Tag Archives: grain

Water or Wheat?

A melon farm in Toshka, Egypt.

Much of Northern Africa, the Middle East, and other countries in dry climes are facing this dilemma. They have too little water to farm intensively and be food-sufficient, and yet are getting hammered by rising food prices, which have caused the prices of imported staple grains to as much as triple. Add in rising unrest and food riots and the political volatility of many of these countries, and it is a very tense situation indeed.

To recap, there are basically two radically different choices:

Option 1: Stop growing what entirely, or cut way back to preserve your water. Rely on your foreign income to purchase as much wheat as you need. This is the path that Saudia Arabia is taking. While this seems pretty safe for the Saudis, due to their large reserves of cash and oil, this is a lot more problematic for poorer countries.

Option 2: Grow your own wheat. Don’t rely on a global supply chain or risk astronomical prices; ensure that you will have your staple grain by growing it yourself. Worry about water later.

According to a recent article in the New York Times, it looks like Egypt and several other middle Eastern countries are pursuing this latter choice. Smug though I am to have beaten the NYT to this issue, I’m glad they’re writing about it. This is a big, big deal, particularly when you factor in the politics at play in the region.

Global food shortages have placed the Middle East and North Africa in a quandary, as they are forced to choose between growing more crops to feed an expanding population or preserving their already scant supply of water.

For decades nations in this region have drained aquifers, sucked the salt from seawater and diverted the mighty Nile to make the deserts bloom. But those projects were so costly and used so much water that it remained far more practical to import food than to produce it. Today, some countries import 90 percent or more of their staples.

The problem with importing such a huge percentage of your food is that you become incredibly vulnerable to disruptions in supply and price increases. The governments who, like Egypt, subsidize wheat imports are spending a lot more on those subsidies. Fears of supply disruptions and rising prices have sparked food riots in dozens of countries worldwide. In some cases, such as Egypt and Pakistan, the army has been mobilized to maintain control of the grains and prevent looting.

“The countries of the region are caught between the hammer of rising food prices and the anvil of steadily declining water availability per capita,” Alan R. Richards, a professor of economics and environmental studies at the University of California, Santa Cruz, said via e-mail. “There is no simple solution.”

Several countries are starting or reviving huge irrigation and agriculture projects, while others are looking at developing agriculture. “You can bring in money and water and you can make the desert green until either the water runs out or the money,” said Elie Elhadj, a Syrian-born development expert and former banker with a Ph.D. in Islamic history and political economy from London University’s School of Oriental and African Studies.

Dr. Elhadj actually commented on this topic back in June, posting an excerpt from his article Saudi Arabia’s Agricultural Project: Dust to Dust, published in the Middle East Review of International Affairs [MERIA], Vol. 12, No. 2 June 2008.

The New York Times article continues:

Djibouti is growing rice in solar-powered greenhouses, fed by groundwater and cooled with seawater, in a project that produces what the World Bank economist Ruslan Yemtsov calls “probably the most expensive rice on earth.”

Several oil-rich nations, including Saudi Arabia, have started searching for farmland in fertile but politically unstable countries like Pakistan and Sudan, with the goal of growing crops to be shipped home.

“These countries have the land and the water,” said Hassan S. Sharaf Al Hussaini, an official in Bahrain’s agriculture ministry. “We have the money.”

In Egypt, where a shortage of subsidized bread led to rioting in April, government officials say they are looking into growing wheat on two million acres straddling the border with Sudan.

Economists and development experts say that nutritional self-sufficiency in this part of the world presents challenges that are not easily overcome. Saudi Arabia tapped aquifers to become self-sufficient in wheat production in the 1980s. By the early 1990s, the kingdom had become a major exporter. This year, however, the Saudis said they would phase out the program because it used too much water.

Egypt is intensifying efforts to ramp up agricultural production with the Toshka Project, also known as the New Valley Project. Started in 1997, the project involves diverting water from Lake Nasser (created by the construction of the Aswan dam) to create 558,000 new acres of arable land in the Western Desert, part of the Sahara.

From the New York Times article:

When the Toshka farm was started in 1997, the Egyptian president, Hosni Mubarak, compared its ambitions to building the pyramids, involving roughly 500,000 acres of farmland and tens of thousands of residents. But no one has moved there, and only 30,000 acres or so have been planted.

The farm’s manager, Mohamed Nagi Mohamed, says the Sahara is perfect for farming, as long as there is plenty of fertilizer and water. For one thing, the bugs cannot handle the summer heat, so pesticides are not needed. “You can grow anything on this land,” he said, showing off fields of alfalfa and rows of tomatoes and grapes, shielded from the sun by gauzy white netting. “It’s a very nice project, but it needs a lot of money.”

Egypt’s increasing population is also cited as one of the motivations behind the need to expand domestic food production:

Mr. Mubarak calls his country’s growing population an “urgent” problem that has exacerbated the food crisis. The population grows about 1.7 percent annually, considerably slower than a generation ago but still fast enough that it is on pace to double by 2050. Adding 1.3 million Egyptians each year to the 77 million squeezed into an inhabited area roughly the size of Taiwan is a daunting prospect for a country in which 20 percent of citizens already live in poverty.

