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Saturday, April 05, 2008

The Impact Of Food Prices

It's not just me. This is completely out of sync with the consumption capacities of multiple economies around the world.

Wheat prices hit $24 a bushel this week in the futures markets, having been $3 a bushel four years go. That dwarfs the rise in oil prices.

This problem has been coming for some time, driven by three separate factors. The first is overall population increase. The second is that emergent economies like China and India are climbing up the prosperity chain and demanding more meat protein, which takes eight times as much land to produce as vegetable protein. The third is that short-sighted government subsidies for biofuels are eroding the amount of crops available for eating.
"In some of these developing countries, prices have gone up 80 percent for staple food," Sheeran said, adding her agency's budget was soaring by millions of dollars a week.
Read the rest of the article about the political impacts. It's sheer lunacy to worry about the rise in Muslim extremism while following policies that starve the peoples of Indonesia, Pakistan and Egypt.

Inflation in India:
India's wholesale price index, released weekly, hit 7% for the year up to 22 March, the highest since December 2004.

The government has been taking steps to control prices, banning exports of non-basmati rice and scrapping import duties on cooking oils and maize.
The estimates on economic growth provided are not viable.

A very good WorldNetDaily article reviewing the developments:
Global food prices, based on United Nations records, rose 35 percent in the last year, escalating a trend that began in 2002. Since then, prices have risen 65 percent.
According to some experts, the worst damage is being done by government mandates and subsidies for "biofuels" that supposedly reduce carbon dioxide emissions and fight climate change. Thirty percent of this year's U.S. grain harvest will go to ethanol distilleries. The European Union, meanwhile, has set a goal of 10 percent bio-fuels for all transportation needs by 2010.
Yesterday, the Hong Kong government tried to put a stop to panic-buying of rice in the city of 6.9 million as fears mounted over escalating prices and a global rice shortage. Shop shelves were being cleared of rice stocks as Hong Kong people reacted to news that the price of rice imported from Thailand had shot up by almost a third in the past week, according to agency reports.
You see, it's not just the very poor any more. The lower end of the US population is being hit too. The ethanol push is going to create a situation in which more food is imported into the US to feed its population. This makes no damned sense - it is sinister environmentalism. Oh, perhaps it makes sense if you believe, as so many of the talking heads like Ted Turner do, that the best thing to do for the environment is to kill off a large number of human beings. The view of human beings as pollution has been current among the raving intelligentsia of pseudo-environmentalist movement, but naturally it is not shared by the human beings who are hungry now.

Following policies that directly take the food out of people's mouths is a policy of economic warfare. It is not environmentalism.

Since I am sure the talking heads care nothing at all about some poor family in Indonesia eating dead chickens they find on the street because they are hungry, let me try another argument.

The financial crisis of loose lending (which is just about global) is spreading rapidly. We are going to see rolling crises as banks start to attempt to exit their holdings of consumer and commercial debt in one country after another. For example, the race to the exits on Spanish debt is beginning. Ireland is in trouble. The incredible surge in debt in countries like Poland and other eastern European countries is not sustainable either.

In all of the emerging economies, the rise in food prices has a much larger impact than it does in the US. These countries will see a vicious rise in consumer defaults. So, for example, Citibank's Indonesian and Mexican adventures are about to come to a disastrous end. India was planning to cut interest rates after March, but now it will have to raise them. That may well precipitate the beginnings of the collapse of the property bubble there.

There is no alternative for countries like Indonesia but to subsidize consumer basics like basic food and fuel, and in doing so, Indonesia is throwing its entire budget into imbalance. To understand the impact, this year Indonesia's subsidies are estimated at 4-5% of GDP. That is equivalent to servicing public debt of about 80% of GDP. (By subsidizing fuel costs, countries like Indonesia, China and India have made it uneconomic to invest in fuel-efficient production, which is the reason that fuel usage in those countries is so high relative to GDP). In other words, the net impact to many of these countries is to deflate their currencies, which very likely will lead to another Asian bond crisis.

