that this makes America less dependent on foreign supplies of
energy. However, the subsidy for corn has reduced the land used for the
production of other food crops such as wheat and soya. So world prices of
all these crops have gone up sharply! This, in turn, has affected millions
of poor people all over the world in terms of their ability to have access
to affordable food.
According to an Oxfam report in June 2008, "rich countries spent up to $15
billion last year supporting bio-fuels while blocking cheaper Brazilian
ethanol, which is far less damaging for global food security."
However, rich countries are trying to blame the weather and other factors
for the rise in price of food. According to a Wikipedia entry, "The German
Chancellor, Angela Merkel said the rise in food prices is due to poor
agricultural policies and changing eating habits in developing nations, not
bio-fuels as some critics claim." The Guardian (4 July 2008) has reported,
"President Bush has linked higher food prices to higher demand from India
and China."
The use of food crops for fuel is both an economic and moral issue. For
example, according to a Wikipedia entry filling a tank of an average
American car with bio-fuel is depriving a poor African person of his or her
annual supply of maize (corn), which is a main staple food there! Something
is seriously wrong in terms of priorities here.
(iii) The changing diet in rapidly developing countries
In rapidly growing developing countries such as China, India and Brazil, a
large new middle class is emerging. Though the vast majority of the
population in these countries remain poor, the growth of the middle class
has been impressive due to the sheer size of the population of these
countries. Their eating habits are changing. With increasing affluence, they
are consuming a bigger variety of food as well as substituting plant-based
food with more meat and dairy products. For example, between 1990 and 2005,
per capita meat consumption increased by 2.4 and 1.7 times in China and
Brazil respectively. During this 15-year period, consumption of milk in
China increased by three times. Eating habits in emerging countries are also
influenced by the rapid spread of Western fast food chains such as McDonalds
and KFC.
The problem with this change is that more grains are being used to feed
animals, which is not a very efficient way of producing proteins. For
example, it is reported that to produce 1 kg of chicken meat, 3 kg of maize
has to be used while the amount of maize required to produce 1 kg of pork
and beef is 5 kg and 8 kg respectively. These changes have a sustained long
term impact on the demand for food.
(iv) Speculation by commodity and hedge funds
Futures markets in agricultural products have long been used by both
producers and food processors to hedge against price instability. Though
there have been speculative activities in the past in these commodity
markets, it was limited. However, in the recent past, the low interest rate
regime that was prevailing in the USA has encouraged mutual funds, hedge
funds and even large pension funds to look for new places to invest to earn
higher returns.
Many market participants believed that there is going to be a long-term
increase in demand for most commodities due to the rapid economic growth of
large countries such as India, China, and Brazil. There is some truth to
this argument of a super bull market in commodities. With this belief firmly
intact in their minds, these funds began to invest heavily in the futures
markets which led to a sharp increase in the prices of major food and
non-food commodities. Thus it became a self-fulfilling prophecy. As the
price rose, more of these funds rushed into the market creating a huge
bubble. The prices of some metals increased by more than five times in three
years. At some point, the bubble had to burst as price increases were
unsustainable given the actual demand and supply of these products.
One of the first bubbles to break was in the wheat market. After reaching a
peak of $13.50 a bushel in February 2008, the price of soft red winter wheat
on the Chicago Board of Trade (CBOT) is now about $5.30 per bushel.
According to a BBC report, farmers responded to higher prices by planting
more of the crop, which is expected to lead to a bumper harvest this year
and next. The International Grains Council has projected a record world
wheat crop of 645 million tonnes in 2008/9. Other commodities also have had
similar downturns in the last few months. Closer to home, we have seen the
dramatic drop in palm oil prices.
Thus, those who went in early made a lot of money in commodity speculation
but those who joined the game late lost a lot. The sad thing is that these
speculative activities have led to a sharp increase in food prices which has
very little to do with real demand for food. As we shall see later, the
recent drop in wholesale prices in food commodities has not been accompanied
by a reduction at the level of the final consumer.
(v) Rise in price of crude petroleum
Another important reason for the increase in food prices is the hike in the
price of crude petroleum. Because of this, the cost of production in the
agriculture sector, especially, the cost of producing fertilisers has
increased sharply. The petroleum industry is the key source of raw materials
for producing the main type of fertilisers. An increase in the cost of
petrol and diesel has also led to increases in the cost of storing and
transporting food from producers to final consumers. It also has led to
increases in the cost of processing the food. Indirectly, the increase in
petroleum price also encouraged more switching of food crops for the
production of ethanol and bio-diesel. All these together have had a
substantial impact on food prices.
