Diversion of maize to produce biofuel will continue to send food prices aflutter

JOHANNESBURG, 17 October 2011 (IRIN) — In the past four years, global prices of staples such as maize and wheat have twice hit record levels, driving hundreds of thousands of the world’s most vulnerable people further towards hunger and poverty.

It is the poorest people in the poorest countries who are most affected by the high price of staple foods.

Recent responses to high prices have increasingly tended to focus on reducing price volatility — sharp fluctuations in food prices.

G20 countries in their June 2011 ministerial declaration recommended measures such as building grain reserves, a global market information system and regulating financial transactions in commodities markets.

But economists like Brian Wright, professor of agricultural and resource economics at the University of California, Berkeley, and Christopher Barrett, professor of applied economics at Cornell University, believe more emphasis needs to be placed on underlying policy problems.

Volatility is a symptom of a structural problem of low stocks, says Wright. When supplies get to certain low levels the prices become vulnerable to volatility.”

He makes a distinction between the impact of one-off production shortfalls and low grain stocks over a longer period: “Though [price] spikes do not indicate times of large aggregate food grain production shortfalls, it is easy to check that they do indicate times when aggregate stocks were low.”

Volatility is a symptom of a structural problem of low stocks

Barrett would like to see more emphasis on boosting production and improving distribution systems to increase the supply of food and bring down prices. Food price volatility gets addressed naturally as food supplies expand, bringing down prices and encouraging expansion of price-stabilizing inventories [stocks].

Traditional policy responses to price volatility tend to benefit large farmers in developed countries and not the poor consumer or producer in a developing country, said Barrett.

Every dollar spent on developing expensive reserves or marketing systems is a dollar taken away from improving yields, from developing drought-tolerant rice or setting up marketing infrastructure in a developing country, he said.

The Food and Agriculture Organization (FAO) in its new annual report. advocates creating buffer stocks, but admits maintaining them is expensive.

Biofuels

Maximo Torero, director of the International Food Policy Research Institute’s (IFPRI’s) Markets, Trade and Institutions Division, highlights some “non-traditional” causes of price volatility: the increasing use of food crops to produce biofuels, extreme weather events, and an increased volume of trading in commodity futures markets.

He also notes that price volatility is common in agriculture because of seasonal variations.

The surge in demand for biofuel since 2006 caused a decline in aggregate grain and oilseed stocks that made markets and governments much more sensitive to routine disturbances, according to Wright.

The increasing diversion of food crops like maize and soya to produce ethanol has been the new shock to the market that has kept stocks and supplies of food staples extra low… With low stocks otherwise — minor disturbances become major price movers,” he said.

In the USA, the amount of maize being diverted to ethanol production has increased rapidly — from less than 5 percent of total maize production in 1995 to more than 35 percent by 2010, according to the Earth Policy Institute. This year it will rise again.