The big increase in food prices over the last six months or so raises lots of issues, of which I’ll try to cover a few.
The first arises from the fact that prices for commodities, including oil as well as most ag commodities, are typically quoted in $US. In a situation where, for obvious reasons, the value of the $US is declining against all major currencies, this can be quite misleading. Measured against the euro, the currency of the world’s largest unified economy, the increase looks a lot less steep. The declining usefulness of the $US as a unit of account is another step in the process of transition away from a world in which the $US is a reserve currency. More on what will replace it soon, I hope.
In substantive terms, the increase in $US commodity prices is a big problem for the many Asian economies that have pursued some kind of peg to the $US as a means of maintaining export competitiveness. The adverse impact on domestic consumers is now becoming obvious, and the only solution is to abandon the dollar peg and allow an appreciation. China is already moving in this direction.
A second important point is the impact of demand from the biofuel sector, particularly for corn in the US. The idea of making biofuels from food crops was always problematic and the subsidy regime in the US makes it more so. The current food crisis should make subsidies for food-based biofuels politically and economically untenable, pushing the industry away from this easy short term solution and in the direction of sources such as switch grass, grown on marginal or non-arable land.
Finally, the biggest increases have been in wheat prices, reflecting the drought in Australia and in some other wheat producing countries (Kazakstan?). It seems likely, though it’s still impossible to prove, that human-induced climate change is increasing the frequency and severity of drought. So, it’s important not to regard climate change as a problem for the future. In all probability, adverse effects are already here.
John Quiggin 
Add to that Chinese wanting a meat rich diet and things get really interesting.
I wonder if the dark browns think we will have business as usual if or when food riots break out in China and across the world?
Maybe this will be the straw that broke the camels back as far as food subsidies and they will start allow a fair trade system instead of the current biased system.
PS
Global food system ‘must change’
http://news.bbc.co.uk/2/hi/science/nature/7347239.stm
The global agriculture system will have to change radically if the world is to avoid future environmental and social problems, a report has warned
Sixty countries just signed a UN document calling for more eco-friendly agricultural production techniques. Australia was one of just four countries which refused to sign, “citing concerns over trade”. (Looks like the others were Canada, USA and Britain). So much for our new pro-UN and pro-environment government?
Australia’s agriculture sector remains immune to share market volatility, and is tipped as “the most attractive sector on a risk-return basis for 2008”. Whoo hoo. At least we’ll all have a nice portfolio in our hands as our planet hurtles into oblivion.
Meanwhile George Monbiot suggests we should cut way back on meat and eat Tilapia instead: “This is a freshwater fish that can be raised entirely on vegetable matter and has the best conversion efficiency — about 1,6kg of feed for 1kg of meat — of any farmed animal.”
Talapia is currently listed as a noxious pest in Queensland. Could we kill two environmental birds (or fish, even) with one stone here? Maybe not, because “in the wild they tend to breed in large numbers and not grow large enough to be of commercial size”.
I’m starting to wonder how much a little plot of land on some remote Philipines island might cost… Our global political and financial systems seem totally stuffed at the moment.
BTW (via Antony Loewenstein’s great little blog) Tom Dispatch has an excerpt from Michael T. Clare’s new book, “Rising Powers, Shrinking Planet: The New Geopolitics of Energy”. He details five key forces in the new world order which will change our planet:
1. Intense competition between older and newer economic powers for available supplies of energy,
2. The insufficiency of primary energy supplies,
3. The painfully slow development of energy alternatives,
4. A steady migration of power and wealth from energy-deficit to energy-surplus nations, and
5. A Growing Risk of Conflict.
That last one is the big one, I would say. If we work together as a planet of equals, we can turn this crisis into a positive. But that is going to take some seriously inspiring political leadership at an international level. Not much sign of that anywhere on the planet at the moment.
I’m an exporter, I sell software developed in Australia primarily to Americans and priced in US dollars. I’d love to transition away from Useless Stupid Dollars, but I can’t see it happening anytime soon.
BTW, the current economic environment is torture for my company and companies like mine. We’ll all be gone soon and no-one will miss us. I’m convinced Australia is destined to become a quarry for Asia.
The authority on all things biofuels is Robert Rapier. Read his CV — he knows his stuff. RR is also decidedly pessimistic about cellulosic ethanol from switchgrass. According to RR the only biofuel that’s both scaleable and has a reasonable energy return is sugarcane ethanol.