The effect on Asia was magnified less than two weeks ago by the rice crisis, in which a bunch of rice-exporting countries became alarmed and either slammed on tariffs or curbed exports by volume. The increase on food prices is such that these consumers will not be able to buy the electronics and other consumer discretionary items.
So the likely situation in 2009: we are likely to see drops in revenues to Asian manufacturing countries, a correlated imbalance in a number of emerging economies' government budgets, an outright contraction in world trade, the beginnings of definite manufacturing overcapacity, and a correlated rise in defaults on payments to the money interests around the world which have just thrown money at everyone in Asia, from the consumer to the next pharmaceutical plant owner.

In other words, another global depression. I'd put the odds at about 80% after this past week's developments. Needless to say the traders are getting into this and bidding up futures, which tends to hold back releases of goods (why should I sign a contract now if I believe I may get more a month from now?) onto the market.

This is by far and away the worst crisis of my lifetime because it involves such huge areas, the absolute basics, and so much of the world's financial system. This will create tremendous stresses on governments everywhere and further stress the financial system at a minimum. World inflation will continue to rise this year, and there is little the central banks of the individual countries can do to combat it.

The last Asian currency crisis hit in 1997, and it was a contributing factor to a global recession in 1998 which corresponded with a Russian ruble crisis. These instabilities were a contributor to the LTCM collapse. The reason that there was not a global depression was largely that the US managed to stay out of the recession.

This time we will not be so lucky. The best we can hope for is global recession, because the US, UK, and a host of other developed countries have built up unsustainable debt loads that must be diminished, AND SO HAVE THE EMERGING ECONOMIES. Faced with sharply increasing food and fuel bills, the world cannot sustain expenditures on discretionaries.

Darlin', you write about three college economics courses above my level of understanding on economics. But from what I read here, you're saying we're in for a serious global recession--if we're lucky and don't have a depression.

So, what do we do to mitigate?
If http://biopact.com/2007/10/study-adding-small-amount-of-dairy-and.html is any indicator, changing our diet might help with land usage. .44 acre per year per person to 2.11 acres is a big gap....
Bread, aka dried beer is grains and energy. Seen beer prices lately? No biggie, I need a reason to cut those calories anyway but bread is not a optional component. Americans spend far less on food than most. A price doubling is a budget squeeze for us. For some nations it is a hunger and civil unrest issue.


The only good thing might be the last barriers to food trade finally crumbling. The Japanese have already developed a taste for our California ultra-premium produce with very favorable trade balance results.
Danny, you try to force Americans into vegetarian diets and you'll anger most of them. Tell the third world to go starve and you'll provoke wars.

Keep in mind that the effects MoM is describing are produced by trying to fuel small percentages of our transportation needs with crops. What happens as the mandates rise further?

Either the Greens haven't figured out the consequences of their policies, or they don't care about the consequences. Given how few people actually think quantitatively about issues, I think it's the former for the vast bulk of Greens. The "humans are a disease" crowd probably look at the consequences as a feature, not a bug.

The only hope is to smack the grass-roots environmentalists in the face with the causal chain from the policies they are supporting to the disaster they are creating. But I don't see how that is going to be achieved quickly enough to matter.
Well, the first step when you find yourself in a hole is to stop digging it deeper. The west should dump carbon tariffs.

The ethanol policy is not working out. The US should step back. At current corn prices an ethanol subsidy is insane.

Danny, the big draw is on basic grains, therefore the US population going vegetarian wouldn't do much.

The best prospect for ameliorating this is to get those rice exporting countries together and try to float some sort of trade plan. It is the recent break in rice that's going to escalate the damage sharply.
I wonder how much U.S. rice production could be expanded, and how long it would take.

More broadly, how much could U.S. food production capacity of all types be expanded? I'm guessing the answer is "a whole lot," but that considerable time would be involved.

Some of the constraints that come to mind are water, fertilizer, transportation facilities, and knowledge...there are probably many fewer Americans that know anything about farming than there were 30 years ago, in absolute as well as relative terms.
MoM ,
Thanks for another well written piece.
Food for thought.
David - the yields go down sharply and the inputs go up sharply as you move to land less well suited for various crops.