The Toshka Project is not the only effort to increase agricultural production in Egypt. According to this website from Egypt’s State Information Service, Egypt will increase its arable land by 3.274 million acres in 2017 from 8.159 million acres in 2006, a 40% increase in arable land.

The website, which emphasized the technological marvels at hand and details how important agricultural exports are to Egypt’s economy, also lists several other massive projects. The Toshka project and the Al-Salam Canal are listed as adding over half a million acres each to Egypt’s agricultural land. Both are to be fed with water from the Nile. East Uwaiynat and Darb al-Araba’in, both smaller projects irrigated from underground aquifers, would add 45,000 and 11,000 acres, respectively.

Essentially, Egypt is trying very hard to increase its amount of arable land, relying on the mighty Nile and underground aquifers to do so. But rivers can be overused, as the Colorado River is, and aquifers, once depleted, can take thousands of years to recharge naturally.

In this situation, there aren’t really any good options. You can import food at ever-higher prices, and risk supply disruptions and food riots. If the food is subsidized, you also risk depleting currency reserves and draining the government treasury. And yet attempting to become more nationally food self-sufficient and rely on domestic production, you risk totally depleting your non-renewable water resources.

Naturally, the Times suggests a free-market, capital-intensive solution: abandoning subsistence agriculture to focus exclusively on low-water cash crops for export, exploiting the law of comparative advantage, and then using the proceeds to buy staple foods.

Economists say that rather than seeking to become self-sufficient with food, countries in this region should grow crops for which they have a competitive advantage, like produce or flowers, which do not require much water and can be exported for top dollar.

For example, Doron Ovits, a confident 39-year-old with sunglasses pushed over his forehead and a deep tan, runs a 150-acre tomato and pepper empire in the Negev Desert of Israel. His plants, grown in greenhouses with elaborate trellises and then exported to Europe, are irrigated with treated sewer water that he says is so pure he has to add minerals back. The water is pumped through drip irrigation lines covered tightly with black plastic to prevent evaporation.

A pumping station outside each greenhouse is equipped with a computer that tracks how much water and fertilizer is used; Mr. Ovits keeps tabs from his desktop computer. “With drip irrigation, you save money. It’s more precise,” he said. “You can’t run it like a peasant, a farmer. You have to run it like a businessman.”

Israel is as obsessed with water as Mr. Ovits is. It was there, in the 1950s, that an engineer invented modern drip irrigation, which saves water and fertilizer by feeding it, drop by drop, to a plant’s roots. Since then, Israel has become the world’s leader in maximizing agricultural output per drop of water, and many believe that it serves as a viable model for other countries in the Middle East and North Africa.

Already, Tunisia has reinvigorated its agriculture sector by adopting some of the desert farming advances pioneered in Israel, and Egypt’s new desert farms now grow mostly water-sipping plants with drip irrigation.

The Israeli government strictly regulates how much water farmers can use and requires many of them to irrigate with treated sewer water, pumped to farms in purple pipes. It has also begun using a desalination plant to cleanse brackish water for irrigation.

“In the future, another 200 million cubic meters of marginal water are to be recycled, in addition to promoting the establishment of desalination plants,” Shalom Simhon, Israel’s agriculture minister, wrote via e-mail. Still, four years of drought have created what Mr. Simhon calls “a deep water crisis,” forcing the country to cut farmers’ quotas.

I don’t love this option; I’m skeptical of any solution that puts so much risk (of price collapses, dips in demand, crop failures) on the people who are relying on this to buy staple foods. Moreover, technology required to move to computerized drip irrigation and greenhouses represents a huge capital investment, an enormous barrier to poor farmers and an incentive to centralize and scale up farming operations.

But is a greenhouse running on recycled wastewater more sustainable than relying on the aquifers? Certainly. There’s no easy answers to this one.

Free Markets and Food Markets: The Ugly

The food crisis is bad, and getting worse. The Washington Post calls it “the worst food crisis sine the 1970’s,” and both they and the New York Times have series on the jump in food prices. A lot of it has to do with rising demand worldwide, coupled with scarce supplies due to drought and the use of cropland for biofuel production. The role speculators on the commodity markets have played in driving up agricultural commodity prices has largely been unexamined.

An excellent article, Deadly Greed: The Role of Food Spectators in the Global Food Crisis, in the top German news-magazine, Der Spiegel, lays it all out clearly

But classic supply and demand theory offers only a partial explanation. Sudden price hikes since last January have been alarming. The UN estimates that at least $500 million (€312 million) in immediate aid will be needed by May 1 to avoid serious famines. Agricultural scientists at the world body’s Educational, Scientific and Cultural Organization (UNESCO) have presented a report on the world food crisis. And criticism is growing that hedge funds, index funds, pension funds and investment banks bear part of the blame

“What we normally have is a predictable group of sellers and buyers — mainly farmers and silo operators,” says Greg Warner [a two-decade veteran of the grain wholesaling business]. But the landscape has changed since the influx of large index funds. Fund managers seek to maximize their profits using futures contracts, and prices, says Warner, “keep climbing up and up.”

