Student - June 12, 2008

‘Drought and dollar also influence food prices’

The combination of low food reserves, bad harvests as a result of drought, high oil prices and increased demand for crops for biofuels is largely responsible for the current high food prices, according to economists at the LEI agricultural economics institute. The report in which they state this was presented on 4 June by Dutch minister of agriculture Gerda Verburg at the FAO food summit.

The causes and severity of the current high food prices are the subject of much discussion. The main question is the extent to which the growing demand for biofuels is influencing the price of food. Biofuels are made from grains and oilseeds that are also food sources. The LEI researchers refer to various studies in their report. According to the OECD, the price of maize is likely to rise by an extra 13 percent in the coming decade if demand for biofuels doubles. The International Food Policy Research Institute (IFPRI) estimates that the effect will be greater, saying that 39 percent of the current higher maize price is due to increased demand for biofuels.

Dr Hans van Meijl of the LEI thinks that the IFPRI figures are on the high side. ‘Biofuels do have an influence, but we mustn’t exaggerate this. Drought and the dollar exchange rate are equally important factors. And because everything is going on simultaneously, it’s difficult to separate issues.’

The best medicine against high food prices is high food prices, say the LEI researchers. The ‘invisible hand’ of Adam Smith will see to it that the market adjusts itself: farmers will produce more in response to higher prices, and as the supply increases, prices will go down. Nevertheless, the researchers argue in favour of more money for emergency assistance, and for building up food reserves so that food prices fluctuate less. They also recommend that investments be made in agriculture and agricultural research in developing countries.

The LEI study was commissioned by the Dutch ministry of agriculture, and was used as background information for the FAO food crisis summit held last week.


Why are food prices so high?

Two researchers at Wageningen UR give their opinions in response to the LEI report.

Dr Prem Bindraban, researcher at Plant Research International
‘What would you do if you had no food to eat? It’s very understandable that food producing countries take measures to reduce their exports so that there’s more food available for their own people. Countries where there is social unrest because of food shortages shouldn’t expose themselves more to the wiles of the international market. Liberalisation isn’t the answer to everything: we’re talking about food here. If I don’t have a bike, I walk instead. But if I don’t have food, I die. That’s a different matter. What’s disappointing about the LEI report is that it doesn’t use specific examples. How is the situation in Mexico for instance? Ten years ago, the free trade zone with the US and Canada was introduced: the Mexican market was flooded with cheap maize from the US and Mexican farmers couldn’t compete. So they disappeared. Now Americans are using that maize for fuel, so less maize goes to Mexico. It would be good to do research on whether this is the cause of the current tortilla crisis, and whether there is now hunger in Mexico as a result. Maize production is being resumed in Mexico, but mainly by rich farmers. It’s probably the same in other areas too. If the market reacts favourably, as the LEI economists hope, it’s unlikely to be to the benefit of small farmers and will not lead to broad rural development.’

Dr Niek Koning, researcher in agricultural economics and rural policy
‘The LEI report wrongly plays down the influence of biofuels on food prices. Various studies show that a quarter to a third of the food price rises are a direct result of increased demand for biofuels. If you include the indirect effects of speculation as well, the figure is closer to a half. Biofuels are therefore one of the big factors in the current high food prices. The reason to trivialise the influence is Wageningen UR’s own commercial interests in the ‘bio-based economy’. The report also lets the Dutch ministry of agriculture off the hook. The LEI doesn’t dare to say that the liberal reforms, supported by the ministry for the last ten to twenty years, are a major cause of the high food prices. Agricultural prices used to be stabilised in Europe and America, so there were less fluctuations. But as this policy has been dismantled, the prices have become more instable. Liberalisation has also led to a reduction in food reserves on both sides of the Atlantic, so a temporary shortage results more quickly in price rises. If you really want to do something about high prices, a global price stabilisation system must be reintroduced. And instead of giving subsidies, biofuels should be taxed when international grain prices rise above the ceiling set.’