There are, for example, a bunch of farmers planting corn the last couple of years in GA who really shouldn't be. If they get a crop they will do well, but the soil, likely moisture and amount of chemicals needed greatly exaggerate their losses if conditions drop below average.
Thoughtful as always MoM.Do you expect a Plague to follow Famine? I do recall my mother discussing epidemiology at the dinner table and saying it was just a matter of time.we have a busted healthcare system and resistant bugs,seems like a logical progression from war and famine.
MoM,I find it anything but reassuring to find that we both assign an 80% probability to a world wide depression.I have had conversations regarding this with the brightest person I know who is interested in this subject (!?) and she has a similar opinion.I hope we are wrong.give my best to Jay and Cheryl,Tom Stone.
To all: I'm not advocating vegetarianism: In fact, the article argues that some meat growth is even more productive use of land than pure vegan lifestyle.

With that said, I'm for free market solutions so I don't see any need for mandates. How that works out today, I'm not sure, but I think less [regulation] is always better.
I hate to say this but

You are also assuming a finite supply. Sense the price of food is going up so much then guess what, people we plant more of it. People will find alternatives, come on these are basic rules of economics.
nmoerbeek - no, supply is definitely not finite. However biofuels are consuming more than the increased supply by large numbers. This drives up the price, and adding subsidies allows the price to rise further.

Remember, these prices are already a reality. This is not some future prognostication based on doubtful economics.

The reason why you can produce such an imbalance with biofuels is the relative energy density of biofuels vs food.

It takes over 20 pounds of corn to make a gallon of corn-based ethanol, for example. When cars and trucks start eating food, the equivalent is to a huge and sudden increase in human population.
MoM, why do you characterize the idiocy of corn-based ethanol as being the fault of environmentalists? The law that caused this problem was signed by Bush in 2005, benefits mainly large corporations, and was heavily pushed by Bush's Texan buddies. I don't think this was pushed by anyone who really deserves to be called an environmentalist -- to anyone having sufficient scientific credentials to qualify as an environmentalist, corn- and grain-based ethanol are brain-dead.
JM - Well, let's put it this way - those who push biofuels call themselves environmentalists. I am personally conflicted and want to write here that they are not "genuine" environmentalists, but I am not sure that I can prove that position.

Much of the popular support for corn-based ethanol derived from individuals who were genuinely worried about the environment.

Certainly special interests will campaign for their own benefit under whatever rubric will sell on the popular stage, and it is a form of environmentalism which has presented the western world with the justification for these policies. That is literal fact. People of good will, including me, are perfectly willing to spend somewhat more in order to protect the environment. Long term, we know that protecting the environment is good policy. Heck, I'm in my later forties. I remember when rivers caught on fire and burned! I remember the filthy water. I was raised on an environmental low-impact philosophy and style of life. That's still the way the Chief and I live. If it weren't that we are also pretty ag-aware, the biofuel fallacy wouldn't have been apparent to me.

It is not the popular intent that's at fault here. It's poor analysis by scientists that presented the justification for this. I linked earlier to the IPCC report about mitigation that had some environmentalist groups absolutely screaming last year.

Even though concerns had been raised, last year a Dem-led Congress passed an accentuation of the ethanol subsidies, and the EU made it policy to go 10% biofuel.

Do I believe that this is correct environmentalism? No. But it is environmentalism, and most of all it's CO2-fear environmentalism that's causing this.

The failure to distinguish between the effect of minor uses of biofuels and the effect of a full-scale campaign is at fault here. It makes plenty of sense to use waste products for biofuels if it can be done in an energy-positive way.

I am in no way arguing that environmentalism should be abandoned. Like everything else, environment-focused policies must be pragmatic and carefully studied and tested. The CO2 hysteria appears to have led to some bad decisions. And it is a hysteria. There is no scientific evidence showing that we have a CO2-induced catastrophe on our hands.

Yes, CO2 is a greenhouse gas, but the theory that it is a strong driver of the global climate seems to be getting weaker the harder we study it. I am not saying that the IPCC hypothesis has been debunked, but at this point it is still a hypothesis and not the strongest one out there.

I do, however, personally want to see lower fossil-fuel use. I would support much stronger use of nuclear power for that purpose.

My point is that a depression involves an extremely long period of decline. While in economics there are only peaks and troughs. It is my opinion that in the next year farmers will plant more, 3rd world nations will grow more food and people will adapt there eating habits to their budgets.

