| For
the third time in five years the world is braced for
another food crisis. Bad weather conditions are leading
to projections of major production shortfalls in some
the world's leading food suppliers. Substantially reduced
access and sharp price increases are, therefore, expected
to keep food out of the reach of a larger proportion
of the world's population. The last two crises, in 2007-08
and 2011, led to food riots in many countries. So it
is not just high food prices, increased hunger, localised
famines and widespread increase in deprivation that
are possibilities. Given the fact that the current food
crisis occurs when the world is still steeped in the
Great Recession that began in 2007, a period of political
turmoil with unexpected consequences is also on the
anvil. The world is only just waking up to this prospect.
With the world's food basket consisting of a range of
commodities sourced from varied locations, each crisis
has its own special features. But the cumulative consequences
are similar, especially since the currently developing
crisis is being determined by expected weather-induced
shortfalls in the larger producers. Prime among these
is the US, the central agricultural belts of which are
experiencing their worst drought in almost half a century.
Reports from the National Oceanic and Atmospheric Administration
of the US are startling and almost unbelievable. July
2012 was the hottest single month in the country on
record, and the first seven months of 2012 were on average
the warmest since records began to be kept in 1895.
The two crops whose production has been affected the
most by this extreme weather event are maize (corn)
and soya bean. Between July and August the US Department
of Agriculture (USDA) has slashed its estimate of production
from the standing corn crop by 2.2 billion bushels to
10.8 billion bushels. Half of the corn crop is assessed
as being in ''poor'' or ''very poor'' condition, which
is the worst assessment since 1988. The output of soya
beans is also expected to be the lowest in five years.
These production shortfalls are significant for three
reasons. To start with, the US is the largest producer
and exporter of corn. It accounts for nearly half of
world exports of corn and about one third of the exports
of soya bean. This implies that the effects on supply
and prices of the shortfall in the US would be quickly
transmitted to global markets for this important grain.
Second, corn has alternative uses besides directly entering
the food chain. Forty per cent of the crop is estimated
as being absorbed by the ethanol companies and about
a third as entering feed required by the meat and poultry
business. So, when output falls, demands from competing
sources tend to drive up prices to even higher levels.
Finally, even if the worst production shortfalls are
in corn and soya bean, other commodities such as wheat
would also be affected, since they can substitute for
expensive corn. Thus, there are fears that wheat production
would be diverted to feed production, affecting supplies
available for direct human consumption.
This is bad news because bad weather and expectations
of output shortfalls are not restricted to the US and
maize and soya bean alone. Drought conditions have affected
wheat production in the Black Sea region (Russia, Ukraine
and Kazakhstan), which accounts for a quarter of global
exports. Adverse weather is also expected to lower production
in Australia, Argentina and China. To make matters worse,
governments, such as Putin's in Russia, are expected
to adopt policies to discourage exports, tightening
global supplies.
The first signs of the likely results are already visible.
There has been a sharp increase in the prices of certain
food grains. The FAO's Food Price Index (FPI) rose by
6 per cent in July 2012, driven by grain and sugar prices.
Cereal prices rose by 17 per cent in June relative to
the previous month, maize prices by close to 23 per
cent and wheat prices by around 19 per cent. In the
US, the USDA predicts that corn and soya bean prices
may break previous records. When prices begin to rise
in this fashion, speculators enter the market and push
up prices further. Corn and soya bean futures have turned
buoyant, reflecting this possibility.
In sum, the world must brace itself for another food
crisis. Poor developing country exporters that have
not recovered fully from earlier crises would be affected
the worst, more so because the dollar (in which global
prices are quoted) has strengthened as a result of the
flight of international investors to what is seen as
a ''safe(r)'' currency. Reuters reports that West African
countries such as Mali, Niger and the Ivory Coast have
cut import tariffs on imported food as a means of containing
the rise in domestic prices.
Clearly action is needed at the supply end. FAO Director
General Jose Graziano da Silva has in an article in
the Financial Times of August 9, 2012 called on the
US to substantially reduce the diversion of maize to
ethanol production. ''With world prices of cereals rising,
the competition between the food, feed and fuel sectors
for crops such as maize, sugar and oilseeds is likely
to intensify. One way to alleviate some of the tension
would be to lower or temporarily suspend the mandates
on biofuels. At the moment, the renewable energy production
in the US is reported to have reached 15.2bn gallons
in 2012, for which it used the equivalent of some 121.9m
tonnes or about 40 per cent of US maize production.
An immediate, temporary suspension of that mandate would
give some respite to the market and allow more of the
crop to be channelled towards food and feed uses'',
he argues.
India too is likely to feel the effects of the imminent
crisis. The south-west monsoon in the country has been
deficient to the extent of an estimated 22 per cent
or more leading to delayed and much reduced sowing.
So the kharif crop is expected to be significantly lower
this agricultural year. With food prices already ruling
high, this can have adverse consequences even without
accounting for the global crisis.
However, India's food economy has a buffer to fall back
on. Good rainfall in 2010-11 had resulted in a recovery
in production from its lower level in the previous relatively
poor agricultural year (2009-10). In that year, rice
production had fallen quite significantly and wheat
production had stagnated. The better performance in
2010-11 was followed by a further rise in production
in 2011-12. This had taken both rice and wheat production
to levels that are about 4 per cent higher than their
previous peaks.
While comforting, this is by no means a major step up
in production. However, even that rise in production
has resulted in excess stockholding in the system. In
April 2012, rice and wheat stocks at 333.5 lakh tonnes
and 199.5 lakh tonnes respectively were much higher
than the prescribed minimum buffer limits of 142 and
70 lakh tonnes for that time of the year. A consequence
has been that the Food Corporation of India has run
out of appropriate storage for the stocks it has been
able to procure and needs to hold. In the event there
have been recommendations from various quarters that
the government must not only release stocks to the ''open''
market but should resort to exports, either directly
or through market agents, of the stocks it holds.
It is not only the availability of stocks in excess
of the buffer required that is being used to justify
such demands. More importantly, since prices of food
grains in the international market are ruling relatively
high, it is being suggested that exports would not only
help the government recoup the expenditure it has incurred
on procuring and storing the food grains concerned,
but would endow domestic prices with the buoyancy that
would help farmers reap the benefits being obtained
by their counterparts elsewhere in the world.
What is being ignored here are the likely global effects
of production shortfalls in the major food exporting
countries. With government having made a principle out
of calibrating domestic prices in line with international
prices, the danger that the country would fritter away
its excess food reserves rather than use it to strengthen
food security in period of global uncertainty is real.
*
This article was published in the Frontline Volume 29,
Issue 17, August 25-September 7, 2012. |
