Aug 02, 2011
Ever since the global food crisis of 2007-08, a perception has persisted in many parts of the world that one of the main underlying reasons for the price spikes in major food items - especially food grain - is the increased demand from countries such as China and India. If anything, this perception has become even more widespread since prices started rising again, especially since early 2010.
On the face of it, such a perception seems quite reasonable. After all, China and India both have huge populations, accounting for nearly 40% of the total world population between them. Their economies have both been expanding very rapidly, much faster than most of the rest of the world, so per capita incomes have been rising from relatively low bases. It is well known that as incomes rise from low levels, people tend to consume more food grain - not necessarily directly, but indirectly through the consumption of livestock products that require more grain in the form of food.
So it is only to be expected that the increased incomes in China and India would translate into more demand for food grain, and this could certainly affect the global supply demand balance in ways that would cause food prices to rise. Expected, yes: but did this actually happen?
It turns out that there has been barely any change, and if anything a slowdown, in the rate of grain consumption in these two large countries. And the global consumption of grain for all food purposes has actually decelerated in recent years compared with previous periods.
This is very evident from an important new report from the high level panel of experts set up by the FAO to study commodity price volatility and its relationship to food security. The report contains a careful assessment of both the actual trends and the various attempts to explain the price changes. In the process, it blows the myth about increased consumption from developing countries leading to higher global demand and, therefore, higher grain prices.
Consider the evidence it provides on rates of change of global cereal consumption, as shown in the chart. The growth rate of total cereal consumption was considerably slower in the period since 2000 than it was in the 1960s and 1970s, and only around the same as it was in the 1980s. It did increase relative to the 1990s, but not by very much. And, contrary to the general feeling, feed consumption for livestock actually increased more slowly than direct (or non-feed) consumption.
In fact, the report notes that even the apparent acceleration of feed use in the last decade was essentially because of the recovery of feed use in the former Soviet Union after the 1990s. So, despite all the booming demand for meat in fast-growing Asia, the growth of feed consumption in the rest of the world outside the former Soviet Union was not accelerating. Rather, it has actually been slowing down.
As it happens, FAO food balance sheets show that both direct and indirect demand for grain in China and India barely increased between 2000 and 2007, and cereal imports were actually lower. Why this has been happening, and why the economic growth has not translated into more aggregate demand for grain, is obviously a fascinating question on its own and one that deserves more study. It is likely that the worsening income distribution in both countries may have had something to do with it, so that increased demand from high-income groups is counterbalanced by reduced demand from poorer sections. But this needs to be explored further.
The relevant point is that it is not increased demand from China and India that is driving up grain prices. This does not mean that there are no other demand forces at work, however. Financial speculation in commodity markets is clearly significant, but it is also true that even such speculation must be based on some assessments of changing global balances. What could that be based on?
The report from the FAO has a convincing response to that as well: it notes that the biofuel boom has had a major impact on the evolution of world food demand for cereals and vegetable oils. According to page 32 of the report "there is a real acceleration of non-feed uses boosted by biofuel development. Excluding use for biofuel, the growth rate for non-feed use is stable compared with the 1990s and markedly inferior to its historical performance. Without biofuel, the growth rate of world cereal consumption is equal to 1.3% compared with 1.8% for biofuel".
This massively increased demand from biofuel is largely determined by the very large subsidies provided in many western countries, which have, ironically, been increasing their subsidisation of biofuel at the same time that they have reduced subsidies on food cultivation. Aside from a few producers, such as Brazil and Cuba, biofuel production in most locations would be completely unviable without these large subsidies.
The impact of these on diverting production and affecting price has been even more significant in the case of edible oils. The report shows that "the use of vegetable oils for food slowed down between the 1990s and the 2000s (from 4.4% a year to 3.3%), but industrial use of vegetable oil soared, pushed by the booming European biofuel industry. As a result, the share of industrial use in world consumption of vegetable oils jumped from 11% to 24% between 2000 and 2010".
The surprising conclusion from all this is that, leaving out the impact of the biofuel boom of the 2000s, global consumption of both cereals and edible oils is actually slowing down. All the more tragic, then, that speculative forces are still allowed to run amok in global commodity markets and global food prices are kept so high as to increase the deprivation of the millions of hungry people in the world.
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