But some basic market rules seem to have stopped working. “The enormous influx of capital has resulted in the futures markets no longer reflecting supply and demand,” says Todd Kemp of the US National Grain and Feed Association. Ironically, investors have placed their wildest bets on staple foods. Information about supply bottlenecks and famines at the other end of the world is not noted on market quotations. [emphasis added]

A commodities dealer named Christoph Eibl soberly concludes that financial managers just want to “benefit from the scarcity of these commodities.” Eibl’s Stuttgart-based investment firm, Tiberius, manages €1 billion ($1.6 billion). His in-house experts estimate that hundreds of billions of dollars have flowed into the futures sector as a whole within the last five years, much of it for agricultural commodities. Eibl admits the whole thing demands an “ethical discussion.” Some futures traders argue that they don’t cause prices to rise in the real world because as a rule they never take delivery of a given crop — other parts of the economy control the actual street price. But futures prices affect real-world behavior (such as inventory hoarding), and Eibl says that buying futures in rice, for example, “eventually causes consumer prices to rise in developing countries like Haiti.”

In Haiti, people are eating dirt formed into patties because they can’t afford rice, scavenging for food in garbage dumps, and food riots forced the Prime Minister out of office.

The upshot is that more and more small investors are jumping on the commodities bandwagon. Many investors, not unlike hedge fund managers, seek diversification in their portfolios, partly through investment in agricultural commodities. From the standpoint of these investors, poor harvests that drive up prices are only good for their portfolios. Many investors either don’t care or are simply oblivious to the fact that by investing in the global casino, they could be gambling away the daily food supply of the world’s poorest people.

Financial giant ABN Amro has been especially adept at turning a profit in the current market. As a provider of commodities-investment products for private investors, ABN Amro last March became the first bank to offer certificates allowing small investors to place bets on rising rice prices on the Chicago Futures Exchange.

The bank’s marketing department has reacted with cold precision to headlines about famine around the world. Two weeks ago, when experts warned of an impending hunger crisis and the political instability associated with it, ABN Amro introduced a new ad campaign on its website. As India imposes a ban on rice exports, the ad said, world rice supplies have declined to a minimum: Now ABN Amro was making it possible, for the first time, to invest in Asia’s most important basic food product. In the space of only three weeks, investors raked returns of more than 20 percent. The number of futures contracts traded in Chicago has skyrocketed

A Sasketchwan grain elevator

Last week’s column by recent Pulitzer Prize-winner columnist Steven Pearlstein touches upon another effect of this speculation in commodities markets, aside from the astronomical rise in prices:

Speculators have always played a prominent role in commodities markets, but in the past year, they have literally overwhelmed them, causing a dramatic increase in trading volume, volatility and prices and disrupting many of the normal relationships between producers and end-users. [emphasis added]

There are various estimates of how much of this new investment money flowed into these vehicles in the past two years. Philip Verleger, an economist who closely studies commodity markets, estimates that the inflow was running at an average of $100 million a day during most of 2006 and 2007, rising to as much as $1 billion a day during the frenzied trading days of February and March. J.P. Morgan put the amount at between $150 billion and $270 billion. And the Bank for International Settlements estimates that the value of all the derivative contracts traded on the unregulated over-the-counter markets surged from about $3 trillion in the spring of 2005 to more than $8 trillion today.

Whatever the number, it’s hard to imagine that it wasn’t a significant factor in skyrocking prices that have created problems for many of the nonfinancial players who rely on the commodity futures markets for selling products, assuring adequate supplies and hedging against price fluctuations. Many farmers and grain elevators are reluctant to sell their product on futures markets out of fear they won’t have the cash to meet the ever-escalating margin calls, while giant users like Cargill are reportedly also cutting back on the their use of futures contracts to lock in supplies. [emphasis added]

Essentially, tons of new investors rushed into commodities markets, looking for the next sure thing. There is only a limited amount of wheat or soybeans contracts to buy, and so global commodity prices go up even more than they would have due to increased demand and diminished supply. This influx causes a lot of volatility and uncertainty in the markets, because no-one is sure what the market price, based on true supply and demand, should actually be. Hence, the commodities and futures markets no longer work for the people they were designed to serve: farmers and buyers who want to lock in a guaranteed price and protect themselves against price swings.

Another New York Times article, Price Volatility Adds to Worry on U.S. Farms, gives the details from the farmers’ perspectives.

Today’s crop prices are not just much higher, they also are much more volatile. For example, a widely used measure of volatility showed that traders in March expected wheat prices to swing up or down by more than 72 percent in the coming year, three times the average volatility for that month and the highest level since at least 1980. The price swing expected in March for soy beans was three times its monthly average, and the expected volatility in corn prices was twice its monthly average.

Fred Grieder has been farming for 30 years on 1,500 acres near Bloomington, in central Illinois. His crop insurance premiums rise with the volatility. So does the cost of trading in options, which is the financial tool he has used to hedge against falling prices. Some grain elevators are coping with the volatility and hedging problems by refusing to buy crops in advance, foreclosing the most common way farmers lock in prices.

“The system is really beginning to break down,” Mr. Grieder said. “When you see elevators start pulling their bids for your crop, that tells me we’ve got a real problem.”

