Global Food Shock

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Global Food Shock
Commodities / Food Crisis May 10, 2008 - 07:52 AM

http://www.marketoracle.co.uk/Article4656.html

By: Jennifer_Barry

Commodities
Best Financial Markets Analysis Article

As an American, I've taken for granted that I can get just about any food I want at the supermarket. In fact, the number of choices are dizzying. I never really thought about the tenuous chain between myself and my food. Less than 1% of the U.S. population is employed in agriculture, and 40% of these farmers are 55 or older. 1 The chain of transportation that brings goods to the stores is tenuous and depends on a few key railways and truck drivers. Supermarkets could experience spot shortages if the proposed trucker strike gains momentum or more drivers quit the business.


Rich countries like the U.S. used to store extra food in case of emergencies. Many grain elevators were built in the Great Plains after World War II for this purpose. 2 This stockpile reduced the volatility of food prices. When prices rose, the government released some grain into the market. When costs were low, the Department of Agriculture would support prices by purchasing surpluses. Excesses of wheat, milk, and butter were exported, given away or even destroyed for lack of demand. After the passage of the 1985 farm bill, the USDA divested itself of grain stocks and other foodstuffs.

What happens in the U.S. agricultural markets has a great impact on the rest of the world. America is the “Saudi Arabia” of grain as it is the largest exporter. The U.S. supplies 70% of the world's corn, and it has little 2007 crop surplus of soybeans and wheat left to sell. 3 Many poor countries depend on imports of these staples to feed millions of their hungry citizens.

Another major cereal exporter, Australia is just starting to lift out of a drought that started in 2002. 4 They lost most of the winter wheat crop and their main breadbasket, the Murray-Darling Basin is still excessively dry. Officials hope that the La Niña weather pattern will lead to bumper crops this fall. However, the La Niña that should bring rain to Australia and India will likely deny it to the U.S. agricultural heartland, as well as parts of Brazil and Argentina. 5

With increasing world demand and poor weather in the Southern Hemisphere, the margin for error has become very thin. This year, global wheat supplies are projected to hit a 60-year low, and barley will plunge to a 42-year low. Corn stocks are expected to drop to the lowest level since 1984. Global grain supplies are down to 50 days, less than half the amount just 8 years ago. 6

Another pressure on cereals is the increased global consumption of meat and dairy products. Asians were mostly vegetarian a half century ago, but today they can afford more animal protein. Increased demand for meat puts upward pressure on grain prices, as livestock consume large quantities of feed. Many pounds of grain are necessary to produce each pound of meat.

While China has approximately 25% of the world's population, it only has 10% of its arable land, making it vulnerable to food shortages. More land is turning into desert every year from climate change and poor soil management practices. Ground water is being depleted at a frightening rate, and China will likely have to import water in the form of grain. China isn't expected to export any corn this year, and may become an importer. Half the world's soybean crop is now consumed by China, and a small 2007 harvest has left stocks low. 7 Asian crises like bird flu and the current pig disease further deplete food supplies. 8

Another threat to the food supply is a mysterious disorder killing honeybees called Colony Collapse Disorder, or CCD. Even before this threat, bee populations shrunk 50% from their peak in the 1970s. Bees are essential to pollinate many commercial crops we take for granted. 9 About one third of fruits and vegetables produced in the U.S. depend on insect pollination.

Worker bees are suddenly disappearing and abandoning their hives, and some keepers have suffered a 90% loss of their insects. Even more odd, bee predators like the wax moth won't touch the unguarded hive. Theories range from stress to mites, fungus, pesticides, genetically modified crop poisoning and even abnormally large honeycombs, but no one knows for certain. Now another pollinator, bats are dying in a similarly baffling way in the Northeast U.S.

Much of the world's food supply is not eaten, but converted into biofuels. Even coffee beans are being harvested as an energy source. The EU has mandated that 10% of car fuels should be from biological sources by 2020, a target that will lead to much higher food prices.

Last year, 24% of the U.S. corn crop was used to produce ethanol. 10 In America, ethanol production is subsidized which pushes up the price of corn. At the same time, taxes are levied on foreign sugar ethanol to support domestic sugar growers. About 20% of the U.S. soy oil production is used for biodiesel.

