Surely taking corn out of the market will raise the price

I’ve been in conversation with David Benson, about the roleof biofuels in the current round of food price rises across the world.

We’vebeen chatting in the comments a couple of posts back . I don’t think that we aretoo far apart in our appreciation of the situation.

For what it’s worth, I think there are a number of pretty likelyreasons for the rise in food prices.

One of the most important is that the price of crude oil hasrisen over the past year from $65.5/bbl to $130/bbl . Thishits the price of food because the price of harvesting it, moving it,processing it, distributing it and taking it home is influenced by the price ofoil. This influence is greater in the developed world, where people eat moreenergy intensive processed food.

Another are distortions caused by trade and byprotectionism. Most countries want to operate their agriculture at a surplus,this keeps prices to consumers down (which helps keep the peace) and farmershappy, through subsidies. There are often difficulties where this process ends, when local farmers can not compete with imports and when these get more expensive .

Thirdly, there are distortions in the world market.Protectionism isn’t perfect and countries with too much excess production maysell their surpluses in foreign markets at or below their own cost ofproduction and transportation. That’s dumping, which spoils otherwise wellbalanced markets. (Fair trade is the best solution but there’s no time for that now)

Fourthly, there are futures contracts. These allow farmersto fix the amount of money they will get when their crops are harvested. Butalso they allow speculators* to enter the market and trade the contracts amongstthemselves.

*You may wish to call them investors.

Finally there is the level of production of crops and thedemand for crops.

I’d put more weight on this aspect, than David does. I dothis on the basis that taking 25% of the UScorn crop to use in ethanol in 2007 effectively reduced the amount of grain availablefor food use by 12% in the USlast year. (In 2007, the USproduced 334.5 million tonnes of corn and 83.6m tonnes were used in the ethanolbusiness).

The USDA says in its baseline prediction for 2008 to 2015for corn.

Market adjustments to the increased demand for corn toproduce ethanol extend well beyond the corn sector. Movements in relativeprices trigger supply and demand adjustments for other crops. Higher feed costsaffect the livestock sector, slowing increases in or reducing production of allmeats over the next several years.

If you reduced the volume of a big commodity like corn in abig producer it simply has to contribute to bringing supply and demand closerto balance. Once we get to balance then small distortions in supply will havebig impacts on prices. This may be why the drought in Australia isbeing used as one explanation behind high food costs. Australia accounts for about 1.3% of the worldgrain production, compared with 18% from the US.   

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One Response to Surely taking corn out of the market will raise the price

  1. David B. Benson 30 May, 2008 at 12:34 am #

    Well, it is complicated. Most of those production totals are for domestic consumption, only a fraction going into the international foods markets. Here is a somewhat superficial article about the current food crisis:

    http://news.bbc.co.uk/2/hi/business/7340214.stm

    entitled “Q&A: Rising world food prices” which avoids mentioning much the role of the World Bank and the IMF in bringing this about.

    In the longer term, surely food, fibre and biofuels are all going to compete against each other for the same soils (somewhat), water and NPK fertilizers. But so far in the current food crisis, the U.S. (stupid) ethanol-from-corn policy has, it seems, only strongly affected Mexico and Haiti. The Philipines, where the problem is lack of rice imports, is due entirely to failed government programs egged on by the World Bank, etc.

    That the Argentine, the Ukraine, and India have essentially ceased food exports can hardly be blaimed on biofuel production, nor their government’s malfeasance. There are a few encouraging signs from Africa (Malawi) and also most of South America. Maybe with this the World Bank will adopt more compassionate, workable agriculature policies in the future. I’m not holding my breath.

    All that said, there is ample poorer-quality land available in Africa and South America for growing the biomass for appropriate biofuels. If done properly this will increase wealth and food security for peasants and ex-peasants alike. If done poorly, the only benefits will acrue to a money class, as in (to pick one example out of many), Haiti.

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