On a side not though,

Sense you sad that many of these governments are going to be subsidizing their populations as food prices go up. Will this effect the sale of US treasuries in a major way?
Hm. Markets, when left alone, tend to sort out shortages pretty quickly. And with grains, the time frame is one year--less, considering that there are two hemispheres with opposing seasons.

But the markets aren't being left alone; both the EU and the US have greatly increased biofuels targets recently. Yes, pastures can be plowed and sown; but if the additional grain is grabbed by the new ethanol plants coming on-line, the situation could be unchanged, or even worse.

I'm just surprised that there hasn't been more noise about this coming from politicians from non-grain belt states like Colorado and Oregon (for example).
Nmoerbeek - yes, farmers will plant more. But biofuels suck up such a huge ag output that it will be insufficient.

People eat very diffuse energy sources compared to fuels.

Take corn. The best-yielding acreage in the US gets very high doses of ag chem, and yields over 200 bushels per acre. A bushel gives you about 3 gallons of ethanol, so call that 600 gallons per acre. The average on midwestern acreage used to be about 160-170 bushels per acre. More around 500 gallons of ethanol per acre.

Now plant corn in our GA fields. We generally won't get more than 70 bushels an acre at best. More like an average of 40-50. Some farmers are planting mediocre acreage that might yield 30, and on a bad year get nothing.

So additional marginal acreage might give you 1/3rd the ethanol.

To give you a further idea, calories per grown pound of corn probably average about 1600. We'll up that to 2000 for laziness' sake, and say that one pound of corn will feed a human per day. So a bushel of corn will feed one human for 50 days, 7 bushels of corn will feed a human for a year, and 5 bushels of corn will fill the tank of a car once with ethanol.

Take my 30 acre field. 30-50 bushels of corn will be the most it will put out, so call that 40 X 30 = 1,200 bushels total (if there's a crop at all). I can keep about 170 people alive for a year, or fill a car with ethanol 240 times (1,200*3=3,600/15=240). Assuming one tank per week, 50 weeks in a year, I can keep less than 5 cars running for that year.

Just keep that 170/5 ratio in mind, and you'll see that what you are claiming makes no sense.

Approximately 15% of US corn is scheduled to go into ethanol this year. The energy intensity of oilseed crops is better, but people need those oils too, and acreage that would have been planted in grain crops is being swapped for oilseed crops.

The output price/input price on crops is pretty tightly balanced. It is true that the world can easily increase food production to feed a population that grows a few percent a year. If we try to feed the cars, it's no go.

From a 2006 NY Times article:
Indeed, the study published by the National Academy of Sciences found that neither ethanol nor biodiesel can replace much petroleum without having an impact on food supply. If all American corn and soybean production were dedicated to biofuels, that fuel would replace only 12 percent of gas demand and 6 percent of diesel demand, the study notes.
Take my 30 acre field. 30-50 bushels of corn will be the most it will put out, so call that 40 X 30 = 1,200 bushels total (if there's a crop at all). I can keep about 170 people alive for a year, or fill a car with ethanol 240 times (1,200*3=3,600/15=240). Assuming one tank per week, 50 weeks in a year, I can keep less than 5 cars running for that year.

But you can do both if you 'wet mill' vs 'dry mill' the corn into ethanol. MOM - before you go too deep into the anti-biofuels rant mode at least learn the various options to get there.

Most ethanol mills are dry mills - they grind up the corn & ferment it.

Dry mills are an economic & energy disaster.

In a wet mill they 'fractionate' the kernels first - into gluten, germ, fiber & starch... they only ferment the starch while all the other products (protein & food oil mostly) either go into human food or animal feed. Little value is wasted.

The world isn't terribly short of starch (sugar) so turning that into ethanol isn't a terrible loss - but protein & oil are in short supply going dry on them loses much of their food value.

Plus wet mills use other sources of energy (like coal) to power the plants so they take 'non-available' energy (coal) and make it 'available' by turning it into ethanol. You'd have to walk through the mass & energy balances like I have (years ago when I worked in the biz) to fully grasp both the strength & weakness from corn ethanol if properly implemented. But wet mills are not nearly as bad from a world food perspective as are dry mills.

Bad news is from a carbon perspective wet mills are not very non-green. It really beaks down into a coal to liquid fuels & electricity strategy if done right.