Removing the bio-fuel industry subsidies is a great idea but why stop there? Why not remove all agricultural tariffs and subsidies? We could start with the CAP.
ghandi said: “… a little plot of land on some remote Philipines island… ”
Well above sea level, I hope!
SimonMJ wrote: “I wonder if the dark browns think we will have business as usual if or when food riots break out in China and across the world?”
The local army shoots the protesters. The occasional third world government gets overthrown. A few million non-Caucasians starve.
To some people that IS business as usual and an acceptable price to pay to maintain western lifestyles. Just dress it up with some rhetoric about how the free market will save us all eventually.
“Maybe this will be the straw that broke the camels back as far as food subsidies and they will start allow a fair trade system instead of the current biased system.”
Food subsidies make food CHEAPER. This has been the recurrent complaint of the anti-globalisation crowd – cheap allegedly dumped food from the developed world suppresses the prices received by third world farmers.
Currently, third-world farmers are doing quite nicely – at the expense of the urban poor and landless rural workers.
There are a whole bunch of reasons why agricultural subsidies are bad but we need to have a clear understanding of how they operate and what their effects are.
When this issue arose in another thread I mentioned the rise in rice prices in south Asia.
I think it’s instructive to look at what’s happened there because, rice is not a major developed world export and rice isn’t used for biofuels. (Although in theory I suppose rice fields could be being converted to biofuel crops such as oil palms.)
Rice prices have risen in parallel with other food prices and there seem to be several factors driving that:
1. Increased input costs, particularly for fertilisers and fuel;
2. Increased demand, primarily to support increased meat production;
3. two successive years of poor rainfall;
4. reductions in the area of rice production with land being converted to other more profitable crops or converted to urban use.
5. The old back-up systems of state-subsidised distribution of staples to the poor have been closed down or scaled back during the relatively affluent period of the last decade or so – in part due to pressure from the IMF.
I think it important that we understand the role of biofuels in the current situation and show that biofuels are only one of a range of factors at work. Otherwise we’re goign to end with another “Greens kill babies” Big Lie like the nonexistent ban on the use of DDT to control malaria.
The role of increasingly expensive water and fossil fuel inputs needs to be emphasised. US studies suggest that the calorific value of food is just a tenth of the energy input via tractor fuel, nitrogen fertiliser (derived from natural gas), electricity and the additional requirements of processing and distribution. Another key input, phosphate, is in world decline as witnessed by Incitec Pivot’s skyrocketing share price and the revival of mining on Nauru.
Whether drought and insect tolerant GMO foods can make up the gap is arguable. We’re going to have to eat less red meat, buy local foods in season rather than exotics and recycle the water, nitrogen and phosphorous that passes through our innards.
On a slightly different note, apparently the way to go with Ethanol is deriving it from waste products. There’s a small startup company in the US that can apparently produce Ethanol from waste products like garbage and plant waste etc. for something like less than 30c per litre, which is apparently around half the cost of producing petrol. Apparently it’s something like 800% efficient too (ie. produces 8 times the energy output than it requires for input).
Anyway, ethanol’s not a bad medium term alternative for the world’s dwindling fossil fuel supplies, and this technology appears to negate any concerns that currently surround ethanol production.
The company that owns the technology is called Coskata and they are apparently being backed by GM in the face of the CAFE ammendments for 2020.
Up in Qld there were floods and down here in sunny SA our Murray Water allocations are to be <=4% starting July this year. Where does the upstream water go? (Rhetorical question)
Seriously, there are some ridiculous allocative issues to do with water and the products grown with it in Australia. Meanwhile, river city councils and rural viewspapers seem unable to grasp the full gravity of the situation – the cargo cult mentality (there’s always been water flowing freely down the Murray, so therefore there always will be) here is very depressing. God help us if they decide to use rice for ethanol in this country, but hey why not, then it can be subsidised not once but twice.
Some developing world farmers are doing quite well – soy farmers in Brazil and oil palm farmers in Indonesia. But these are not the small subsistence farmer that you find in much of the developing world. These are corporate sized farming enterprises feeding both the obscene meat eating habits of Europe and the cosmetic obsession of the developed world. Meat eating in particular is an energy, water and land intensive exercise. Reducing the amount of meat we eatincreases the amount of food available to us all. Equitable distribution, of course, is another matter.
