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A GRAIN OF TRUTH
Philip Bowring*
25-06-2008
HONG KONG – Is there really a global food shortage caused by a mix of bio-fuels, bad weather, declines in yield growth, urbanisation, fertiliser prices, and rising consumption in countries such as China?
Or is this an illusion created by speculation, fear and inefficient markets?
There is no simple answer, but getting the facts right and drawing distinctions is needed if Asia is not to draw the wrong conclusions.
Take rice, the most important – but not the only – Asian staple. World production last year, and as forecast for 2008, grew by around 1.5 per cent, about in line with consumption. So why the panic which doubled prices between September and April? Partly, it was supply.
Although few noticed at the time, rice stocks fell by 50 per cent between 2000 and 2005. Since then, they have stabilised, but at only around 18 per cent of annual consumption. This would be a thin margin anyway, but it is particularly thin for rice because there is so little trade in it. Only about seven per cent of production is traded across borders, so a sudden increase in demand can have an outsize price effect.
In this case, two major importers, the Philippines and Nigeria, seem to have panicked, setting off both domestic hoarding and fears in rice exporting countries that local prices could be driven up too far. Hence Vietnam, China and India all imposed export controls.
All this took place at a time of rising prices for most other commodities, helped along by cheap money and ultra-low US dollar interest rates. So financial speculation, plus the impact of energy prices on fertiliser, added fuel – creating a price spike which has since partly subsided.
Looking at longer-term factors, rice has some contrary characteristics. China’s consumption is actually falling very slowly as diets become more diverse. India, with yields per hectare only one half those of China, has the potential for very big increases in production – but only if it can both invest more and remove some of its many controls, which are designed for food security – rather than for maximising production. Myanmar, once the largest exporter, has huge potential but needs the kind of reforms which transformed Vietnam’s production.
Nutritional standards in parts of Asia – mainly South Asia – have a long way to go. But everywhere, population growth is declining and, on average, is now no more than productivity growth.
In Asia, overall production has been keeping up with consumption. However, rice deficits have been growing elsewhere, particularly in Africa – where yields are low, and for many urban dwellers, rice has supplanted traditional crops like cassava and sorghum. Demand from the oil-rich Middle East and Russia has also been an important factor at the margin in driving prices, as they are countries not constrained by price.
Negatives for the future include a decline in the growth of productivity per hectare – now around one per cent a year – and the heavy fertiliser demands of high-yield varieties. Another is shrinkage of cultivable areas due to urbanisation – a problem particularly acute in China. Upstream hydro-electric schemes and salination pose risks to deltas such as the Mekong.
In China, the rapid decline of the water table will force pricing of water, which will deter production of thirsty rice outside the well-water central and southern provinces.
But equally problematic for rice is the low level of trade, which results both from export subsidies by the likes of the US (third or fourth largest exporter) and high cost self-sufficiency goals in other countries.
For years, export subsidies helped suppress international prices, discouraging production for export by more efficient (mostly Asian) producers. Meanwhile, because the rice market was so thin, large countries focussed on keeping domestic prices to farmers relatively high to encourage self-sufficiency, at the same time as often subsidising consumption (including at the expense of other local crops). China exports just 1-2 per cent of its crop, India at most four per cent.
This vicious circle could be made worse by the recent price spike, which is encouraging major importers like the Philippines and Malaysia to throw more money at their relatively high-cost production.
This seems particularly silly in the Malaysian case, given its role as a large net farm exporter – particularly of palm oil. Malaysia also has relatively high labour costs, a drawback for rice which, unless on a large and highly-mechanised scale, is a labour-intensive crop. As for the Philippines, it has seldom been self-sufficient in rice because of its relatively small area of flat land and lack of major rivers for large-scale irrigation systems.
While some poor countries struggle to provide cheap rice, countries such as China are finding that some foods, such as potatoes, are easier to grow, equally nourishing and growing in popularity.
Meanwhile, high food prices generally are providing excuses for the US and EU to continue with their wasteful, market-distorting farm subsidy programmes. The effect of these can be seen not just in rice. The recent contrast with sugar prices shows how farm markets are upside. Sugar prices have fallen 35 per cent since the start of the year, and are at half 2006 levels. At 11 cents a pound, even the most efficient Brazilian producers lose money.
Yet sugar is the biggest contributor to bio-fuel production – the same bio-fuels that are supposedly causing a food crisis.
The answer to this apparent paradox is found both in the myriad of subsidy schemes sugar is subject to in the developed world (excluding Australia), and the protection that the US gives to its corn-based ethanol producers. The ethanol tariffs which push up demand for, and hence the world price of, corn, simultaneously drive down the price of sugar even as oil prices hit record levels.
There is no overall world food – or even bio-fuel – problem which could not be fixed by ending subsidies and freeing markets.
* Philip Bowring is Chief Correspondentof ATI Magazine.
Asia Today International June/July 2008 |
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