BTW - if you are only getting 30-50 bu/acre on your land - I'd look at growing something else. Maybe kudzu. Up here on the midwestern plains you'd have to plow farm land under to get as little as 50 bu/acre. I haven't known anyone do less than 100 bu/acre in almost a generation.

Of course our kudzu yields are much lower...
Dryfly - yes, corn isn't a good use for the land. We don't grow it for yield but for the purposes of the place, which is really more a conservancy for birds than anything else. It was amazing how much land was shifted to corn in the area, though. It's incredibly inefficient.

Yes to the wet mills, but first, there is more to biofuels than corn. That's just an example to show why biofuels shift the food balance so sharply. And second, most US corn ethanol plants are dry mill, in part because they are considerably cheaper. background.
The water usage in wet milling is also a potential difficulty.

You bring up a VERY good point, which is that the biofuel strategy that is suggested by a carbon focus is not necessarily the one that would be suggested from an energy balance basis. The two agendas often conflict.

I am not anti biofuel in principle, although I think one must be realistic about the limits on biofuels. Using waste products from ongoing food production makes total sense if you can do it effectively, just as capturing gases from landfills, etc, does.

Biofuels are a very good thing as long as one recognizes the scaling limits.

If anyone is confused, here is something that might help understanding Dryfly's point about wet milling.

Wet milling is how most commercial processing of corn is done. It uses a lot of water and creates multiple food products. It also as a byproduct produces some ethanol. Most ethanol plants in the US run as dry mills and produce starch (converted into ethanol), CO2 and DDG which is used in animal feed.

Thank you for your reply. I seldom receive something that is backed up by evidence on the internet. It shows a great deal of professionalism.
Most ethanol plants in the US run as dry mills and produce starch (converted into ethanol), CO2 and DDG which is used in animal feed.

DDG is crappy feed too - unlike high quality gluten & germ produced from a wet mill.

But you nailed the real problem: 'scale'... bio-fuels only work IF there is (1) massive conservation (2) other alt-energy substitution efforts like using solar and (3) if going to bio-fuels then for crying out loud find crops & processes that make sense for bio-fuels... corn dry milling does not.

Sound like your land would work plenty fine as a small 'bio-fuels' farm if it was growing some kind of cellulostic feedstock... but we don't have that process in place & probably won't for 50 years or more.
What is interesting to me is that beef and pork are fairly inexpensive right now. I can buy whole boneless pork loins for under $2 a pound. Boneless Boston butt is about $1.28. Both are fairly lean. Beef is more, but not outrageous. Of course, most folks want to buy smaller cuts. Me, I run them through the smoker, then portion them out mealsize and freeze.

Is this low price because there's a plentiful supply of the DDG on which they can be fed?
"Plus wet mills use other sources of energy (like coal) to power the plants"...I believe almost all ethanol plants built to date use natural gas, although some coal-fired plants may be under construction. (I wonder what happens to the "environmental" image of ethanol when neighbors of the plant find out that it includes a rail siding and noisy coal deliveries every few days)

I'd love to see an anaylsis of the economics and energy balance of using natural gas to make ethanol from corn *versus* making liquid fuel out of the nat gas directly.
M.G. I think it is because farmers are cutting the sizes of their herds because feed stocks are low and expensive. (That's why the cuts are lean!) Eventually, it will reverse as the stocks are cut down.

David, if we weren't utterly stuck on the carbon thing we could probably get better solutions. I know the Chinese are beginning to work on coal liquefaction background. At current prices I think it would pay.

We have to pay attention to all forms of pollution.

I think we need a lot more engineering in the energy debate and less politics.
Main rice growing areas in the US are Louisiana and California. As I've mentioned before, they lost rice fields around Sacramento to the housing boom. I'm not familiar enough with the growing area in Louisiana to comment.

You are going to see meat prices trend lower because folks are dumping their livestock on the market due to high grain and hay costs. (I haven't read this anywhere online but I'd bet I can find an article on it. I buy both grain and hay for my animals so I know what prices are doing.) At some point, after the purge, meat prices will climb.
Main rice growing areas in the US are Louisiana and California. As I've mentioned before, they lost rice fields around Sacramento to the housing boom. -- Teri

Most rice in CA is grown in the Sacramento Delta, where it's swampy. Going up I-5 between Stockton and Sacto, you normally could see clear to the horizon and see nothing but occasional farm buildings and rice dryers.

