The global grain bubble
As prices soar, riots rise. But it's not for lack of crops. The cause? A rush to biofuel and grain-fed meat.
from the January 18, 2008 edition
Record prices for grain from corn to rice have ignited food riots from Jakarta to Rome. In Pakistan, troops now guard wheat stocks. China and Russia have imposed price controls. Connect the dots and there's a need for a fix to a crisis that, strangely, isn't caused by smaller harvests.
No, the main reasons for a long-term bubble in grain prices lie largely in a number of dubious human actions, related to heightened competition for grain as either fuel or feed.
One reason is an ill-conceived dash by both the United States and Europe to use grain and valuable farmland for biofuels, motivated more by powerful farm lobbies than concerns about global warming. (Telling factoid: To fill up the tank of one SUV with ethanol would require enough grain to feed one person for a year.)
Then there is the rising demand for grain-fed meat by an expanding middle class in China, India, and other fast-growing economies. (Factoid: To produce one pound of meat can take up to eight pounds of grain and a loss of land to other agricultural uses.)
And with world oil prices at nearly $100 a barrel – up 57 percent last year alone – the costs of food transport and petroleum-based fertilizers are also driving "ag-flation." (Factoid: In the past year, the world has seen more protests over higher food prices than over fuel hikes.)
If bad weather has played any part, it was mainly in Australia, where a long drought has reduced that nation's ability to export food. But worldwide, last year's production of cereal crops was the highest ever. The ever-improving "green revolution" in agricultural technology, such as genetically altered seeds, keeps on boosting productivity at farms both big and small.
As with oil, though, the supply of grain can't keep up with new demand, especially for biofuels and meat. One global index of food prices is at its highest in more than a century, with the largest increase just last year. The effects on political stability in many countries – if not the potential for spillover trouble – are worrisome.
Last year saw mass protests in Mexico over the skyrocketing prices of tortillas, rice riots in Senegal, and street demonstrations in Italy over higher prices for pasta. Many governments have slapped price controls on food or imposed limits on exports of grain (such temporary measures, done for political purposes, usually backfire later in the economy).
So far this year, higher wheat prices in Pakistan have led to smuggling and a need for troops to guard grain reserves. In Indonesia this week, 10,000 sellers of soybean products stormed the government palace to protest high prices.
Much of the blame for high prices can be attributed to the US energy bill passed last month that mandates an increase in ethanol production from the current 9 billion gallons a year to 36 billion by 2022. The anticipated rise in corn farming – and expected crowding out of other crops – has helped create yet another spike in grain prices. (Half of the world's corn is grown in the American Midwest.)
Is the era of cheap food over? Or will farmers expand production enough to bring back the historic decline in food prices? Either way, world peace may depend on how leaders respond and help burst this bubble.