Don O. I was wondering how Adelaide’s milk supply would be affected if they can’t irrigate the river flats along the Murray. Maybe the cows can be trained to make powdered milk. There seems little prospect of increased river flows soon and any water from coastal desal will be too late and too expensive for broadacre farming. Thus more and more of Adelaide’s food will have to come from interstate. As you say the Croweaters seem strangely nonplussed about their dire outlook.
Ian Gould Says:
We should recognise that we’re going to get the Big Lie anyway. It’s Bush who’s diverted 30% of the US corn production into energy negative ethanol production. The US right and their camp followers in Oz will blame the greens for Bush’s stuff-up as surely as night follows day.
That shouldn’t halt discussion about the stuff-up, because it’s going to happen anyway.
30% of US corn production is huge.
More at Econbrowser:
More still from Yves Smith at Naked Capitalism:
(I note that Yves also cites both Econbrowser and this very post by John Quiggin, giving us a very neat circle). 🙂
The topic of this thread takes a global perspective and brings out resource allocation problems associated with ‘uneven development’ – a problem about which Stephen Hymer (and possibly others) wrote before the big march forward to the past in the application of the history of economic thought happened in the late 1970s. On this and other blog sites, this march forward to the past is associated with the term ‘neo-cons’ and, at times, with ‘economic rationalism’. The topic is listed under ‘Economics – General, Environment, and there is a reminder of possible feedback relationships between human induced climate change and food supply.
I have a request. I am asking John Quiggin whether he would be kind enough to stress at the upcoming 2020 event that the idea of separating ‘the environment’ from ‘economics’ is economic nonsense.
My request may appear to be a request for stating the obvious because economics, as I understand it, is concerned with the material welfare of humans under alternative institutional environments and the finiteness of resources (‘in the long run’) is explicitly acknowledged in neo-classical theoretical models of economies, going back to Arrow-Debreu in the 1950s.
The crucial dependence of ‘prosperity’, in an economic as distinct from a merely monetary or financial sense, on the environment seems to be taken as axiomatic by most people I have met in my life. However, the ‘metaphor’ of ‘economic growth’ seems to be deeply embedded in the public language. For example:
According to the smh, a recent ANU survey found that:
“Almost one in five of those polled listed the environment as their number one concern, four times as many as a decade ago. The economy came in second, and water third.�
And,
“Labor senator Kate Lundy, who attended the launch, said the Government would take the message of the poll on board.
She was surprised the environment was considered more important than the economy, and said environmental issues were clearly “worthy of a lot of policy thought and deliberation”.
http://www.smh.com.au/news/environment/our-no1-worry–the-environment/2008/04/16/1208025271917.html
I think that the whole biofuel thing is too complicated and technical in its ramifications to be prescriptive about. It may have a role to play or may not. Subsidies for any given crop is bound to be a very bad idea. We simply do not know where the technology is going to take us yet. While the current state of play does suggest that ethanol from sugarcane, which is not that great a food anyway, is the best of a bad lot. Ethanol from wheat or maize is just not going to work. It belongs to the useless symbolism and rural rorting wastebasket.
Agriculture’s predicament is that is most vulnerable to the multiplier effects of rising fuel costs. The very thing that will drive the search for alternatives.
I believe that the government should stay out of the portable transport fuel market. Every rise in the price will bring in a new tier of possible technologies. If fuel prices have to go to $3.00 or more a litre so be it. Spend the subsidies monies on basic research.
Food is a different matter – it is looming as a geo-political disaster. The vast sums wasted on “Defence” should be urgently turned to ensure that the world has enough to eat.
A good point from Raj Patel in The Guardian:
For anyone who understands the current food crisis, it is hard to listen to the head of the World Bank, Robert Zoellick, without gagging…The reason we’re seeing such misery as a result of this particular spike has everything to do with Zoellick and his friends.
Before he replaced Paul Wolfowitz at the World Bank, Zoellick was the US trade representative, their man at the World Trade Organisation. While there, he won a reputation as a tough and guileful negotiator, savvy with details and pushy with the neoconservative economic agenda: a technocrat with a knuckleduster.
