Caution urged to resolve food crisis

The world has faced food crises twice since the latter half of the 20th century.

The first one took place in 1973. The world end of term grain stock ratio, which had been on the decline for some years because of the worldwide grain failure, sank to a record-low of 15.4% in 1972. In the same year, the Soviet Union became a net-importer of grain due to the increase of livestock products consumed by the Soviet people.

The 1973 crisis was caused by factors such as the bulk purchase of grain by the Soviet Union under the circumstances of poor harvest, and the U.S. placed an embargo on soybeans, albeit for a short period of time. The impact was so enormous that they named it the Reappearance of the Ghost of Malthus, and grain was referred to as the third strategic material behind nuclear weapons and oil.

After that, however, countries including the European Community (EC) steered toward the enhancement of agricultural production, which considerably alleviated the condition of grain supply and demand.
While protecting national borders by levying import surtaxes under the Common Agricultural Policy, the EC protected intraregional agriculture through generous support for farm product prices.

As a result, they were plagued by excess produce in the 1980s. The EC implemented the raw milk quota system in 1984, and the U.S. also undertook the set-aside.

The world grain market substantially shifted to the tone of excesses. The EC, which had failed to eliminate such excess, exported excess agricultural products to developing countries with export subsidies, and the U.S. used the said subsidies in defiance, causing a dumping battle with financial burdens.

The agricultural negotiations in the Uruguay Round of GATT started in 1986 under the theme of removing the market distortion through agricultural protection by such developed countries, and the parties reached an agreement in 1993 based on the basic rule of reducing production-stimulating agricultural policies including price support. It was the 2008 crisis, however, that made us realize a change to the long-lasting tone of alleviating the conditions of supply and demand.

The 2008 Food Crisis

Although the world end of term grain stock ratio, which rose to 35.7% in 1986, subsequently maintained a high level, it dropped rapidly at the beginning of this century, and in 2006 got quite close to the cautionary zone of the stock level (17.1%) stipulated by the FAO.

In 2008, nine countries, including Brazil and India, enforced bans on food exports, and five countries including China, Vietnam, and Argentina imposed export taxes and set the export ceiling.

Also, food protests and riots occurred in 20 countries including Tunisia and Egypt. After the latter half of 2008, grain prices fell sharply and seemed to calm down, however they skyrocketed again after July 2010, and as of September 2011, they have been elevated to levels 2.6 to 3.3 times, as compared with the fall of 2006.

Corn set a historic high of $309.8/ton on June 10, 2011.

The backdrop of the recent food crisis is the economic growth of emerging countries such as China and India. It brought resource price hikes including crude oil, as well as a rapid increase of livestock product consumption due to an income increase among the people in emerging economies.

Sophistication of diet entails a surge in the demand for feed grains. Although Beijing makes it a basic policy to maintain self-sufficiency of three kinds of staples (i.e., rice, wheat, and corn), it became a net-importer of corn due to a soaring feed demand in 2010.

Being a super-populated country, China’s future import expansion will wield an impact on the world market.

Meanwhile, export expansion of soybeans, which are not the three kinds of staples, is astounding. The import volume of 290 thousand tons in 1995, when China became a net-importer, was boosted in 2010 to 54.8 million tons (60% of the global soybean trade volume).

However, as Lester Brown pointed out in his book, Who will Feed China? there is a question as to whether the sophistication of the Chinese diet will lead to U.S.-level livestock consumption.

Experts argue that the income elasticity of demand for livestock in Chinese urban areas has been dropping sharply in recent years. Also, the fact that per-capita annual meat consumption in Japan as a high-income nation stays at 34% of that in the U.S. in feed grain equivalent suggests the changing pattern of diet in China.

Chinese agricultural production has been stagnant. It should be noted that cultivation areas have been significantly decreasing at present because of farmland diversion, water shortage, soil erosion, and the conversion of cropland to forest policy.

Since the beginning of this century, demand for bioethanol derived from corn (U.S.) and sugar cane (Brazil) has drastically increased against a backdrop of the crude oil price hike.

The Energy Independence and Security Act enacted in December 2007, following the State of the Union address delivered by the former President Bush in the same year, states that the renewable fuel standard (RFS) shall be 36 billion gallons by 2022.

In the U.S., a soaring demand for corn as a raw material of bioethanol resulted in boosted prices of wheat converted to animal consumption due to the price hike of feed corn, and the drastic increase of corn acreage in turn decreased soybean acreage, causing an increase in soybean prices. This is a chain of grain price hikes starting with the skyrocketing crude oil price.

As mentioned above, it seems that the world has entered upon a new phase of demand for agricultural products. It can be said that against this backdrop, the inflow of speculative money triggered the recent crisis. It has been pointed out that the year 2008 goes far above the negative correlation line between the ending stock ratio and prices.

Solving shortage in low-income countries

If the demand structure of agricultural products shifts to an increase, prices will rise, causing an adjustment to be made through increase in supply and drop in demand, and no shortage of agricultural products. Furthermore, promotion of technological advancement due to the price increase will change the supply structure, causing the prices which have remained high to decline. Therefore, simple pessimism is not appropriate.

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