However, this biofuel production is a drop in the bucket of gasoline demand. Even if all the grains harvested in America were converted to fuel, only 16% of the automobile needs would be met. Peasants in the developing nations may be forced off productive cropland so that governments may produce more profitable and nonedible biofuels for export to the energy thirsty West.

The world can't increase supply of food or biofuels easily. Global arable land has reached a plateau at 3.7 million acres. Prime farmland is still being purchased for housing developments decreasing acreage for planting. In suburbs across the United States, former farms are now growing condos and big box stores. Without more acreage under cultivation, "we go to a religion-based energy policy -- pray for good weather," remarked Monte Shaw, head of the Iowa Renewable Fuels Association. 11

All this excess demand has caused rapid increases in food prices, putting the poor in grave danger. Wheat, barley, and oats have more than doubled over the past year. The poorest individuals already spend 80% of their income on food, and they can't afford the price hike. There are nearly 900 million hungry people in the world with the population growing every year.

Jacques Diouf, head of the UN's Food and Agriculture Organisation warned of serious social unrest if food prices continue to skyrocket. In Argentina, farmers are currently on strike to protest the high export taxes on their soybean crop, while Italians protested the high price of pasta with a one day boycott last year. 12 In 2007, there was a huge protest in Mexico City as the price of corn jumped by more than 400%. 13 Food riots have also occurred in West Bengal, Burkina Faso, Yemen and Uzbekistan.

Nations feel pressure to control prices that are spiraling out of control, and keep their citizens from going hungry. Russia, Argentina and the Ukraine decided to restrict wheat exports to ease the pressure on the price of bread. Kazakhstan has a four month moratorium on exports. 14 Vietnam, Cambodia and Egypt have reduced their foreign rice sales, while India and Bangladesh banned exports of most types of rice. The devastating cyclone that recently hit Myanmar has only increased anxiety about the supply of staple foods.

Some experts hope that technology will be able to solve the food crisis. In the past the “green revolution” was a great success, enabling the world to feed more people on less land using hybrid crops, irrigation, fertilizer, and pesticides. In fact, this was really a petroleum revolution. Cheap energy allowed farmers to fuel tractors and other machinery that raised productivity. Globalization and low transport costs allowed farmers to find markets at the opposite end of the globe, allowing consumers to eat apples in May and strawberries in December. Fertilizers made from natural gas allowed food to grow in depleted, even sterile soil. Commercial pesticides are also produced from petrochemicals. 15 Oil is imbedded in every calorie we eat, and the surging price of petroleum will only accelerate food price inflation.

Many countries like to blame speculators for the price rise in foodstuffs. India has taken the extreme step of stopping trading in some commodities like potatoes and soy oil for at least four months, even though last year's ban in rice and wheat futures had no discernable effect. 16 These actions distract from the real cause of inflation, the debasement of their currency.

If you look at the price of a staple food like corn, the price was severely depressed. U.S. farmers were getting no more in nominal terms for their crop in 2005 than they did in 1994. Meanwhile, official CPI had increased by a third.

The bull market in foodstuffs is driven by real fundamentals. Prices are high because stockpiles are depleted, and forecasts for production in many commodities are poor. Prime farmland has been turned into subdivisions and big box stores. Pollinators are dying while the global population explodes. Food is being burned in gas tanks instead of eaten, eroding the margin of safety. The manufacture of biofuels also uses up part of the rapidly dwindling petroleum reserves.

Food is not a luxury and demand will not be significantly depressed by rising prices or punishing “speculators.” These higher food costs are not going away. In fact, I expect that food will take an ever increasing bite out of your budget, as governments competitively debase their currencies. News of shortages only exacerbate the problem as individual consumers stock up. While the Federal Reserve disparages this “inflationary psychology,” I think buying some extra non-perishable food is a wise idea.

