Some Big Grain Exporters Halt Foreign Sales; More on Ethanol Subsidies

Even though the seeming suddenness of the onset of food inflation and shortages has caught many by surprise, this too was predictable. I recall reading a Barrons Roundtable interview some years ago, perhaps around 2000, when Jim Rogers pointed out that China had set a goal for each person in the country to eat one egg a week. Meeting that objective, Rogers claimed, would require global wheat production to rise three-fold.

Although it also follows in the category of “obvious with the benefit of hindsight,” I’m not sure how many would have predicted grain producers hoarding output for their population. A tendency towards autarky will have nasty consequences. From the Financial Times:

The global food crisis intensified on Tuesday as Kazakhstan, one of the world’s biggest wheat exporters halted foreign sales and rice prices shot to a record high after Indonesia stopped its farmers from selling the grain abroad.

In another sign of turmoil, a big food company in Japan, Nihon Shokuhin Kako, said high corn prices had forced it to buy cheaper genetically modified corn for the first time, breaking a social, though not legal, taboo and signalling that opposition to GM foods could weaken in the face of record food prices.

Meanwhile, fresh wheat export curbs in Kazakhstan, the world’s fifth largest exporter, and the rice bans in Indonesia, threaten to trigger bans in other food exporting countries, which will now face much higher demand from importing countries.

Hussein Allidina, at Morgan Stanley in New York, said pressure for export bans was likely to increase elsewhere as developing countries suffering high inflation tried to combat rising local prices by cutting back on exports of agriculture commodities.

Indonesia – which joins Vietnam, Egypt, China, Cambodia and India in banning foreign sales – was expected to export the grain this year due to a bumper crop. Corn futures prices in Chicago last week hit a record $6.16 a bushel, up 30 per cent in the past three months.

Indonesia’s export ban boosted the price of rice futures in Chicago to a all-time high of $22.17 per 100 pounds, up 63 per cent since January. Wheat prices moved higher to $9.11 a bushel and traders warned prices could rise further as the Kazakhstan ban together with restrictions in Russia, Ukraine and Argentina have closed a third of the global wheat market.

Jim Hamilton at Econbrowser has a post which sheds further light on the ethanol debate:

On one level, the question of whether it is morally acceptable for us to divert the food that might have fed the hungry for purposes of driving our SUVs is no different from similar questions about any of a number of other details of how the well-off dispose of their wealth. But I’m thinking that the profound inefficiencies associated with this particular disposition of resources may also be relevant. As a result of ethanol subsidies and mandates, the dollar value of what we ourselves throw away in order to produce fuel in this fashion could be 50% greater than the value of the fuel itself. In other words, we could have more food for the Haitians, more fuel for us, and still have something left over for your other favorite cause, if we were simply to use our existing resources more wisely.

We have adopted this policy not because we want to drive our cars, but because our elected officials perceive a greater reward from generating a windfall for American farmers.

John Quiggin connects some more dots, in particular that agricultural commodities inflation, which is even more pronounced in dollar terms thanks to our debasement of the currency, will pressure Asian economies to abandon their pegs:

The big increase in food prices over the last six months or so raises lots of issues, of which I’ll try to cover a few.

The first arises from the fact that prices for commodities, including oil as well as most ag commodities, are typically quoted in $US….In substantive terms, the increase in $US commodity prices is a big problem for the many Asian economies that have pursued some kind of peg to the $US as a means of maintaining export competitiveness. The adverse impact on domestic consumers is now becoming obvious, and the only solution is to abandon the dollar peg and allow an appreciation. China is already moving in this direction.

A second important point is the impact of demand from the biofuel sector, particularly for corn in the US. The idea of making biofuels from food crops was always problematic and the subsidy regime in the US makes it more so. The current food crisis should make subsidies for food-based biofuels politically and economically untenable, pushing the industry away from this easy short term solution and in the direction of sources such as switch grass, grown on marginal or non-arable land.

Finally, the biggest increases have been in wheat prices, reflecting the drought in Australia and in some other wheat producing countries (Kazakstan?). It seems likely, though it’s still impossible to prove, that human-induced climate change is increasing the frequency and severity of drought. So, it’s important not to regard climate change as a problem for the future. In all probability, adverse effects are already here.

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  1. Anonymous

    Shell to make Biofuel from Algae

    The facility under question will be run by a Shell/HR Petroleum venture company, called Cellina, and will actually be located on the Kona coast of Hawaii Island, near to other facilities which also grow algae mostly for pharmaceuticals and food.

    Algae fuel, also called algal fuel, oilgae or third generation biofuel, is a biofuel from algae. Algae are high-cost/high-yield ($5-10/kg and 30 times more energy per acre than terrestrial crops) feedstocks to produce biofuels – although there is active research to reduce both capital and operating costs of production so that it is commercially viable.

    The United States Department of Energy estimates that if algae fuel replaced all the petroleum fuel in the United States, it would require 15,000 square miles (38,849 square kilometers), which is a few thousand square miles larger than Maryland, or 1.3 Belgiums. This is less than 1/7th the area of corn harvested in the United States in 2000.

  2. Anonymous

    There does seem to be some fuel R&D out there:

    AlgaeLink has Developed a New Method of Oil Extraction for the Production of Algae Oil
    March 05, 2008
    For immediate release

    Unique in the algae industry

    AlgaeLink has developed a new method of oil extraction for the production of algae oil without the use of any expensive or dangerous chemicals, centrifuge, dryer or oil press…

    Marco: “Since we don‟t use any chemicals, the whatever is left of the algae paste may be sold for it‟s many specific and attractive compounds. Some compounds are very interesting as nutritional supplements, vitamins and antioxidants, such as β-carotene and astaxanthin. As well as important applications in the food industry, the paste can also be used in the pharmaceutical industry as it contains sterols, which can be used as building blocks for pharmaceuticals. Furthermore, cyan bacteria are a potential source of compounds with biomedical applications, such as antimicrobial, antiviral and anticancer compounds.”

  3. foesskewered

    Surprise , surprise, perhaps China had some foresight; it had banned production of biofuels from food crops, switching to sorghum instead. Wasn’t barley the problem last year? Recalled the flurry over more expensive German beer purportedly due to the use of barley to generate biofuels.

  4. Max

    I wonder how big really is the impact of fuel ethanol production on food prices (I’m not an expert at all).

    What I’ve heard is that for decades US farmers had lots of surplus land, due to the protracted bear market in agriculture. Thus, the production of fuel ethanol does not displace traditional food crops, and does not impact the food prices to the degree commonly believed.

    What’s your opinion, guys? I think there is some truth to it, since for ages we’ve benn hearing that we have a huge overprodution in agriculture.

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