The Cost of Surviving

Posted July 7, 2008 

As G-8 leaders gather in Japan this week, one of the main points of discussion will be the extraordinary rise in the international prices of agricultural commodities. The rise in commodity prices has mirrored food price hikes throughout the developing world, including in China and India. Increased prices are impacting the lives of millions of poor, contributing to overall inflationary pressures and risking political unrest.

Moreover, press reports of statements by U.S. President George W. Bush and Secretary of State Condoleezza Rice that rapid economic growth in China and India is causing the rise in world food prices has led to an uproar among Chinese and Indian politicians and the Asian media in general. The recent world food summit in Rome did little to illuminate the issues further, with representatives of major producing countries mostly using the summit to justify the agricultural policies of their governments.

And yet the increasing prices raise some important questions: Did China and India, with their growing demand for energy and other commodities, contribute to the recent food price increases? Or are higher prices the result of U.S. crops going toward biofuel production? Who is affected and what are the lessons? Research shows that if food consumption by the one billion poor in Asia and Africa shows genuine improvement, further food price increases can be expected. Clearly, it is time for a more informed debate and more focused action on fronts where it matters most.

Since World War II we have seen a steady rise in food supplies and decline in real world food prices (exceptions include the steep spike in 1974-75). A genetic revolution led developing countries in Asia to expand investments in agricultural research and extension, irrigation and fertilizer use causing major supply shifts. Concurrently, their import dependence declined. For most of the past 25 years, China has been a net food exporter. India too has joined the ranks of net food exporters. So how could they be causing prices to rise?

Previous spikes in international food prices were the result of major drops in production in exporting countries. In contrast, the Food and Agricultural Organization’s data indicate that the current spike was preceded by three near bumper crops, although droughts in Australia did tighten wheat supplies temporarily and recent rice price increases are being blamed on the export bans of rice exporters in developing countries.

A shift in global demand for energy and derived demand for agricultural crops explains the price hikes and that shift is unlikely to be temporary. With rising energy prices and use of crops as feedstock for biofuels, crop prices will continue their steep rise. Spot and future prices reflect the difference in expectations. Future trading prices for 1976 were considerably lower than spot prices in 1974 as were future prices in 1997 relative to spot prices in 1995. In contrast, future commodity prices in 2010 and 2011 are considerably higher than spot prices in 2008.

China’s grain and livestock production has been rising steadily for the past 30 years and has not fallen since 2004, with the exception of a small 3.5% decline in meat production Indeed at 500 million tons in 2007, grain production reached the highest level China has witnessed since 2000.

Nor has there been an abrupt increase in China’s domestic food demand over the past years. Although income growth in recent years has put upward pressure on meat prices, the consumer demand shift due to changes in diets from staple grains to meat has experienced a steady increase over the last two decades. Researchers have established unequivocally that China’s rising demand for most food commodities has been met almost fully by an increase in domestic production. Moreover, the rise in food imports in China is matched by its rise in exports.

Rising demand in India does not fit the picture either. Although production growth of basic staples such as rice and wheat has slowed in the last decade after the impressive gains of the Green Revolution, so has demand. Numerous studies have demonstrated a sustained decline in per capita calorie consumption in India during the last 25 years mainly because of lower cereal consumption.

Again counter-intuitively, while the decline has been the largest among the economically better off households—perhaps due to consumption of more milk, fruits and vegetables, as well as more fats—the decline in calorie consumption has been noted throughout the entire household income ranges. There has been neither decline in real incomes, nor any increase in the real price of food over the last 25 years in India until recently. Experts hypothesize that the caloric decline may be explained by the decline in manual work and improvements in health indicators.

This does not mean Indians are adequately nourished. To the contrary, anthropometric indicators of nutritional status both in the case of adults and children in India are among the worst in the world. If India’s growth becomes more broad based and contributes to food price increases, it would be a measure of success of Indian economic policies.

In both countries greater pressure on government supplies and government stocks since the recent price hikes to control domestic inflationary pressures, together with tightening of global supplies, have set off a number of policy responses including export bans. But they reflect marginal supply shortfalls. Indeed as importers of soya and palm oil, India and China are victims of the biofuel boom.

The Real Causes of International Price Increases

Contrary to some studies, biofuels are not only driving the rise in prices of crops used as feedstock in fuel production but of other crops that compete with the feedstocks for land and other resources. The U.S. and Brazil produce more than 90% of the world’s ethanol and have more than 90% of the ethanol market. Both have ambitious plans to expand production. Twenty-percent of U.S. corn production in 2007 went into ethanol, up from only a small fraction several years ago, and equal to half the amount traded on the global market in 2000. With ambitious U.S. plans to produce 15 billion gallons of biofuel by 2010—and double that by 2015—up to half of the U.S.’s corn crop will be used for biofuels.

In Brazil, ethanol is produced largely using sugarcane and feeds a large domestic energy market. Brazil’s expansion of the domestic soybeans production has come mainly from accelerated deforestation in the Amazon, setting off international alarm bells on global warming. Other countries, such as Indonesia and Malaysia, are getting into the act because profitability of biofuels is directly related to the price of energy.

In short, the price of food in the world is rising because it is closely tied to the rise in the global price of oil. A fundamental deepening linkage between the forces affecting the supply and demand for agricultural commodities is taking place through energy markets in a way never before experienced.

Meanwhile, investment in food and agriculture in developing countries, including external aid to agriculture, dropped dramatically. Since 2004, investment has begun to pick up but remains nowhere near necessary levels. Increased reliance on energy in agriculture through the increased use of fertilizers, electricity, water and transport to globalized markets further increase dependence on energy.

Implications for the Future

The good news is that increased international prices should help developing countries focus on food and agriculture. Donors, and hopefully countries, will invest more, not just in international agricultural research of the CGIAR, but in national research, extension, soil and water management, and do so in ways that involve the poor.

Elimination of agricultural subsidies by the U.S. and OECD countries for food and energy production is long overdue but is unlikely to happen any time soon. The least the OECD countries can do is to greatly increase assistance to developing countries in science and technology so that not just large corporations but the world’s small farmers can participate in the agricultural boom and create employment for the poor.

Mr. Jikun Huang is director of the Center for Chinese Agricultural Policy. Mr. Scott Rozelle is a professor of international studies at Stanford University. Mr. Bharat Ramaswami is a professor at the Indian Statistical Institute. Ms. Uma Lele is a former senior adviser at the World Bank and a visiting professor at the University of Maryland.