Now they're interspersed with "abandoned sets from Over the Hedge", walled-and-gated "communities" of McMansions (with back yards a whole TEN FEET DEEP!) sitting empty in the middle of the rice fields, with no other sign of civilization within line-of-sight, flanked by billboards pimping "INVESTMENT Real Estate".

"Look upon my Planned Community, investors, and despair!
Nothing more remains...
All ways around,
The lone and level rice fields stretch far away..."

I generally appreciate your insights and analyses, but lay off the environmentalists on this one for cryin' out loud! I've been following corn-based ethanol for years and the mainstream of the environmental movement has never backed it. Most of the early zero net energy gain analysis that I read came from conservationist thinkers.

I think your personal biases are coming out here all too clearly.

MOM is right on this one. Yes, some environmentalists have pointed out some of the problems with ethanol. But the US and EU would not have passed the big biofuels expansions bills if they weren't kowtowing to those who are demanding action on carbon. Without the constant hectoring of Gore, Suzuki in Canada, Sheryl Crow and Laurie David on their biofueled bus tour, and yes, Ted "We're gonna be cannibals" Turner, the politicians wouldn't be flailing about trying to look like they're doing something useful.
Anon - actually, I am an environmentalist.

I would like to believe that the mainstream of environmentalists are against the weirder outgassings of extremism, but I cannot at this time make that case.

I have recently come to believe that the extremist, alarmist, most weakly data-supported environmentalists are directing the environmentalist agenda. Therefore, if I have a bias it is to struggle for the solid and extremely scientific and extremely appropriate strains of environmentalism.

You know nothing about my bias. I used to give to a number of environmentalist groups, but it is becoming harder and harder to find groups that are not advocating unrealistic extremism. Eventually those extremists will utterly discredit all environmentalists if people who are interested in the environment do not stand up for solid science and workable policies.

Already many in the emerging countries (which urgently need to take environmentalist policies into account) have begun to look at environmentalism as an instrument of oppression and the tool of hidden agendas.
MoM: great blog (first time reader, impressed).

Another dot to connect maybe: when prices of a lot of staples (wheat, rice, corn, soy beans) all rise together to unprecendented levels, there has to be a common cause. You and your stalwart commenters have identified one structural aspect - the substitution of fuel for food as a crop end-use.

What about global cooling? Plants are sensitive to their environment, and when you read the reports associated with the shortage/price spikes, 'unseasonal weather' does seem to figure a lot.

When you consider that we have currently have a very quiet sun: quiet sun (sunspots) = less shielding of the Earth from galactic cosmic rays (GCR's), more GCR's = more clouds (the seeding effect: Svensmark and crew) = more sunlight reflected (higher albedo) = cooling earth. And cool = less biomass.

And as Herschel noted over 200 years ago, the solar signature on crop prices was unmistakable.

My contention is that we're seeing the start of a perfect storm here:
- more difficult cropping conditions: drought, salinity, temperature etc
- credit crunch, which impacts on the financing needed to carry inventory, and buy capital goods
- protectionism rearing its head again, as seen in the various Governments' responses
- biofuels debacle causing a switch in end-uses at just the wrong time
- input costs (fuel, fertiliser, pesticides etc) rising

No doubt there are other factors...

But a common factor is that of a contrarian climate shift.

The coal liquifaction mentioned is a pollution and energy scam. And protests by ?environmentalists? to bio-fuel are popping up around the world.

My hopes and money are on a small (too small to attract much support, previously) initiative called Focus Fusion. It's a miniature reactor using magnetic "implosion" of hydrogen and boron to generate helium and energy. If the calcs bear out, it will have a 40% surplus of energy output over input (the power required to set off waves of plasma collapse resulting in the fusion events).

The generators/reactors would be safe and cheap (<$300,000) and produce ~5GW @ $0.002/kwh, or less. That's about 1/50 current break-even energy plan proposals. It would collapse petroleum demand, since power plants using oil and gas would be uneconomical by comparison.

Timeline should be prior to 2020, maybe 2015. We'll see.
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