 

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Re: Global Food Shock

WHILE STOCKS LAST

http://lifeandhealth.guardian.co.uk/food/story/0,,2278480,00.html


In just a year, the cost of eggs is up by 40 per cent, butter is up by 60 per cent and wheat has more than doubled. As prices soar and British production plummets, Joanna Blythman investigates the crisis in store: we are running out of food

Sunday May 11, 2008
The Observer

For the past half-century, Britain has been lulled into the belief that a plentiful supply of food is here to stay. Supermarkets give us a season-defying availability of agricultural products, sourced from all over the planet, 365 days a year. We gorge ourselves on Peruvian asparagus, Israeli potatoes, Chilean apples and New Zealand lamb, blissfully unaware this might not go on for ever.

While our parents and grandparents dreaded not having enough food to put on the plate, we have had the luxury of worrying about quality. A series of scares - mad cow disease, bird flu, pesticide residues and more - has left us with an almost unhealthy preoccupation with the risks, real or imagined, that lurk in the food we eat. But one risk has barely registered on our radar. It is so fundamental that we barely clocked it, and yet it is the biggest food scare yet. Are we running out of food?

Article continues
All of a sudden, we have the first inkling that the world is panicking about having enough to eat. Shortages of staple foods such as wheat and rice - caused by climate change, the biofuel gold rush, and the growing taste for a more western diet in developing countries - have generated a wave of troubling headlines. But viewed from the crowded supermarket shelves of lush, green, prosperous Britain, there is a feeling of 'Panic? What panic?'

Cost-conscious shoppers will have noticed that their food bill has gone up by 11 per cent in just a year, but global fears of growing food insecurity still seem reassuringly distant, something to do with famine-prone people in faraway countries, something as yet intangible and not likely to affect us.

But while Britain likes to think of itself as a fertile, productive country, a land of plenty with lots of food left over to export profitably, the truth is less comforting. Those surpluses of the Sixties, the milk lakes and butter mountains, have melted away as the Common Agricultural Policy has been reformed. Our potential self-sufficiency in food, meanwhile, has plummeted.

'In 40 years of farming I've never known a crisis like this one,' says Peter McLaren. Along with his wife Elma, McLaren rears free-range, rare-breed pigs - Berkshire, Gloucester Old Spot and Saddleback - on his farm at Ballencrieff in East Lothian, selling the meat from their farm shop and at farmers' markets. When he started farming in 1968, there were around 20 pig farmers in the locality. Now he is one of just three or four. The McLarens have a loyal customer base for their meat, but even so, they are struggling. 'We need to put prices up so much because of rising costs,' says Peter, 'and I worry that even some of our best customers will say: "Your stuff is nice, but we can't afford it."'

The dramatic squeeze that McLaren has witnessed has been replicated in every sector of British farming. Our food-production capacity has lost vital critical mass. British farmers and growers now produce only 60 per cent of the food we eat - down dramatically from 75 per cent in 1994 - and our food producers represent less than one per cent of the workforce.

The notion that it is sensible for any country to be more or less self-sufficient in food can be dismissed as a romantic attachment to a bygone era. Who needs home production when, as an affluent country, we can surely rely on our powerful supermarkets to snap up supplies of any commodity that is in short supply? But can we? The globalised food sourcing and distribution system on which we depend is predicated on a reliable, affordable supply of oil. This flow has made it more profitable to import frozen chicken breasts from Thailand and Brazil, where labour is cheap, than to pay British poultry producers higher costs. But this economic equation could change overnight if the oil tap was reduced to an expensive trickle.

Tractor fuel, heating bills for indoor sheds for livestock, operating costs for food manufacturing factories, bills for refrigerating chilled convenience foods, diesel-glugging supermarket juggernauts, air and shipping costs for food cargo, petrochemical-based pesticides and fertilisers - all these items that currently prop up our food system start looking shaky. One alternative lies with farmers such as James Hague, who runs the award-winning Daisy's Dairy at Hook in Hampshire, and is pioneering a mainstream yet localised food supply. 'Supermarkets have had the food supply sewn up,' he says. 'The only way for farmers to make any money these days, or to have any security, is to take control of all aspects of their businesses.'

Hague operates his own doorstep delivery service to 1,400 households within a 25-mile radius. And he has just taken over a nearby organic farm to grow his own winter cereals as a buffer against rising feed and fertiliser costs. Daisy's milk is surprisingly competitive at 45p a pint. 'I don't want it to be a "niche" product,' Hague says. 'The key thing is that we can produce and deliver healthy, better-tasting food at an affordable price.' The Daisy's Dairy concept has taken off to such an extent that he is in the process of franchising it all over the country.

