Although not the sole cause for the worldwide rapid increases in food prices, the biofuels market has created a new and significant source of demand for some agricultural commodities such as sugar, corn, cassava, oilseeds and palm oil. This increase in demand, according to a report prepared by the UN’s Food and Agriculture Organization (FAO) “has been one of the leading factors behind the increase in their prices in world markets which, in turn, has led to higher food prices.”
The report, Soaring food prices: facts, perspectives, impacts and actions required, was prepared as one of the discussion documents for an upcoming conference on world food security in Rome focused on the challenges of climate change and bioenergy.
A “confluence of different forces” has contributed to the rapid increase in food prices, according to the report. On the supply side, these include:
Weather-related production shortfalls. Cereals production in major exporting countries has declined annually by 4 and 7 percent respectively beginning in 2005. Yields in Australia and Canada fell by about one fifth in aggregate, and yields were at or below trend in many countries.
There was a significant increase in cereal output in 2007, especially in maize in the US, in response to higher prices. On the other hand, production of all the other major food commodity groups by major exporting countries was not affected in a similar way during the same period. The quick supply response for cereals in 2007 came at the expense of reducing productive resources allocated to oilseeds in some countries (especially soybeans in the United States), resulting in an important decline in oilseed production.
Stock levels. Global stock levels have declined, on average, by 3.4% per year since 1995 as demand growth has outstripped supply. Production shocks at recent low stock levels helped set the stage for rapid price hikes.
Increasing fuel costs. Increases in fuel prices have also raised the costs of producing agricultural commodities with, for example, the US dollar prices of some fertilizers (e.g. triple superphosphate and muriate of potash) increasing by more than 160% in the first two months of 2008, compared to the same period in 2007. With freight rates doubling within a one-year period beginning in February 2006, the cost of transporting food to importing countries also has been affected.
On the demand side, the surging biofuels market is the significant new factor.
Among all major food and feed commodities, the additional demand for maize (a feedstock for the production of ethanol) and rapeseed (a feedstock for the production of biodiesel) has had the potential for the strongest impacts on prices. For example, out of the nearly 40 million tonne increase in global maize utilization in 2007, almost 30 million tonnes were absorbed by ethanol plants alone, mostly in the US which is the world’s largest producer and exporter of maize. Over 30 percent of that country’s 2008 maize harvest is forecast to be diverted to ethanol distilleries, which amounts to over 12 percent of global maize production. In the EU, the biodiesel sector is estimated to have absorbed about 60 percent of member states’ 2007 rapeseed oil output, which amounts to about 25 percent of global production and 70 percent of the 2007 global trade in the commodity.
The issue is not limited to how much of each crop may be used for biofuels instead of food and feed, but how much planting area could be diverted from producing other crops to those used as feedstock for production of biofuels. To illustrate, high maize prices since mid-2006 encouraged farmers in the US to plant more maize in 2007. Maize plantings increased by nearly 18 percent in 2007. This increase was only possible because of reductions in soybeans and, to a lesser extent, in wheat areas.
Other relevant factors contributing to the rise in prices include operations on financial markets; short-term policy actions; and exchange rate swings.
Despite an expected increase in world cereal production of 2.6% in 2008, low stock levels that are not likely to be replenished quickly, the report notes, and “the possibility of further sharp price hikes and continued volatility as a result of unforeseen events seems to be likely for the next few seasons.”
The report concludes that the world could be facing higher agricultural commodity prices for some time.
Of significance in this respect is the possibility of the persistence of demand for biofuels, which would depend on a number of factors, including:
whether the price of crude oil continues to increase and policies supporting the biofuels sector are maintained;
whether the rate at which second generation feedstocks—lignocellulosics that do not compete with agricultural products for land resources—are developed and commercialized speeds up sufficiently to replace first generation feedstocks.
Other important factors that will be influential over the longer term include population and income growth, as well as intensifying urbanization; climate change impact on agricultural yields in different parts of the globe; land and water resource constraints; and the ability to increase yields of agricultural products through more effective use of existing technologies and/or adoption of new technologies.
Separately, the just released Agricultural Outlook from OECD and the UN Food and Agriculture Organization (FAO) projects that while agricultural commodity prices should ease from their recent record peaks but over the next 10 years they are expected to average well above their mean levels of the past decade.
In OECD countries, at least, the growth of biofuel production has thus far been driven largely by policy measures, and the report says that it is not clear that the energy security, environmental and economic objectives of biofuel policies will be achieved with current production technologies. The report suggests further review of existing biofuel policies.
List of Documents, High-Level Conference on World Food Security: the Challenges of Climate Change and Bioenergy