(vi) Impact of IMF/World Bank policies on supply of food in poor countries
When a country faces a severe financial crisis and it does not have
sufficient financial reserves to cope with it, then it is forced to go to
the IMF for financial aid. Before granting loans to the country, the IMF
will insist on the implementation of a number of "free market"
conditionalities one of which is the removal of subsidies for farmers in
poor countries. This results in lower production of food crops and in some
countries and an increase in non-food crops such as cut flowers and fibre
crops. However, the poor in those countries cannot afford to buy the now
higher-priced food resulting in extensive hunger and malnutrition. The irony
is that the rich countries are still continuing to subsidise their already
well-to-do farmers. This is a stark example of the hypocrisy and double
standards that poorer countries face in international economic
relationships.
(vii) Reduction in farmland acreage
Rapid urbanisation and industrialisation has led to the conversion of
fertile farmland in many developing countries to be used for factories and
housing. A local example is the conversion of vegetable gardening land in
Tanjong Tokong in Penang Island to luxury apartments. In addition, many
countries face a loss of soil fertility due to pollution from industrial
activities, soil erosion and water depletion. Thus, total output of food
declines just when the rising middle class tends to consume more food.
(ix) Lack of competition at the middle level of the food chain
Another important reason for the rise in food prices is the domination of
the agribusiness industry by some large multinational firms. For example,
three companies (Archer Daniels Midland, Cargill and Bunge) control the
world's grain trade! Monsanto has a 60 per cent share in the world seed
market! Nestle, General Foods and Unilever dominate the downstream market in
food products.
With the market power they have, these firms are able to pass on most if not
all the increase in raw material prices to the consumer. However, when raw
material prices drop, consumers do not benefit as these firms pocket the
difference. They are able to do this because there is no real competition in
the market place given their monopoly power. Lower food prices means lower
profits for them, which they will resist! They can and do manipulate prices
so that they can earn higher profits. For example, both Nestle and Unilever
announced higher profits for the third quarter of this year. The reason
given was higher selling prices of their products did not affect the volume
of sales and thus profits increased handsomely. This is why with the recent
drop in wholesale prices of commodities, we do not see a decrease in food
prices at the retail level. For example, coffee beans price is down, but
Nescafe price is still high! So coffee farmers get less income, but Nestle
earns higher profit.
So what can be done?
We need to discuss and come up possible solutions to the food crisis both at
the global and local level. Here are some observations to assist in this
process..
(i) Bring down food prices
We can try to bring down the price of food by
. reducing the cost of production through subsidies for agricultural
inputs.
. reducing the market power of global food companies.
. regulating commodity speculation.
. using other non-food crops on marginal land for bio-fuel.
. Encouraging and educating the public to consume less resource-intensive
food
~ by eating more soya and dhal and less meat for protein.
~ by eating less processed food and substituting it with more natural
food.
(ii) Increase the purchasing power of consumers
In the final analysis, a small country such as Malaysia cannot be
self-sufficient in food. Therefore, it is important that citizens have the
purchasing power to buy food. We can
. provide direct food aid to the poor.
. improve the human capital of and provide opportunities for every
individual so that he or she can be economically more productive, and thus
earn enough.
. ensure more equitable economic growth so that there is less disparity
in income;
~ thus, even the less well off in such societies will have enough
resources to buy food.
~ we cannot have the trickle-down economic growth model that leaves
substantial number of people in many countries too poor to afford food for
themselves.
(iii) Ensure that availability of adequately nutritious food is a basic
human right
Food cannot be treated like any other commodity. It is one of the most basic
needs for human existence. It is the responsibility of governments to ensure
sufficient food for everyone. Thus, governments must have the right to
regulate the appropriate markets to ensure a sufficient supply of food at
reasonable prices.
Conclusion
Based on the discussion above, we can make the following conclusions:
. The food crisis has been caused by both structural and short-term
factors.
. The right to food is a basic human right.
. The government has the important responsibility of ensuring an adequate
supply of nutritious food for all citizens.
. Governments should have the right to regulate the players in the food
industry.
. The public too must play a role by reducing their consumption of
resource-intensive food.
-------------------------------------------------------------
Subra delivered the above as the keynote address at the Global Food Crisis:
A Malaysian Response Forum.