His mission was to accelerate two decades of trade liberalisation in key strategic commodities for the United States, among them agriculture. Practically, this meant the removal of developing countries’ ability to stockpile grain (food mountains interfere with the market), to create tariff barriers (ditto), and to support farmers (they ought to be able to compete on their own). This Zoellick did often, and enthusiastically.
Without agricultural support policies, though, there’s no buffer between the price shocks and the bellies of the poorest people on earth. No option to support sustainable smaller-scale farmers, because they’ve been driven off their land by cheap EU and US imports. No option to dip into grain reserves because they’ve been sold off to service debt. No way of increasing the income of the poorest, because social programmes have been cut to the bone.
Steve Hamilton says “On a slightly different note, apparently the way to go with Ethanol is deriving it from waste products” This may well work on a small scale but can the volume of waste be maintained on a sufficiently large scale to make it cost effective. You need the inputs to get the outputs. I would hope this does work but I need to be convinced.
Where does the upstream water go?
Most leaks from poor irrigation infrastructure, in Victoria!
While building “centres” and generally spending on “things to get me elected” the infrastucture for irrigation on the Murray was neglected. While this was going on SA was piping its irrigation channels.
Now the rest of Australia has to take up the slack.
Now the Vic govt. has the temerity to be drawing water from the Murray to supply Melbourne!
Paying to pipe water 70 kms to Melbourne weirs while twice the water leaks to ground water in northern Victoria is madness. To further aggrevate me open channels with their myriad faults, like evaporation being in the order of 6 feet a year, are denying the environmental flows, the Coorong is damn near dead.
To top it off they got 1 billion dollars more in the latest handout to subsidise their inefficiency.
One very pissed off fluff4
rossco Says: “This may well work on a small scale but can the volume of waste be maintained on a sufficiently large scale to make it cost effective. You need the inputs to get the outputs. I would hope this does work but I need to be convinced.”
Apparently the process can work with virtually any organic input, ie. carbon-based input. They are on track to open a plant in the next 3 years with an expected output of about 380 ML (380 million litres) per annum. The Energy Independence and Security Act requires the production of around 26 GL (26 Billion litres) in the US per annum by 2012. Of this, around 10 GL will come from food-based sources. So just one of these plants could be supplying almost 2% of the US total ethanol production by the time it’s up and running. 25 plants and you no longer need to source ethanol from any food-based source; and I think the concensus is that given the lax nature of the standards of inputs required (ie. any carbon-based source) there is unlikely to be an issue in sourcing the required inputs. As a sidenote, you can even apparently use old tyres as an input!
Like any new technology, it probably won’t all go perfectly to plan, but it looks promising. At the very least it seems like a far more plausible idea to use waste to produce ethanol, rather than food; especially when the process is more than 8x more energy efficient that corn-based ethanol production, half the cost of petroleum production, and requires a third the amount of water required by corn-based ethanol production.
“On November 6, 2007 Range Fuels broke ground on our first commercial-scale cellulosic ethanol plant near Soperton, Georgia. This plant will be the first in the United States to produce commercial quantities of ethanol from biomass, which includes all plant and plant-derived material, such as wood, grasses, and corn stover.
We are focused on utilizing leftover wood residues from timber harvesting that serve no useful purpose, converting them to about 20 million gallons of ethanol and other alcohols per year, initially.”
http://www.rangefuels.com/our-first-plant
Also, sugarcane works well as an ethanol feedstock in Brazil: “”Sugar growers here have a greener story to tell than do any other biofuel producers. They provide 45% of Brazil’s fuel (all cars in the country are able to run on ethanol) on only 1% of its arable land”.
http://www.time.com/time/magazine/article/0,9171,1725975-2,00.html (and ignore the rest of Time’s ignorant rant titled, stupidly, “The Clean Energy Scam”). It’s estimated somewhere that Brazil’s sugarcane ethanol has an EROI of better than 8:1, higher than for gasoline although not necessarily a terribly meaningful comparison.
On tele recently, a crop I learned to despise, sugar cane, is apparently feeding electricity into the grid, by processing the waste.