Until recently, that system had worked well for generations. Since 1877, grain producers have been able to hedge the price of their wheat and corn crops on the Chicago Board of Trade through the use of futures contracts, which are agreements to buy or sell a specific amount of a commodity for a fixed price on some future date. Soybean futures contracts were introduced in 1936. More recently, the exchange has offered another tool: options on those futures contracts, which allow option holders to carry out the futures trade, but do not require that they do so. Trading in options is not as effective a hedge, farmers say, but it does not require them to put up as much cash as is required to trade futures. These tools have long provided a way to lock in the price of a crop as it is planted, eliminating the risk that prices will drop before it is harvested. With these hedging tools, grain elevators could afford to buy crops from farmers in advance, sometimes a year or more before the harvest.

For a clear description of what a futures contract is, look here. There is a more detailed explanation of how futures contracts and options actually work here, which has some nice examples.

But that was yesterday. It simply is not working that way today. Futures, for example, are less reliable. They work as a hedge only if they fall due at a price that roughly matches prices in the cash market, where the grain is actually sold. Increasingly — for disputed reasons — grain futures are expiring at prices well above the cash-market price.

When that happens, farmers or elevator owners wind up owing more on their futures hedge than the crops are worth in the cash market. Such anomalies create uncertainty about which price accurately reflects supply and demand — a critical issue, since the C.B.O.T. futures price is the benchmark for grain prices around the world.

“I can’t honestly sit here and tell you who is determining the price of grain,” said Christopher Hausman, a farmer in Pesotum, Ill. “I’ve lost confidence in the Chicago Board of Trade.”

At current levels of volatility, options trading becomes riskier, and therefore more expensive — too expensive for many farmers like Mr. Grieder, who now has to hedge with the recently less reliable futures contracts.

That exposes him to the risk of having to put up more cash — to maintain his price protection — whenever a weather threat, shipping disruption or a fresh surge of money from Wall Street suddenly pushes up grain prices. “If you’ve got 50,000 bushels hedged and the market moves up 20 cents, that would be a $10,000 day,” he said. “If you only had $10,000 in your margin account, you’d have to sit down and write a check. You can see $10,000 disappear overnight.”

I strongly recommend reading the more detailed explanation of commodities futures trading here. Essentially, the two major problems are uncertainty about the true price of a commodity and the increasing volatility of commodities markets cause by the huge influx of investors trading contracts. This is very interesting, and worrying and certainly looks like bad news for farmers. It seems like these tools, designed to protect the farmers, are now benefiting the speculators at the farmers’ expense.

Free Markets and Food Markets: The Good

In theory, a free market trade of goods, particularly foodstuffs, could ensure that goods get where the demand is greatest, ensuring a relatively stable supply with the fluid movement of food around the world, preventing spikes in prices.

This is the argument that is put forward by Tyler Cowen, a libertarian and economics professor at George Mason University, in a column in Sunday’s New York Times. All emphases are added.

Poor rice yields are not the major problem. The United Nations Food and Agriculture Organization estimates that global rice production increased by 1 percent last year and says that it is expected to increase 1.8 percent this year. That’s not impressive, but it shouldn’t cause starvation. The more telling figure is that over the next year, international trade in rice is expected to decline more than 3 percent, when it should be expanding. The decline is attributable mainly to recent restrictions on rice exports in rice-producing countries like India, Indonesia, Vietnam, China, Cambodia and Egypt.

I’m sure poor rice yields are a problem locally. For example, the rice crop in Australia, down 98% from what it was 6 years ago, has led Australian rice distributors to buy up rice in the Oceania region to make sure they will have rice to sell to the domestic market. Furthermore, those numbers only say how much rice is produced, not what the demand for rice is. Thus, they only look at half of the supply-and-demand balance.

At first glance, this seems understandable, because a country may not wish to send valuable foodstuffs abroad in a time of need. Nonetheless, the longer-run incentives are counterproductive.

Export restrictions send a message to farmers that their crops are least profitable precisely when they are most needed. There is little incentive to plant, harvest or store enough rice — or any other crop, for that matter — as a hedge against bad times. This tendency to skew supply and demand is also apparent in the Philippines, where the government is tracking down and arresting rice hoarders, who, of course, are simply storing rice for the possibility of even harder times to come.

Now, I am not an economist, but this presumes a primarily export/international markets-driven view of trade at the farm level. I don’t have any figures handy, but a lot of farmers worldwide, perhaps the majority, are subsistence farmers. That is, they live on what the farm produces, selling whatever surplus they have on the local markets. These farmers largely don’t participate in the export trade, because they don’t operate on the scale that farming for export needs. For larger, cash crop farms, export restrictions doubtless do have some effect.

However, this would seem to depend on the price on the domestic market compared to the international market. In a number of countries, the government is buying grains at market price and then subsidizing their sale at below-market price, ensuring that people will be able to buy them. In this case, it’s the government that’s taking the financial hit. Of course, if the government mandates the the purchase of the grains from the farmer at a below-market price, then the financial penalty is imposed on the farmer.

