The Rice Panic  

The FT reports "Rice traders hit by panic as prices surge" as Bangladesh and The Philippines struggle to find anyone to sell rice to them.

Rice prices hit the $1,000-a-tonne level for the first time on Thursday as panicking importers scrambled to secure supplies, exacerbating the tightness already provoked by export restrictions in Vietnam, India, Egypt, China and Cambodia. The jump came as the Philippines, the largest rice importer, failed for the fourth time to secure as much rice as it wanted. The unsuccessful tender followed Bangladesh’s inability to buy any rice at all this week.

Traders and analysts warned that rice demand was escalating in spite of prices rising to three times the level of a year ago as countries try to build up stocks. Vichai Sriprasert, president of Riceland International, a leading rice exporter in Bangkok, said several of its customers, including governments, were buying far more than they usually did amid fears about scarcity. “It is panic,” he said. “My customers are demanding double the usual volume. We would not have enough supplies for all the demand we are facing.”

Michael Whitehead, a rice specialist at Rabobank in New York, added: “The potentially destabilising social effect of rice shortages in most high-consumption countries has strengthened the resolve of governments to build supply.”

The Progressive says that the way to solve the food crisis is by changing policies - their prescription being to embrace the idea of "food sovereignty" (a concept I mentioned in The Fat Man, The Population Bomb And The Green Revolution) instead of global free(ish) trade in cash crops.

Food riots are erupting all over the world. To prevent them and to help people afford the most basic of goods, we need to understand the causes of skyrocketing food prices and correct the policies that have fueled them.

World food prices rose by 39 percent in the last year. Rice alone rose to a 19-year high in March – an increase of 50 per cent in two weeks alone – while the real price of wheat has hit a 28-year high. As a result, food riots erupted in Egypt, Guinea, Haiti, Indonesia, Mauritania, Mexico, Senegal, Uzbekistan and Yemen. For the 3 billion people in the world who subsist on $2 a day or less, the leap in food prices is a killer. They spend a majority of their income on food, and when the price goes up, they can’t afford to feed themselves or their families.

Analysts have pointed to some obvious causes, such as increased demand from China and India, whose economies are booming. In the last thirty years, developing countries that used to be self-sufficient in food have turned into large food importers. Rising fuel and fertilizer costs, increased use of bio-fuels and climate change have all played a part. But less obvious causes have also had a profound effect on food prices.

Over the last few decades, the United States, the World Bank and the International Monetary Fund have used their leverage to impose devastating policies on developing countries. By requiring countries to open up their agriculture market to giant multinational companies and by persuading them to specialize in exportable cash crops such as coffee, cocoa, cotton and even flowers, Washington, the IMF and the World Bank created a downward spiral. They made matters worse by demanding the dismantling of marketing boards that kept commodities in a rolling stock to be released in event of a bad harvest. These boards shielded both producers and consumers against sharp rises or drops in prices. But the shield is no longer there.

Here’s what we must do to prevent an epidemic of starvation from breaking out.

First, it is essential to have safety nets and public distribution systems put in place. Donor countries should provide more aid immediately to support government efforts in poor countries and respond to appeals from U.N. agencies, which are desperately seeking $500 million by May 1.

Second, we should help affected countries develop their agricultural sectors to feed more of their own people and decrease their dependence on food imports. We should promote production and consumption of local crops raised by small, sustainable farms instead of growing cash crops for Western markets. And we should support a country’s effort to manage stocks and pricing so as to limit the volatility of food prices.

To embrace these crucial policies, however, we need to stop worshipping the golden calf of the so-called free market and embrace, instead, the principle of food sovereignty. Every country and every people have a right to food that is affordable. When the market deprives them of this, it is the market that has to give.

Kevin Bullis at Technology Review has an article on Battling Ethanol-Propelled Food Prices, noting "Demand for corn-derived fuel is driving up food prices, but new technologies could help" and quoting from an article in Foreign Affairs last year on "How Biofuels Could Starve the Poor".