They have changed the practice of wasting water and are generally getting their act together, most encouraging. Their waste water ran into tidal rivers on the coast of NSW. Plus the ground being used gives up acids when cultivated for sugar. With all the other nasties they use the enviroment suffered no end, maybe worse than bananas.
fluff4
Maybe now the farmers have a chance to make some money without polluting everything.
frankis – “Also, sugarcane works well as an ethanol feedstock in Brazil: “â€?Sugar growers here have a greener story to tell than do any other biofuel producers. They provide 45% of Brazil’s fuel (all cars in the country are able to run on ethanol) on only 1% of its arable landâ€?.”
Not so – please read this:
“For Brazil, ethanol is therefore 0.30/3.6 = 8.3% of crude oil energy. This fraction has been fairly constant.”
The 40% figure comes from gasoline use which is not the whole fuel picture.
“In March 2006, the volumetric fractions of all transportation fuels consumed in Brazil were
* Diesel fuel = 53.9%
* Gasoline = 26.2%
* Ethanol = 17% (40% of gasoline energy)
* Natural gas = 2.9% ”
The true picture is somewhat different. All that destruction of rainforest for 8.3% is not a good result.
Sorry forgot to include the reference:
http://www.hubbertpeak.com/BR/
Ender, do you know of any specific examples of rainforest being cut down to grow sugarcane?
I should probably include a link to the website of the company that I was referring to above;
http://www.coskata.com/
And also a link to a press release from General Motors regarding Coskata;
http://media.gm.com/servlet/GatewayServlet?target=http://image.emerald.gm.com/gmnews/viewpressreldetail.do?domain=589&docid=42311
Yes and no Ender. I agree that the paragraph I quoted from Time easily misleads a reader into thinking that ethanol represents a greater fraction of Brazil’s liquid fuel economy than it really does. On the other hand I did refer to the piece as “Time’s ignorant rant” so perhaps people would have been prepared to read it critically 🙂
As Wizofaus is intimating to you, sugarcane does not do well on rainforest soils so the 1% of Brazil’s croplands given over to it does not come (directly) at the expense of rainforest. There’s plenty to think about with biofuels but I see Brazil’s results with so much ethanol from such a small fraction of their land as a more good than bad story.
I read some time ago at http://www.theoildrum.com/ that the reason Brazil produces ethanol from sugar cane so efficiently is that they harvest the cane manually. I think that the time for Kanakas though is past.
I did a fair bit of research on the sugar inudstry a few years back and so far as I know, the claim that Brazil uses manual labor is simply false.
The Brazilian sugar industry is hugely efficient because they have gigantic (and highly mechanised) plantations which produce as much sugar as the entire Australian industry.
Donald O I think you’ll find that Qld only supplies about 5% of the water in the Murray-Darling system.
Most of the water you may have seen on the tele was in the Fitzroy River system (the second largest in Australia) and rivers further north.
Joe, I recall hearing a few years ago from a bloke who would know that the Brazilian sugar industry is more efficient than ours and that we will never catch up.
The factory that used to make sugar cane harvesters in Bundaberg was first bought by an American company which later closed it down and moved manufacturing to Brazil.
South Africa cuts cane by hand, as does much of the Caribbean & lots & lots of other places. Brazilian farmers are incredibly efficient, Mostly of Japanese or Swiss German stock.
“The idea of making biofuels from food crops was always problematic.”
Land is fungible, so the idea of making biofuels is problematic no matter what the source of vegetative material. (Biofuels from municipal solid waste might be a good idea, however.)
Even worse is the idea of using carbon stocks (existing carbon sources such as wood) rather than flows (annual vegetative growth.) In the U.S., carbon policy is getting worse, if that’s possible.
Quite a lot of biofuel/ethanol production requires more BTU’s than it produces.
Quite a lot of biofuel/ethanol is inefficient and burns dirty (ie, blows soot out the smokestack like a loaded gravel truck on a steep uphill grade)
Crops are an annually renewable resource.
The agricultural potential of Australia is considerably untapped.
Perhaps we’ll ride to prosperity on the corn cob’s back?
Brazilian cane cutters have to compete against harvesters – they work long hours and earn about $330/month.
That wouldnt work here.
I’m going to get a little speculative here – what effect, if any, is biofuel production having on fuel prices.
If prices would be even higher in the absence of biofuels, you could argue that there’s an offsetting benefit to consumers and farmers.
Unfortunately, at the moment, I don’t have the time to look for biofuel prices or production volumes.
frankis – “There’s plenty to think about with biofuels but I see Brazil’s results with so much ethanol from such a small fraction of their land as a more good than bad story.”