But this misses one thing: the current price of rice as reflected in the amount paid to the farmer, whether market-price or artificially low, as compared to past prices. Again, I don’t have the numbers, though I’m sure some commodities market and news digging can find them. But let’s think it through. If the price of rice on the retail market has doubled in a year, then the farmer is getting more for the rice than a year ago. The farmer sells his rice on the market directly, he gets all of that 100% price increase. If through a distributor or wholesaler, its less, perhaps 50%. Still a 50% increase from his income last year. If the government is mandating the sale of rice at below-market rates, say at 50% more, instead of at the current market price of 100% more, the farmer can still be making more on the rice than a year ago, and still has incentive to plant more rice, if he can. The catch comes if the price of production has also risen, which I don’t have the numbers for. Demand is not going to shrink too much; rice is a staple grain for billions.

In commodity markets, it’s not uncommon for high demand to cause sharp increases in prices; on short notice, it’s often hard to match the new demand with more supply. The question is whether supply, and trade, can grow to offset market tightness.

This is a major point. The demand for rice and other staple foodstuffs is pretty inelastic, and is growing. You can stop buying TV’s, or even cars. You can’t stop eating, though you can eat less. Moreover, the places in which you can grow rice are finite. You need fertile land, and steady access to water. It’s possible to convert other farmland to rice, though it takes time and money. This is unlikely to happen on a grand scale since prices for everything are up, lessening the financial incentive to switch to rice. It’s also possible to convert fallow ground to rice, though again, it takes time and money. And marginal farmland is harder to cultivate and produces lower yields. Furthermore, most of the best farmland is already in use, and in a lot of places where rice is a staple grain, there really isn’t any more good farmland.

Restrictions on the rice trade run the risk of making shortages and high prices permanent. Export restrictions treat rice trade and production as a zero- or negative-sum game where one country’s gain comes at the expense of another. That’s hardly the best way to move forward in a rapidly growing world economy.

This lack of support for trade reflects a broader and disturbing trend. An increasing percentage of the world’s production, including that for agriculture, comes from poor countries. Over all, that’s good for rich countries, which can focus on creating other goods and services, and for the poor countries, which are producing more wealth. But it can slow the speed of adjustment to changing global conditions. For example, if demand for rice rises, Vietnamese farmers — who remain shackled by many longstanding regulations of communism — aren’t always able to respond quickly. They don’t even have complete freedom to ship and trade rice within their own country. Poorer countries also tend to be the most protectionist. To make matters worse, about half of the global rice trade is run by politicized state trading boards.

The problem of a lack of surplus rice is exacerbated by little trade. If there was a lot of extra rice worldwide, then a few countries prohibiting exports wouldn’t make too much of a difference. But what happens if a country’s rice crops fail, due to flood, drought, disease, or devastation like a typhoon? There isn’t much extra rice, so there isn’t much extra rice to buy on the world market, so commodity prices spike higher. In this case, its clear that more international trade could mitigate a potential disaster.

Conversely, prohibiting exports or setting price caps, as is happening now, can stave off disaster the country of production by ensuring that the food needs of the domestic market are met. Many governments are also replenishing their rice reserves with the rice that would have gone on the export market. Rice reserves, like reserves of other grains, are at a record low, so replenishing them gives governments a crucial tool to mitigate price swings domestically. This can prevent price uncertainty, as the government can release extra rice on the market if prices get too high. If the price will remain within a reasonable range, there is less incentive for hoarders and speculators to buying up rice, either fearing that it will be unaffordable later or hoping to resell the rice later at a higher price.

But for those countries that aren’t food self-sufficient, like Mauritania, this drop in gain supplies is disastrous. Less than 2% of Mauritania’s land is arable, so the country relies almost wholly on imports for grain. With less supply and growing demand, Mauritania’s suppliers must struggle to secure grain against governments and companies that can outbid for the limited supply of rice on the global market.

The reality is that many of today’s commodity shortages, including that for oil, occur because ever more production and trade take place in relatively inefficient and inflexible countries. We’re accustomed to the response times of Silicon Valley, but when it comes to commodities production, many of the relevant institutions abroad have only one foot in the modern age. In other words, the world’s commodities table is very far from flat.

Again, food is unlike every other commodity in that its essential to life. Maybe a freer trade in rice would increase supplies and drive down prices and ensure access to rice for everybody, but you need some serious faith in the free market to believe it. I personally lack that faith.

The price of a commodity on the free market is the collective price that buyers are willing to pay and that producers are willing to sell at, given current supply and demand. It is NOT necessarily the price at which everyone can afford to buy. There are a lot of debates about the relationship of ethanol and other biofuels to the growing food crisis that touch on this issue. The gist of it is, if a rich country is willing to pay more for a grain to turn it into ethanol than a poor country can afford to pay for it to eat, the rich country will be able to buy the grain for non-food purposes. This also plays out in what types of crops are planted, and the debates about using corn to feed animals instead of people.