Food prices worldwide have risen dramatically in the past few years, due in part to a similarly dramatic rise in the amount of corn used for ethanol production in the United States. Now, in an effort to make food less expensive, experts are calling for limits on ethanol production, subsidies for corn, and more incentives for biofuels made from nonfood sources.

According to statistics released Wednesday by the U.S. Department of Labor, food prices for the first three months of the year rose at a rate that translates to an annual increase of 5.3 percent (adjusted for seasonal variations). That's slightly higher than last year's increase, and much higher than the increases in previous years. From 2001 to 2006, the price of food increased each year by an average of only 2.5 percent. According to the World Bank, the situation worldwide is more dire: food prices have nearly doubled over the past three years. That's erased a decade of economic gains for the poor in some countries.

Part of this increase is due to corn being diverted from use as animal feed and food to use as a feedstock for ethanol production. Many other factors are also important--such as growing demand for food imports in India and China and a drought in Australia that hurt grain harvests. But the use of corn for biofuels has been singled out because it is one factor over which governments have some control. Some analysts, such as C. Ford Runge, a professor of applied economics and law at the University of Minnesota, say that the use of corn for fuel rather than food could account for about one-third of the rise in prices worldwide. The other two-thirds is split between the effects of weather and increases in demand, he says. (Runge presents his argument in "How Biofuels Could Starve the Poor," in Foreign Affairs.) A look at the grain markets gives a good idea of the role that ethanol demand plays in food prices, says Patrick Westhoff, codirector of the Food and Agricultural Policy Research Institute at the University of Missouri. In the past two years, global consumption of grains has risen by about 80 million tons, he says. About half of that increase, or 40 million tons, comes from corn used to make ethanol.

To reverse the effects of corn going to fuel rather than to food, some experts are calling for an end to the biofuel mandates signed into law late last year. The mandates require an increase in biofuel production in the United States, including 15 billion gallons of corn ethanol production by 2015--considerably more than the 6.5 billion gallons produced last year. Repealing the mandates would certainly have some effect on food prices, Westhoff says. According to an analysis done by his organization, the mandates will decrease U.S. corn exports by more than 13 percent from 2011 to 2016. That decrease will tighten corn supplies worldwide, driving up not only corn prices, but also the prices of other staples, such as wheat, that could serve as a replacement for corn. Removing the mandates could improve export numbers, Westhoff says. (Notably, higher demand for corn for use in ethanol production has actually increased corn exports in the short term. High corn prices have led farmers to plant more corn, and last year, not all of the increased supply went to ethanol. Much of the excess went overseas.)

But the effect of repealing the mandates on food prices depends strongly on the cost of energy. If oil prices stay around $100 a barrel, ethanol will remain an attractive alternative even without the mandates, Westhoff says. As a result, ethanol production could reach levels as high as those set by the mandates anyway, putting just as much strain on the corn supply. High energy costs increase food prices in other ways, too, says Simla Tokgöz, an economic analyst at the Center for Agricultural and Rural Development at Iowa State University. Growing crops takes energy, and countries that have to import food are now paying a high price for shipping because of fuel costs. Bringing down food prices requires addressing these problems as well.

One thing that could help is reducing or eliminating subsidies that give corn ethanol an economic advantage over ethanol from other sources, such as sugar cane, Runge says. Ethanol can be made from sugar more efficiently than it can from corn, so diversion of sugar to fuel production wouldn't have as much of an effect on food markets.

Scaling up technology for making ethanol from nonfood sources, such as grass and wood chips, could also help. Federal grants are already starting to make that happen, and certain provisions in the U.S. biofuels mandates call for the use of cellulosic ethanol. But so far, technologies for producing cellulosic ethanol have not been commercially deployed. The jump in food prices "increases the urgency to get them developed," says Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University.

I've seen a couple of reports that corn plantings have actually decreased by 8% in the US this year (somewhat offset by increased soy plantings) which surprised me - especially considering how few reports mention this as a potential factor in further price rises going forward. Explanations for why this is so are scarce, though one commenter pointed the finger at rising fuel, fertiliser and pesticide prices, combined with the credit crunch possibly making farmers less able to afford to plant new crops.

All in all it doesn't augur well for next year.