Expensive tastes: the growing costs of food

Surging agricultural prices – and popular anger -- are prompting governments around the world to freeze prices or enact export bans. Policymakers also are taking another look at biofuels and GM crops, write Javier Blas and Jenny Wiggins.

John Beddington, Britain’s chief scientific adviser, had been in his job for just two months when he outlined an unnerving scenario for his new government employers. The world, he argued in early March 2008, faced an enormous problem – one on a par with climate change – that policymakers were nonetheless ignoring: food security.

As prices for agricultural commodities, from wheat to milk, have surged globally with unprecedented speed, social unrest and hunger have emerged in different parts of the world, challenging rich and poor countries alike and forcing governments to consider a variety of measures to bring prices down. Long subject only to the disciplines of the market, producers now increasingly find themselves contending with higher import tariffs, export bans and price freezes.

Rising food costs have also called into question government support for biofuels projects that divert needed arable land from food production, while putting pressure on many sceptical governments to review their opposition to genetically modified (GM) crops, which increase yields and drive down food prices.

“This is a key political issue that is about every country,” says Lennart Båge, president of the International Fund for Agricultural Development (IFAD), the United Nations organisation set up to finance agricultural development projects.

While Båge says that a common view on the solution has yet to emerge, many governments agree that support for biofuels and opposition to GM crops must be tempered by the reality that food prices have reached crisis levels. He points to a consensus that investment in agronomics, largely forgotten in the past two decades, would need to rise if the world wants to see a repetition of the “green revolution” of the 1960s, when crop yields jumped thanks to the spread of irrigation, fertiliser and better seeds, depressing prices and freeing millions from hunger.

The danger, experts argue, is that many policymakers have a short-term view of the crisis and are pursuing short-term solutions that could prove harmful in the long run. In spite of dramatic warnings from institutions such as the World Food Programme (WFP) – which is running out of money to feed the world’s poorest – many governments, particularly those facing elections, have so far merely attempted to buy time.

Food-importing countries such as Russia and China have imposed retail price freezes on staples including milk, bread and eggs. Meanwhile, France and Australia have launched national inquiries into rising food prices, pressuring their largest supermarkets and food producers into absorbing cost jumps. Exporters of food such as Argentina and Kazakhstan are also taking action, imposing onerous foreign sales taxes or outright export bans to keep their local markets well supplied.

The worry is that measures such as banning exports could eventually do more harm than good, because by depressing prices artificially they make agriculture investments less profitable and thus lower future production. Investors in new farms, for example, may be losing confidence as a result of the increasingly unpredictable politics, says Gilles Mettetal, director of agribusiness at the European Bank for Reconstruction and Development (EBRD).

Most governments now agree that the astounding surge in food prices last year – the cost of food rose almost 40% globally, according to the United Nations Food and Agriculture Organisation (FAO), and has continued to rise this year – is structural, meaning that prices will not retreat to former levels. This is because newly wealthy consumers in countries such as China and India, who can increasingly afford to improve their diets, as well as the biofuels industry, are expected to maintain a rapacious demand for basic food commodities such as wheat, corn and soya.

Joachim von Braun, director-general of the Washington-based International Food Policy Research Institute (IFPRI), says the current food price crisis is already more severe than that of the early 1970s, when prices rose on the back of an oil shock and poor global harvests. “[The crisis] will be worse and more long-lasting than [in] 1974,” von Braun says.

Jacques Diouf, director-general at the FAO in Rome, has taken a leading role in raising awareness among governments that a long-term solution is needed, warning that without action the world will witness social unrest and a rise in global hunger.

The FAO hopes to encourage a co-coordinated policy response in the second half of the year, at least as regards the impact of biofuels and climate change. It has convened a high-level conference in Rome in June, which would bring together policymakers in the area. “Agriculture is back into the political agenda,” says Alexander Mueller, assistant director-general at the FAO in Rome. “We want to take the triangle of food security, biofuel and climate together because they are closely linked,” he says.

Ahead of the meeting, there are signs that a new consensus among policymakers is beginning to emerge. Båge says, for example: “There is a much more sceptical [view] about biofuels than six months or a year ago.” He adds that, even if GM crops still face opposition, “there is a growing realisation that we need to use science in agriculture.”