However Brazil is the exception rather than the rule. Abundant rain combine with climate and soils to produce probably the best conditions to grow the highest yielding ethanol crop. This cannot be transferred as an example to other countries with poorer soils, less rainfall and less favourable climate.
Ethanol is far more a farm subsidy than a solution to peak oil. Is more about preserving the status-quo.
Ethanol from corn, especially subsidised corn, is a travesty. Ethanol from lignocellulose is an idea with a big future.
The issue with Biofuels is that they are potentially “cheaper” for consumers (mostly because of subsidies I would suspect), but at the same time they are siginificantly less efficient; they increase fuel consumption in passenger vehicles by something like 30%. So the value equation is completely balanced by the increased fuel usage. Not to mention the significant engineering upgrades required for engines to sustainably run on high-grade ethanol blends (ie. ethanol eats pretty much any rubber or plastic part that it comes into contact with). This has been estimated at around $US1000 per vehicle.
So they’re not really a compelling alternative to petroleum in my view; and by the time that oil stocks dwindle to the point that their cost becomes prohbiitvely high, it’s likely that other solutions such as plug-ins and hydrogen fuel cells will have become more dominant. I don’t really see ethanol as having any medium- to long-term role.
Everyone loves demonising petroleum, but I think everyone needs to take a minute to think of its miraculous value; $77 worth of petrol contains enough stored energy to launch a two-tonne car 100km into the air. And all for $1.50 per litre; Milk, Beer, Coca-cola, fruit juice all cost more than that.
wizofaus – “Ender, do you know of any specific examples of rainforest being cut down to grow sugarcane?”
No however Brazil’s farming practice leaves a lot to be desired.
http://www.time.com/time/magazine/article/0,9171,1725975-1,00.html
“In Brazil, for instance, only a tiny portion of the Amazon is being torn down to grow the sugarcane that fuels most Brazilian cars. More deforestation results from a chain reaction so vast it’s subtle: U.S. farmers are selling one-fifth of their corn to ethanol production, so U.S. soybean farmers are switching to corn, so Brazilian soybean farmers are expanding into cattle pastures, so Brazilian cattlemen are displaced to the Amazon. It’s the remorseless economics of commodities markets. “The price of soybeans goes up,” laments Sandro Menezes, a biologist with Conservation International in Brazil, “and the forest comes down.””
There are flow on effects from biofuels that lead to the destruction of the rainforest.
Ender, er.. have you ever been involved in Primary Production?
I mean, beyond reading a few anti-McDonald’s pamphlets?
frankis at #22: Are you BilB under another name?
Robert Rapier has debunked the “Brazil 45% myth” several times, including here:
steve at the pub – “Ender, er.. have you ever been involved in Primary Production?”
er no – do I have to have been? The article I quoted from was about biofuels and how they are not anything like green fuels. Mostly they result in higher CO2 emissions. The Canadian Tar Sands are much the same. Biofuels are mostly about keeping the fossil fuel dream alive and making a few people a lot of money in the process.
Ender, yes I’m aware that corn ethanol production in the US is leading to rainforest destruction, but I don’t see the link to sugarcane ethanol production.
Ender: Your post at #40 would indicate you have never been involved in primary production.
I was being naughty, asking a question which had answered itself.
Carbonsink (eager would-be demythologiser): Ender debunked Time’s crummy wording 24 hours ago at comment #24 above.
Robert Rapier knows his crude oils OK but he’s alarmist on prospects for new technologies. Sometimes you’d think innovation ended with the dinosaurs.
And Brazil is overall energy self-sufficient with a huge fuel-ethanol economy sustained on only 1% of its ag lands, while Australia and the US are in deep energy debt.
Um, I’m fairly certain Australia is a net energy exporter, measured in either dollars or joules. That might include uranium, which is cheating a little, seeing we can’t actually use it ourselves.
I’m as concerned as the next guy about the effect of our increasing dependence on foreign oil, but I don’t think it’s very likely to cause us to become a net energy importer, and quite probably won’t even significantly increase our trade deficit.
See this for instance: http://www.austrade.gov.au/Oils-ain-t-oils-/default.aspx
Oh right. I was trying (and succeeding!) to forget about coal (thanks wiz).