The green movement and the food industry have never been so polarised. Food security intensifies all the debates conducted around what we eat. We are set for a titanic 21st-century struggle over how best to ensure that there is enough food on British plates only decades from now. The one crumb of comfort is that we have made progress of sorts.

Pasta

The wholesale price of durum wheat, grown for pasta, has soared by 250 per cent since last June, claiming casualties in the UK. In February, the chilled-food manufacturer Bakkavor announced that it would close its fresh pasta plant in Scunthorpe, with substantial job losses, because soaring ingredient costs had made production unviable. 'It's still sinking in,' one worker told the local paper, 'that within three months we're going to be looking for work - 107 of us all at once.'

And whether consumers go for spaghetti, tagliatelle or penne, there's no escaping the spiralling cost of dried pasta. It has nearly doubled in the last year alone.

Bacon and sausages

UK-produced bacon and sausages are starting to look like endangered foods. Pig farmers are buckling under pressure from feed costs that have doubled in six months. The National Pig Association says that farmers lose ?26 on every carcass they sell. Supermarkets have raised pork prices, but farmers are adamant that little of this is being passed on to them, sentiments expressed in their campaign anthem, 'Stand By Your Ham', a play on Tammy Wynette's 'Stand By Your Man': 'Right now it's hard to make a living/Rearing all your pigs for pork and ham/The supermarkets make money/But we don't make any money/And that's quite hard to understand...'

British pig producers have never been subsidised and have no insulation against market forces. After years of sustained downward-price pressure from retailers, they say they simply don't have enough fat on their backs to survive, can't compete with countries like Denmark and Holland, where lower animal-welfare standards make pork cheaper to produce, and accuse UK supermarket chains of disloyalty to British pork. According to the National Pig Association, 95 per cent of British pig farmers are thinking about giving up.

Milk and butter

In just one year, British milk has gone up by 20 per cent, while butter has notched up a dizzy 60 per cent increase. These heavy price hikes are a reflection of the dairy commodity markets, where prices are at their highest level for a decade.

The European Union introduced quotas in 1984 to eliminate milk lakes and butter mountains; other schemes giving farmers price support wound down in 2003. This has made dairying less attractive, and rising costs have made matters worse. Last year, it cost dairy farmers up to 22p a litre to produce milk; now, with increases in feed, fertiliser, oil and energy, it costs up to 27p, leaving producers lucky to break even. Supermarkets cream off excessive profits, taking a 13p to 16p margin on every litre of milk they sell.

Milk processor Arla Foods says that unless supermarkets pay farmers more very soon, there could be a 'mass exodus' from dairying. Many farmers are holding back from making winter feed because they might not keep their cows unless they are assured a better price.

In 1996, there were 34,500 dairy farms in the UK. Now there are only 19,000. The Milk Development Council predicts a further fall of 7 per cent in UK milk production this year.

Bread

A sliced white loaf used to be one of the cheapest items in our national shopping basket. Back in 1990, supermarkets were selling loaves for as little as 7p. For years bread has been a key weapon in supermarket price wars. As a 'Known Value Item' - a category of food where consumers are very price-aware - bread was discounted in supermarkets to give the impression of all-round good value.

Now the global demand for wheat outstrips supply, and last year branded 800g white sliced loaves broke the ?1 barrier. By the end of the year, a loaf of Hovis cost ?1.15. Premier Foods, which owns Hovis, said it could no longer absorb steeply rising costs. In February, a bushel of bread wheat hit the all-time high of $25. It historically trades at between $3 and $7 a bushel. Finsbury Foods, one of the UK's largest cake bakers, has accused the government of exacerbating wheat shortages by subsidising farmers to grow the crop for biofuel. Record numbers of vegetable growers and livestock farmers have switched to growing cereals like wheat because the price is buoyant. Even so, they are taking a gamble. A farmer who planted wheat last September won't see payment for it until August 2009 and can't be sure what the final price will be.