The rest of Cowen’s column deals with other restrictions to growing rice for the global trade:

Many poor countries, including some in Africa, could be growing much more rice than they do now. The major culprits include corruption in the rice supply chain, poorly conceived irrigation systems, terrible or even nonexistent roads, insecure property rights, ill-considered land reforms, and price controls on rice. The ability of a country to grow rice depends not just on its weather, but also on its institutions. Burma, now Myanmar, was once the world’s leading rice exporter, but it is now an economic basket case and many of its people go hungry

Of course, wealthy countries are partly at fault, too. Japan, South Korea and Taiwan all protect their native rice farmers; you’ll even see rice being grown in Spain and Italy, aided by European Union subsidies and protectionism. The United States spends billions subsidizing domestic rice farmers. In the short run, these domestic rice producers mean less demand pressure on the world market, which might seem like a good thing. But, again, the longer-term effects are pernicious.

Low-cost rice production in countries like Thailand isn’t geared to meeting higher foreign demand, as it would be in a freer market. When more rice is needed, capacity is limited and the grains are slow in coming. And the protected rice from wealthy countries is simply too expensive to alleviate hunger in very poor countries.

Overall, Tyler Cowen’s column raises some interesting points, even though I think his analysis is lacking some important considerations. This is a really thorny issue, particularly the balancing of the needs of particular countries with the rise in global demand. The tension between lowering the high price of rice worldwide via freer trade and ensuring that the very poor have access to rice really highlights the strenghts and limitations of a free market approach.

More details about his opinions, as well as a spirited series of counter-points, can be found on his posts about this issue on his blog Marginal Revolution.

News on the Rice Shortage from Australia: “Rice is a staple food. Chardonnay is not.”

A headline article in today’s New York Times, A Drought in Australia, a Global Shortage of Rice, examined the intertwined problems of climate change and agriculture in some detail.

The Deniliquin mill, the largest rice mill in the Southern Hemisphere, once processed enough grain to meet the needs of 20 million people around the world. But six long years of drought have taken a toll, reducing Australia’s rice crop by 98 percent and leading to the mothballing of the mill last December.

That’s an astounding number; Australia is now producing only 2% of the rice it used to. So Australia is essentially no longer producing rise domestically, and must look to the world market for it’s import needs.

The collapse of Australia’s rice production is one of several factors contributing to a doubling of rice prices in the last three months — increases that have led the world’s largest exporters to restrict exports severely, spurred panicked hoarding in Hong Kong and the Philippines, and set off violent protests in countries including Cameroon, Egypt, Ethiopia, Haiti, Indonesia, Italy, Ivory Coast, Mauritania, the Philippines, Thailand, Uzbekistan and Yemen.

The drought’s effect on rice has produced the greatest impact on the rest of the world, so far. It is one factor contributing to skyrocketing prices, and many scientists believe it is among the earliest signs that a warming planet is starting to affect food production.

This is not a surprising conclusion. Climate change is affecting not only temperature (why global warming is a misnomer), but also rain, storms, the growing season, and everything else to do with weather. In a heavily mono-cropped system of agriculture, like all industrial agriculture, the variety of crops grown are going to be optimized for high yields under pretty specific conditions of sunlight, temperature, and water. If those factors start changing, as they are now, there is a limited amount of variation that the mono-crop species can tolerate before the crops fail. That doesn’t even account for changes in weeds and pests with changing weather, or rising sea levels. If these conditions persist over a period of, say, several years, the amount of food we are going to be able to get from these crops that are far outside their comfort zone could plummet, and prices for the scarce supply will be high

Drought has already spurred significant changes in Australia’s agricultural heartland. Some farmers are abandoning rice, which requires large amounts of water, to plant less water-intensive crops like wheat or, especially here in southeastern Australia, wine grapes. Other rice farmers have sold fields or water rights, usually to grape growers.

Water-hungry rice paddies

This makes sense: in a country as dry as Australia, growing something as water-intensive as rice is probably not the greatest idea. It makes a lot more sense for Australia to grow something else, and then trade that something else for money with which to buy rice. This is a basic example of the Law of Comparative advantage. But then choice of what to grow instead of rice takes on a great deal of significance.

Wheat, as Saudi Arabia has seen, is not all that tolerant of desert climates, but certainly requires less water than rice. The classic choice of economists, as seen during numerous structural adjustment programs in Africa and elsewhere, is to focus on one main cash crop for export, using the foreign currency earned as proceeds to meet basic food needs by purchasing on the open market. This is Saudi Arabia’s route, only with oil instead of a cash crop.

The problem comes when prices for your cash crop collapse (as happened several times for coffee), or when prices for your staple imports rise faster than your ability to pay for them. Then prices go up sharply on the domestic market, leading to the food riots mentioned above. As the article says,

Scientists and economists worry that the reallocation of scarce water resources — away from rice and other grains and toward more lucrative crops and livestock — threatens poor countries that import rice as a dietary staple. The global agricultural crisis is threatening to become political, pitting the United States and other developed countries against the developing world over the need for affordable food versus the need for renewable energy. Many poorer nations worry that subsidies from rich countries to support biofuels, which turn food, like corn, into fuel, are pushing up the price of staples. The World Bank and the United Nations Educational, Scientific and Cultural Organization called on major agricultural nations to overhaul policies to avoid a social explosion from rising food prices.