While the debate about GM is just starting, with proponents of the technology timid in the face of strong public opposition, the political backlash against biofuels is gaining momentum, particularly in Europe. Båge says: “There is a gradual realisation that [biofuels] are not the panacea previously thought.”

Even in Washington – until now a strong backer of using biofuels such as ethanol to cut its dependence on Middle East imported crude oil – there is a growing recognition of the problem. After corn prices in February 2007 reached an all-time high above $5.70 a bushel, US president George W Bush said: “If you look what is happening in corn, you’re beginning to see the food issue and the energy issue collide.”

Although Bush stopped well short of a policy U-turn, analysts say his comments suggest Washington is close to cutting the 51-cents tax credits for domestic ethanol or lowering the 54-cents tariff against Brazilian ethanol. Both moves could slow the rapid expansion of the US biofuel industry.

Bush’s comments came after the US Department of Agriculture (USDA) warned that the ethanol industry would this year consume almost a third of the country’s corn crop, up from 25% in 2007. Joseph Glauber, chief economist at the USDA, has warned that “unprecedented expansion” of the biofuels industry would keep the agricultural market tight: “Prices will remain high for the next two to three years.”

Policymakers said the backlash would not put an end to the biofuel industry but could slow its expansion in the United States and Europe, while concentrating production in developing countries such as Brazil, where it is more efficient. In Germany, for example, biodiesel production is already down after the government started raising taxes on the sector in late 2006 and imposed a second round of higher taxes last January.

Economists and food industry executives also believe governments will have to temper some of their suspicion of GM crops if they want to keep food prices low. Using GM crops to make food has traditionally been viewed with suspicion by consumers in most western European and some Asian countries, including Japan and South Korea.

Hardi Vieira, a development economist at the Amsterdam-based Common Fund for Commodities (CFC), a branch of the United Nations, says GM crops could be a solution to the shortages of agricultural raw materials created by rising global demand for food. “Governments have to respond [to rising food prices] by allowing the import and production of GM crops.”

Last year, 23 countries planted biotechnology crops, including 12 developing countries, while global plantings rose 12% from the 2006 level to hit 114.3 million hectares. That is a ten-fold increase in the past decade. The US has been planting GM varieties of corn and soya for the past decade, and these have raised crop yields by 15%.

Meanwhile, countries that long resisted GM crops are accepting them. In February, a group of leading South Korean food companies agreed to import GM corn for use in food products for the first time, breaking a social taboo in the Asian country.

Marie-Christine Ribera, senior policy adviser with Cogeca, the European farmers’ group, says farmers in the European Union want to be “on the same playing field” as farmers elsewhere and have the freedom to choose whether they plant GM crops or not. “We are highly dependent on imports for feeding our animals … the immediate and urgent problem is how to make sure we can secure the availability of foodstuffs.”

Iain Ferguson, chief executive of Tate & Lyle, the sugar and corn refiner, and the president of Britain’s Food and Drink Federation (FDF), an industry group, says European consumers are likely to suffer financially if they continue to shun GM crops. “An individual market that seeks to isolate itself from the world market is likely to end up paying more … The advantage [of GM crops] may turn out to be one of lower prices and better availability.”

Governments, particularly in the developing world, are also coming under pressure to invest more money in agriculture to ease their reliance on food imports. Donald Mitchell, an economist at the World Bank, says rising food prices reinforce the desire of countries to secure their own domestic supplies. “If you are a country that relies on large food imports, then low world stocks and the increasingly frequent use of export bans would be a concern.”

Peter Kendall, the president of Britain’s National Farmers’ Union (NFU), told the group’s annual conference in February that he could think of “no greater challenge” than finding ways for the world to feed itself, and that global food production would need to double or treble over the next 40 years to meet global needs. He called on the British government to create “a new vision for agriculture” as a high-tech, science-based industry.

Whether that “new vision for agriculture” will provide policymakers with the wherewithal to face up to this problem is unclear, but analysts and industry executives agree that it could be the start of a political solution to the rise in food prices.


Copyright The Financial Times Limited 2008

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