Eggs

Last year, a dozen free-range eggs cost around ?1.75; now they're as much as ?2.50. National Farmers' Union (NFU) figures show that it costs 84p to produce a dozen free-range eggs, raising the question of where the rest of the retail price goes. Poultry farmers report that the price they are paid by supermarkets is 'a few pence below the level needed to prevent further losses'.

To feed their hens, poultry farmers were paying ?70 a tonne for wheat and barley a year ago, and ?130 for a tonne of soya. These same feedstuffs now cost ?160 and ?230 respectively.

Overall, Britain's egg production has been in decline for the past two years, and increased demand for free-range has been met by imports.

Fruit

Britain can grow fantastic apples, pears, berries, plums and cherries. Even so, the UK produces only 10 per cent of the fruit it eats.

Our native apple production took a hammering in 1972 when Britain joined the Common Market: the protected market for UK apples ended and Britain came under the blast of imports. Three-quarters of traditional English orchards have been grubbed up or abandoned since the Second World War.

In 1990, the supermarkets sold just 40 per cent of the apples that British people ate. By 2000, that number had doubled as independent greengrocers were forced out of business and wholesale fruit markets were reduced to a shadow of their former glory. Supermarkets used imports of cheaper apples to grow their market share rather than supporting native production.

In the past three years, as consumer demand for more local food has grown, supermarkets have started to stock more English fruits. English growers who have hung on are seeing better prices, which allows them to contemplate the investment required to plant new orchards and build packing houses. Despite this, only 30 per cent of the apples we eat in the UK are home produced.

Vegetables

In 1996, 73 per cent of the vegetables we ate were home grown. By 2006, that figure had dropped to just 58 per cent. 'We could be 85 per cent self-sufficient in vegetables if we ate seasonally and used UK frozen vegetables at some times, not imported fresh ones,' says Richard Hirst, a pea and potato grower, and chairman of the NFU's horticulture board.

British vegetable production is vulnerable to climate change. More than a third is concentrated on the Norfolk Fens, but climatologists believe the Fens could flood with saltwater as a result of rising sea levels, making cultivation impossible. Last year, Humberside - the world's biggest pea-producing centre - was flooded. A quarter of the crop was ruined, putting 40 per cent on the price of a bag of peas. The NFU has also warned that the British cauliflower could go out of production. Floods in June led to shortages in December and a glut which depressed prices - and growers.

The cost of gas has trebled, hitting growers with heated greenhouses growing vegetables such as tomatoes, cucumbers and peppers. On gas alone, it now costs 5p more to grow just one cucumber. 'Vegetable growers are going to find something different to do,' Hirst says.

Lamb

In 2007, the average farm-gate price for British lamb was ?2.38 a kilo while the retail price for lamb was ?5.77 a kilo - a mark-up of 142 per cent. Sheep farmers say that this differential has widened over the past four years: they now sell their sheep below the cost of production. They receive only 36 per cent of the retail price of lamb and are pushing for more 'supply-chain transparency to be able to understand why this percentage is so low'. The NFU says that lack of profitability among sheep farmers is of 'desperate concern'.

British sheep farmers have seen their returns hit by outbreaks of foot-and-mouth disease and blue tongue. Temporary disease control and export restrictions on UK lamb allowed New Zealand lamb to strengthen its market position. According to the National Sheep Association, in October - usually the peak of the British lamb season - up to one-third of the fresh lamb stocked by leading supermarkets came from New Zealand. Only one chain, Morrisons, has made a commitment to sell only UK-produced lamb.

Ironically, Britain exports 25-30 per cent of the lamb it produces - mainly to France. That's roughly the same amount as it imports - mainly from New Zealand.

Beef

With breeds like the Aberdeen Angus, you might think Britain would be more or less self-sufficient in beef. In fact, we rear just three-quarters of the beef we eat. Holland, Germany, Uruguay, Namibia and Botswana make up the shortfall, much of this making its way into the catering, institutional and food-processing supply chains.

The recent 40 per cent rise in feed costs could be the last straw: last year, UK beef producers lost ?94-?151 on every animal they sold. Since 2004, the beef herd in England alone has fallen by 11 per cent and there are fewer younger beef cattle in the pipeline - down by 15 per cent in four years. Unless prices paid to farmers by retailers rise, British beef will become a niche product.