In this case, the main problem is the rising price of staple grains and cooking oils. This problem is exacerbated in two way. One, increasing amounts of cropland are being used to grow biofuels instead of food crops. This isn’t necessarily the cause of the problem all by itself, but with the various government mandates for biofuel it means that there isn’t a strong prospect of easing the demand for grains by switching this land back to food production. Two, as climate change accelerates and crop yields go down or become even more unreliable, this strengthens the pressure on farmers to grow crops on marginal land in an attempt to secure a decent-sized crop. If heat and drought cut the yield of wheat in half, you’d have to grow wheat on twice as much land to try and get the same crop as before. This, in turn, requires more use of fertilizers and possibly water, hastens soil depletion, removes that land as a carbon sink, and increases erosion.

The news isn’t entirely bad, at least for a while:

Moderate warming could benefit crop and pasture yields in countries far from the Equator, like Canada and Russia. In fact, the net effect of moderate warming is likely to be higher total global food production in the next several decades.

But the scientists said the effect would be uneven, and enormous quantities of food would need to be shipped from areas farther from the Equator to feed the populations of often less-affluent countries closer to the Equator. The panel predicted that even greater warming, which might happen by late in this century if few or no limits are placed on greenhouse gas emissions, would hurt total food output and cripple crops in many countries.

In other words, you would need to count on the markets working really, really well to make sure that countries where climate change reduced local agriculture could still be fed. And then global food production would still decline overall. And I wouldn’t count on a rational distribution of food, considering the paltry $10 million in food aid to Haiti. And even that will buy far less grain than a year ago.

Part of the problem is that it remains much more profitable to grow other crops than staples grains. As the article describes,

Even with the recent doubling of rice prices, to around $1,000 a metric ton for the high grades produced by Australia, it is even more profitable to grow wine grapes. All told, wine grapes produce a pretax profit of close to $2,000 an acre while rice produces a pretax profit around $240 an acre.

Meanwhile, changes like the use of water to grow wine grapes instead of rice carry their own costs, as the developing world is discovering.

“Rice is a staple food,” said Graeme J. Haley, the general manager of the town of Deniliquin. “Chardonnay is not.”

Local Grains and Shortages

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Currently, local grains are the hardest part of eating locally in my particular food-shed. Vegetables and fruits can be had, even in winter, though a bit monotonously. Root vegetables are starchy and a good source of carbohydrates. I can get meat and dairy from the farmers’ market year-round, and I can use butter as a cooking fat. The only thing that is notably absent are grains. There’s Hudson Valley tofu at my local food co-op, but I haven’t found any wheat, millet, rye, barley, or any other type of grain readily available locally. There’s fresh beans in the summer, but no dried beans. Rice in New York is out of the question, and there isn’t any amaranth or quinoa, either. Wheat is still grown in New York, but I don’t have a local supplier. I would like to; aside from benefit of supporting my local farmers and food economy, the shorter the supply chain, the less vulnerable it is to shortages, and the more resistant it will be to price increases due to the increased costs of transportation, processing, and fertilizers, all of which are oil-dependent.

Why do I mention this? Over the last several months, the prices of staple grains have risen dramatically, much more so abroad than in the U.S. There have been grain riots, mandatory halts to exporting, price controls, and military guards for grain shipments.

Mexican Corn Protests

International Herald Tribune, February 26, 2008:

Wheat futures vaulted above $12 a bushel for the first time Tuesday.

Wheat prices have surged 34 percent since the start of year, pushed higher by growing world demand, tight supplies and bad weather that has pummeled crops in Canada, Argentina and India. U.S. exporters are selling wheat a record pace to meet demand, rapidly depleting stockpiles. The Department of Agriculture expects U.S. wheat inventories will total 272 million bushels by the end of May — the lowest level in more than five decades.

“Everybody is coming to the realization that the shortage of wheat is not going away,” said Elaine Kub, a commodities market analyst at DTN. “There’s no relief coming from anywhere in the world until June,” when the U.S. wheat harvest begins.

Unprecedented demand for agricultural products from fast-growing countries including China and India has exacerbated the supply crunch for wheat, which has more than doubled in price since last year.

A Global Need for Grain That Farms Can’t Fill, New York Times, March 9, 2008:

Everywhere, the cost of food is rising sharply. Whether the world is in for a long period of continued increases has become one of the most urgent issues in economics. Many factors are contributing to the rise, but the biggest is runaway demand. In recent years, the world’s developing countries have been growing about 7 percent a year, an unusually rapid rate by historical standards.

The high growth rate means hundreds of millions of people are, for the first time, getting access to the basics of life, including a better diet. That jump in demand is helping to drive up the prices of agricultural commodities. Farmers the world over are producing flat-out. American agricultural exports are expected to increase 23 percent this year to $101 billion, a record. The world’s grain stockpiles have fallen to the lowest levels in decades.

In contrast to a run-up in the 1990s, investors this time are betting — as they buy and sell contracts for future delivery of food commodities — that scarcity and high prices will last for years. If that comes to pass, it is likely to present big problems in managing the American economy. Rising food prices in the United States are already helping to fuel inflation reminiscent of the 1970s.

Now prices have more than tripled, partly because of a drought in Australia and bad harvests elsewhere and also because of unslaked global demand for crackers, bread and noodles. In seven of the last eight years, world wheat consumption has outpaced production. Stockpiles are at their lowest point in decades.

