Dominique Baillard
African populations are suffering the consequences of rising grain
prices, and there have been hunger riots and demonstrations against the cost
of bread. Meanwhile, grain is breaking all records on the American markets.
Food security is once again causing concern, even in industrialised
nations. Observers such as Jean Ziegler (until recently UN Special
Rapporteur on the Right to Food) raise the spectre of famine in west Africa.
Even in the United Kingdom , where agriculture was long ago sacrificed in
favour of industrial revolution (1), the Department for Environment, Food
and Rural Affairs (Defra) raised concerns about the dangers facing food
security in a study published in December 2006 (2).



Just over a year later there is real anger on the streets about the
high cost of living ? in the UK but also, and especially, in the South where
people depend on imports to feed themselves but with incomes that are
unimaginable for the British. Prices (milk, oil, rice and wheat) have
exploded and the surge has been most spectacular on the grain markets.



Prices doubled during the summer of 2007 when farmers in the North
were harvesting. The price of wheat rose from $200 to $400 per ton between
May and September at the Chicagoland Chamber of Commerce, the benchmark for
the international grain trade. The same occurred in Paris where milling
wheat peaked at ?300 ($477) per ton at the beginning of September. Prices
rose again in mid-March when the United States had almost exhausted its
export capabilities. One bushel (27kg) passed the symbolic $13 mark ? a
record. In one year the price of wheat increased by 130% on the American
futures market. Millers and manufacturers of pasta and livestock feed in
developed countries were taken by surprise and protested loudly.



But for several years there has been a noticeable difference between
supply and demand. The final reserves (what is left in the silos of producer
countries before the start of the harvest) have been shrinking while demand
has been growing. The market is no longer regulated by the growth of supply
but by the use of the accumulated reserves of the large exporter countries.



In 2007 this precarious balance collapsed for two reasons: increased
demand generated by the boom in biofuels, and poor harvests due to the
vagaries of the weather. These two phenomena came to a head as tension grew,
caused by the growing demand of emerging nations such as China .



Biofuels absorb 10% of world corn production, but this is only
partially responsible for the spectacular surge in grain prices because US
companies, its main manufacturers, increased their corn production to meet
this new demand. However, according to the Washington-based International
Food Policy Research Institute (IFPRI), the ethanol industry could increase
the price of corn by at least a quarter, and possibly by as much as 72%, by
2020 (see ?Ethanol: the new anti-depressant?).



Weather played a crucial role in 2007. Drought in Australia , lack of
sun and too much rain in Europe , frost in Argentina ; all weakened
production. No one is talking about a shortage at this point but, in the
trading rooms where sales and purchasing decisions are based mainly on final
reserves, such a substantial drop encouraged a surge in prices throughout
the season.

The most widely traded grain



Wheat is widely consumed throughout the world. Its physical properties
make it the most suitable grain for making bread and pasta, and the only
grain suitable for couscous. It is by far the most widely traded grain
(one-fifth of world production moves from one continent to another) but
production for the world market is the privilege of a handful of countries.
The US , the European Union, Australia , Canada and Argentina are the
largest exporters.



But the economic growth of emerging nations, coupled with their
urbanisation, has profoundly changed people?s eating habits. They are eating
more, particularly meat. The Chinese, for example, consumed five times more
meat in 2005 than in 1980. Three kilogrammes of grain are needed to produce
1kg of poultry; more than double that is needed for 1kg of beef. Feed and
oil-producing grain are part of livestock?s daily diet.



With a growing world population and a better quality of life in
emerging nations, the demand for grain is growing inexorably. International
wheat exports tripled between 1960 and the beginning of the millennium.
Egypt , which used to supply the wheat for ancient Rome , has become the
product?s leading importer. Increased cheap imports during the times of
plenty strangled local agriculture in the Mediterranean region and
sub-Saharan Africa . The food bill for these countries has reached
exorbitant levels.



In a report by the UN?s Food and Agriculture Organisation (FAO) in
June 2007, the economist Adam Prakash concluded that food imports will cost
90% more on average than in 2000 for the least advanced countries (3). The
UN experts drove the point home a few months later. At a press conference in
Dakar on 9 November 2007 , Henri Josserand, head of the Global Information
and Early Warning Service at the FAO, calculated that the food bill for
African nations had grown by a third, or even 50% for the most dependent
among them, between 2006 and 2007.

First to benefit



The large exporter nations are the first to benefit from the
situation. The leader of the pack, the US , registered record agricultural
export revenue in 2007 ? $85bn. According to estimates from the United
States Department of Agriculture, the 2008 harvest looks even more
promising. In France grain farmers have doubled their income. The large
trading companies are also, discreetly, recording astronomical results.



Anger is brewing at the other end of the chain in the developing
countries which are net importers. Riots have broken out in Mexico , Senegal
, Morocco and Mauritania . Local agriculture cannot cover the population?s
needs in these countries.



The increased cost of groceries may be bearable in developed economies
where food represents only 14% of household expenses, but it becomes
unmanageable in sub-Saharan African nations where 60% of income is taken up
by food.



In the face of such food inflation, emerging nations which have
traditionally been exporters have raised barriers to keep local prices at an
affordable level. Argentina (4) and Russia have imposed taxes on exports as
well as restricting the amount distributed. When these measures are
reflected on the world market, the tension is pushed up a notch.



The most exposed countries, the net importers, have resorted to
subsidies when their finances allow it. In Morocco last September the rise
in bread prices set by the bakers union provoked violent demonstrations in
several towns. Fearing that the anger in the streets would lead to riots,
the government preferred to cancel the increase and suspend several taxes on
importing wheat to support the millers. The Tunisian government even asked
bakers to reduce the weight of bread to avoid increasing the price.

