Bio-fuel or food!

As we debate on the causes of continued price volatility in international markets, a number of factors appear to have prompted such upward movement of prices of commodities; only more so of cereal. When demand and supply are the determinant factors of price, production of cereal counts most. Last year's shortfall is unlikely to be replenished because that would require production of an additional 100 million tonnes. Add to this, the diversification of corn usage from consumption to bio-fuel production and rerouting a significant portion of soybean trade to a single source, a more or less clear picture is likely to emerge. According to data released by United States Department of Agriculture, there is a rapid expansion of corn and vegetable oil use for fuel. Since 2005-06, 88 per cent, i.e. 115 million metric tons (mmt) of the growth in total world corn use has been in the bio-fuel category. Indeed, total corn usage in the United States (U.S.) has increased by 56.6mmt and corn usage for ethanol has increased by 62.5mmt. Putting it another perspective, this increased use of corn just for ethanol production was 48 per cent or nearly half of the increase in corn use for the whole world over the following five years. Following closely on the heels of crops like corn, rapeseed oil diversified for biodiesel production has played its role in shooting up commodity prices. For instance, rapeseed oil has been used extensively for biodiesel in continental Europe. It is estimated that 13rd of total rapeseed oil is now used for industrial purposes compared to a mere 17 per cent in 2004-05. Similarly industrial applications for world soybean oil expanded to 16 per cent by 2010-11 from a paltry 4 per cent in 2004-05, a staggering six million tonne increase. The other shocker has come from China, which after 1997-98 moved away from concentrating on attaining soybean self-sufficiency, opting instead, for reaching sufficiency in cereal production by bringing more land under cultivation. This inevitably led to massive additional imports of soybeans. Over the last five years, Chinese soybean imports have more than doubled - an increase of 29mmt, which constitutes more than 90 per cent of the increase in world imports. The Chinese policy of soybean import lends credence to stock building over the last three years resulting in accumulated stocks that equal nearly 14th of the total soybean produced globally. The exponential growth in demand from bio-fuel on the one hand and China's oilseed requirements on the other has had a profound impact on U.S. land needs to meet such demand. In 2005, the 16.1 million acres or 11 per cent of annual corn and soybean harvested was sufficient to meet these requirements. In 2011, 46.5 million acres were devoted to meeting ethanol production and China's soybean import requirements from the U.S., i.e. 29.4 per cent of total harvested corn and soybean. Over the five year period (2005 - 10), land dedicated to growing corn for ethanol jumped over 200 per cent from 7.8 million acres to 23.7 million acres. Similarly, to meet China's insatiable demand for soybean, an additional 14.5 million acres were committed in 2010 on top of the 8.3 million acres in 2005. Meeting the needs of bio-fuel coupled with export demands of soy has meant that the U.S. has fundamentally shifted acreage to corn and soybeans from wheat, other feed grains and oilseeds. Though this has helped meet the expanded demand, it has also contributed to the depletion of U.S. food stocks. According to the World Agriculture Outlook Board's 2011 data, compared to 2005-06, where corn stocks represented 64 days of use, levels have fallen to about 20 days in the current period. In case of soybean stocks, the number of days has fallen from 57 days to 20 days. Impact of such stock depletion affects not only U.S. supply and demand but also world markets in the wider context. It is not only the U.S. that has seen changes in cropping patterns. Latin America for instance which supplied more than half of Chinese annual soybean imports saw countries like Brazil, Paraguay and Argentina devote more than seven million hectares of land in 2009-10 solely for soybean production. The end result of such land use adjustment in the American continent and elsewhere has been a major factor contributing to the inelasticity that has become characteristic of global agricultural markets. With land being shifted to meet high-demand crops such as corn, soybeans and rapeseed, traditional crop production such as rice is being hampered. While worldwide land commitment for high-value crops like corn, soybeans, etc. increased by 30.5 million hectares globally, land for rice cultivation lagged behind with an increase of five million hectares over the 2010-11 periods. Although a multitude of other factors contributed to a volatile food market, the substantial subsidies offered by the U.S. government for encouraging bio-fuel production and the strong demand coming from China's import policy for soybean have been key drivers for the exceptionally buoyant commodity price increases of 2011. The United Nations calculates that world population will reach 9.1 billion people by 2050 with most of the growth coming from developing nations with a higher degree of concentrations of people living in urban areas. According to the latest Food and Agriculture Organisation estimates, the overall food production must grow by 70 per cent of current levels to feed this mammoth population. In an age of depleting natural resources compounded by global warming, the question that looms large is whether our priorities are set right in the right area.