Around the world, wheat is becoming a precious commodity. In Pakistan, thousands of paramilitary troops have been deployed since January to guard trucks carrying wheat and flour. Malaysia, trying to keep its commodities at home, has made it a crime to export flour and other products without a license. Consumer groups in Italy staged a widely publicized (if also widely disregarded) one-day pasta strike last fall.

Make Bread Not War, Egypt President Tells Army, Yahoo News, from Agence France-Presse, March 17, 2008:

Egyptian President Hosni Mubarak has mobilised the army’s ovens to deal with the country’s massive bread shortages amid rising social unrest, official media reported on Monday. Mubarak has told the army and the interior ministry, which control bakeries usually used to make bread for the troops, to increase their production in order to “put an end to the bread crisis,” Al-Ahram daily said.

Egypt is in the grip of a serious bread crisis brought on by a combination of the rising cost of wheat on world markets and sky-rocketing inflation. Four people have been killed in fights that broke out in bread queues in recent weeks, a security official told AFP. Mubarak said that the phenomenon of bread queues “must disappear.”

While most bread in Egypt is subsidised, the price of non-subsidised bread has risen by more than 26 percent over the last year.

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High Rice Cost Creating Fears of Asia Unrest, New York Times, March 29, 2008:

Rising prices and a growing fear of scarcity have prompted some of the world’s largest rice producers to announce drastic limits on the amount of rice they export.

The price of rice, a staple in the diets of nearly half the world’s population, has almost doubled on international markets in the last three months. That has pinched the budgets of millions of poor Asians and raised fears of civil unrest.

Shortages and high prices for all kinds of food have caused tensions and even violence around the world in recent months. Since January, thousands of troops have been deployed in Pakistan to guard trucks carrying wheat and flour. Protests have erupted in Indonesia over soybean shortages, and China has put price controls on cooking oil, grain, meat, milk and eggs.

Food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen. But the moves by rice-exporting nations over the last two days — meant to ensure scarce supplies will meet domestic needs — drove prices on the world market even higher this week.

This has fed the insecurity of rice-importing nations, already increasingly desperate to secure supplies. On Tuesday, President Gloria Macapagal Arroyo of the Philippines, afraid of increasing rice scarcity, ordered government investigators to track down hoarders.

Several factors are contributing to the steep rice in prices. Rising affluence in India and China has increased demand. At the same time, drought and other bad weather have reduced output in Australia and elsewhere. Many rice farmers are turning to more lucrative cash crops, reducing the amount of land devoted to the grain. And urbanization and industrialization have cut into the land devoted to rice cultivation. In Vietnam, an obscure plant virus has caused annual output to start leveling off; it had increased significantly each year until the last three years.

Until the last few years, the potential for rapid price swings was damped by the tendency of many governments to hold very large rice stockpiles to ensure food security, said Sushil Pandey, an agricultural economist at the International Rice Research Institute in Manila. But those stockpiles were costly to maintain. So governments have been drawing them down as world rice consumption has outstripped production for most of the last decade. The relatively small quantities traded across borders, combined with small stockpiles, now mean that prices can move quickly in response to supply disruptions.

Tensions Rise as World Faces Short Rations, New York Times, from Reuters, March 30, 2008

Plundered by severe weather in producing countries and by a boom in demand from fast-developing nations, the world’s wheat stocks are at 30-year lows. Grain prices have been on the rise for five years, ending decades of cheap food. Drought, a declining dollar, a shift of investment money into commodities and use of farm land to grow fuel have all contributed to food woes. But population growth and the growing wealth of China and other emerging countries are likely to be more enduring factors.

In Mexico, tens of thousands took to the streets last year over the cost of tortillas, a national staple whose price rocketed in tandem with the price of corn (maize). Global food prices, based on United Nations records, rose 35 percent in the year to the end of January, markedly accelerating an upturn that began, gently at first, in 2002. Since then, prices have risen 65 percent. In 2007 alone, according to the U.N. Food and Agriculture Organization’s world food index, dairy prices rose nearly 80 percent and grain 42 percent.

“The recent rise in global food commodity prices is more than just a short-term blip,” British think tank Chatham House said in January. “Society will have to decide the value to be placed on food and how … market forces can be reconciled with domestic policy objectives.”

Many countries are already facing these choices. After long opposition, Mexico’s government is considering lifting a ban on genetically modified crops, to allow its farmers to compete with the United States, where high-yield, genetically modified corn is the norm.

In the next decade, the price of corn could rise 27 percent, oilseeds such as soybeans by 23 percent and rice 9 percent, according to tentative forecasts in February by the OECD and the U.N.

Waves of discontent are already starting to be felt. Violent protests hit Cameroon and Burkina Faso in February. Protesters rallied in Indonesia recently and media reported deaths by starvation. In the Philippines, fast-food chains were urged to cut rice portions to counter a surge in prices.

These price increases and shortages have me somewhat worried. Seeing the vulnerability of the global supply chain of staple grains to supply disruptions makes me very glad that I have an excellent farmers’ market nearby.