?Food aid vanishes?



According to the agronomist Marc Dufumier, an expert on comparative
agriculture, famine can be triggered by the most insignificant climatic
incident and will be even more difficult to deal with at a time when world
food aid reserves are becoming dangerously low.



?Food aid vanishes when the price of wheat rises,? he says. ?Countries
in the northern hemisphere are generous when they have a surplus. Aid
reduces reserves and contributes to supporting prices at home. But as soon
as prices take off, they sell to anyone who has a solvent demand.?



Figures published by the International Grains Council (5) confirm
this. During 2005-06 8.3m tons of grain were exported as food aid; only 7.4m
tons were exported in 2006/2007. Aid is expected to fall to 6m tons for the
season which is now coming to an end.



The hunger riots show no signs of burning themselves out. While supply
does not satisfy demand, prices will continue to rise. To reverse this
trend, governments could ask their populations to eat less couscous, bread
and particularly meat, but this suggestion is hardly likely to be favourably
received in countries where food standards are just starting to improve ?
not to mention those who have not even seen such improvement thus far.



In China , for example, the health minister is encouraging women to
consume dairy products to absorb more calcium. Milk requires livestock, and
grain to feed them. Demand will almost certainly grow in the years to come.

Investors seduced



There is the speculative trend too. In the autumn of 2007 Financeagri,
a French firm specialising in raw agricultural materials, encouraged its
subsidiaries in an email to ?play a part in the volatility of agricultural
markets. Don?t just be a spectator. Find out more.? Their commercial offer
illustrates the current revolution taking place on the agricultural futures
markets. Initially created to cover the risk of price variation, they have
become a hunting ground for all kinds of speculators, be they regular
(investors and negotiators) or occasional (farmers). The arrival of regular
investors has had a sharp effect on listings by feeding price volatility.



Agricultural indexes, which reflect the current evolution, are popular
with investment funds. According to Barcap (a Barclays subsidiary
specialising in investment), between the end of the first and fourth
quarters of 2007 ? when the grain markets really took off ? the volume of
capital managed by listed investment funds (ETFs in finance jargon) on
European agricultural products grew fivefold from $156m to $911m (6). The
same source has indicated that the amount of capital placed on the American
agricultural markets jumped even further, increasing sevenfold between the
first and last quarters of 2007.



The convergence of the prices for energy products and grain for the
biofuels industry has also seduced investors. An increasingly voracious (and
carnivorous) population, and undervalued agricultural products compared to
other raw materials, could create a long-term surge in agricultural
products. The metal and energy markets have been bubbling away nicely for
five years. Now it?s the turn of agricultural products.



In such a euphoric atmosphere producers are also seeking to maximise
profits. According to an analyst with a large trading company, ?high prices
have strengthened the position of operators?. In France many contracts have
not been honoured, particularly as regards the delivery of milling wheat and
brewing barley. Producers believed that more profit could be generated from
direct sales to manufacturers and have had to reimburse the injured
cooperatives.

?Land is an investment in the future?



For Philippe Mangin, president of Coop de France, this attitude is
entirely understandable. ?Small farmers have never faced such volatility,?
he says. ?Prices have tripled in 15 months. It?s enough to make your head
spin, especially after three lean years.?



However, he deplores this development. Faced with the concentration of
industrial demand and the disengagement of the public sector, the solidarity
of producers, underwritten by the cooperative movement, would be
particularly helpful.



According to the International Grains Council?s assessments, farmers
are starting to react. Wheat fields should increase by 4% in 2008,
comparable to the progress observed the last time the grain market was so
active in 1995-96.



But when all grains are taken together, few countries have the
necessary technical means or, more importantly, the available land. ?Land is
an investment in the future,? maintains British investor Jim Slater. He made
his fortune in the metal market and is now turning his attention to
agriculture, focusing on investments in irrigation programmes.



Russia , particularly the vast steppes in East Siberia , and Ukraine ,
thanks to its famous black earth, could develop farming. But the continental
climate makes this a risky enterprise as frost can cause returns to fall
drastically from one year to the next. Argentina and Brazil , on the other
hand, can convert pampas and forests into farmland.



According to Dufumier, ?there are still unexpected productivity gains
to be had?. Not in Europe , though, where the return per hectare is the
highest in the world. The future of export agriculture is probably to be
found in these new countries where production costs are low and returns
still weak.



It will involve rolling out genetically modified organisms (GMOs)
which are already omnipresent in Argentina , across the board ? and will
lead to a series of harmful consequences for the environment, such as
deforestation in Brazil .



The countries most affected by the grain explosion will be saved by
the renaissance of their own agricultural industry. Mali strengthened its
own productivity and has therefore been relatively spared, thanks to
investments made in rice cultivation in the Niger delta and the common sense
of its cotton farmers.



Disappointed by the ever-lower prices offered by cotton companies for
a kilo of seed cotton, they used the materials allocated for this crop for
sorghum and corn seedbeds. In neighbouring Burkina Faso , soya fields have
advantageously replaced the cotton trees.



Faced with a lack of generosity by the donor countries on which it
depends, the World Food Programme is trying to support internal production
by intensifying local purchases. In West Africa their share increased from
13% in 2005 to 30% in 2007.



The explosion in grain prices again raises the question of what role
agriculture should play in development. It should be at the heart of Europe
?s Common Agricultural Policy and the Doha negotiations. The World Bank,
which contributed to weakening agriculture in some countries by imposing
economic liberalisation, has now put this sector at the heart of its efforts
to fight poverty in its 2008 report on development.


[mondediplo.com]