Grain prices have suddenly doubled worldwide and are expected to remain at these levels. For the billions of people who spend a large percentage of their income on food, mostly the urban poor in developing countries, this is/will be a disaster. Starvation and misery, civil unrest, wars spilling across borders and environmental degradation as marginal land is forced into food production will result from this increase in grain prices.
This escalation in grain prices is a result of an imbalance between supply of and the demand for the world’s grain stocks caused by:
- increased demand for grain-fed protein as Asian countries increase their standard of living and aspire to the standard of living enjoyed in the developed countries;
- increased demand from an increasing world population;
- decreased supply as higher oil prices increase the cost of growing grain;
- decreased supply of grain due to a series of droughts; and
- decreased supply resulting from a rapid increase in the percentage of arable land used to produce biofuels.
Other than biofuel production, we do not have much control over these factors imposing on the grain supply-demand equation.
As in the past, we are relying on increasing agricultural productivity to balance this equation. Greater worldwide investment in agriculture science and infrastructure, together with moderate price increases, should ensure success in meeting this uncontrollable demand.
It is the supply impost and rapid increase of the food to fuel industry, namely the use of arable acres for first generation biofuels; the one factor we can control, that agriculture is struggling to come to terms with.
This food to fuel industry is being driven by the mandates and subsidies put in place by governments of the developed world.
About 2,000 million tonnes of grain are produced annually in the world. The USA has mandated that 150 million tonnes of corn be turned into ethanol each year. Add similar mandates across the developed world and we can see that at least 10 per cent of the world’s grain is mandated for ethanol production.
Further add the acres of sugar beet, sugarcane and cassava used for ethanol, the acres of canola, soybean and palm oil used for biodiesel, and we can clearly see that the percentage of arable land taken from grain production by first generation biofuels is a very significant factor in the doubling of grain prices.
With oil currently at about US$100 per barrel there is the real possibility that it will be economically advantageous for the developed world to outbid the poorer countries for the world’s grain and so lead to the greatest disaster yet known to mankind.
The advertised benefits of first generation biofuels, namely the food to fuel industry, can be largely discredited.
- The increase in fuel security is insignificant as just a 5-10 per cent replacement of fossil fuel would require the conversion of much of a country’s grain production.
- The CO2 reduction benefits of first generation biofuels have been shown to be negligible to negative (Searchinger, et al, 2008, Science 319,1238).
- Owners of arable acres may be able to retire in comfort but some in agriculture will lose. For example, to meet a price point in Asia, higher grain prices for a feedlot will mean that the operator can only pay lower prices for the steers that are to be fattened.
- Food price inflation resulting from high grain prices may be manageable in the developed countries but in the developing countries it will tear them apart economically and politically.
- Higher prices for grain may not in fact lead to the expected worldwide supply response and the modernisation of agriculture in developing countries. This is because to avoid political unrest, riots and worse, many developing countries hold their domestic grain prices down by taxing, limiting exports and subsidising imports. This means their farmers do not receive the price signals to increase production, nor the increased income to purchase the higher priced fertiliser and other inputs.
- Suggestions that grain ethanol production is necessary as a stepping stone to the introduction of cellulose ethanol appear unfounded. The grain ethanol infrastructure will not be located where needed for the production of cellulose ethanol (*see below). With cellulose ethanol potentially a significant player in combating climate change, public acceptance is a given, with no need of a grain ethanol stepping stone.
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