Fuel Costs Drive Global Food Crisis

Shaun Ferris is Senior Technical Advisor on Agriculture and the Environment at Catholic Relief Services headquarters in Baltimore. He provides technical assistance to CRS agricultural programs that help poor farming communities market their harvests. He recently spoke with CRS Communications Officer Michael Hill to give some context to the global food crisis.

Shaun Ferris, senior technical advisor on agriculture and the environment. Photo by CRS staff

Catholic Relief Services:

What is the cause of the sharp rise in food costs?

Shaun Ferris:

There are many, but one of the main ones is the rise in the cost of fuel. That shows up all through the food system, beginning with the cost of fertilizer which is made from petroleum products and continuing with fuel that is used in tractors and irrigation pumps or plastics used in some production machinery or the cost of transportation to local markets or around the world.

The rise in oil prices has also put more emphasis on the production of biofuels. In the United States, that has meant subsidies for the production of corn for ethanol. In Europe, the emphasis is on biodiesel which focuses on oil crops like sunflower and rapeseed and oil palms. What you have to keep in mind is the domino effect these have on food markets. When the price of corn goes up, then people move to wheat so that goes up, and so on.

Then you have the rise in demand from Brazil, Russia, India and China. As their citizens get wealthier, they consume more food, in some cases turning from exporters of food into importers, which takes supplies off the international market. That increase in wealth also means more meat eaters, and beef is a very inefficient food source. It takes 15 pounds of corn to make 2 pounds of beef. It would be better if everyone ate chicken. They produce meat much more efficiently.

Add to these some other factors—drought in some key rice-producing countries, for instance, other countries reacting to the crisis by shutting down exports—and you get a market under stress.

"In a market like food, a 5 percent rise in demand can cause a huge rise in prices. Food is not a discretionary purchase, it is something people have to have. They cannot live without it."

Take a look at rice, for example, where the price has gone, in a brief period of time, from $250 to $350 a ton to $1,200 a ton. You have the price beginning to rise because of rising demand and the drought, and some countries react by introducing export bans which takes rice off the international market causing the price to go up further. The market becomes a mixture of gridlock and panic.

CRS:

Is the international food market in turmoil?

Ferris:

You do have a lot of investors speculating in commodities of all sorts, including food. That is one thing we really don't know, how much of this price rise is caused by speculation. If you look at the wheat market, it spiked earlier this year and has begun to come down. So that spike might have been speculation, just as some of the price of oil certainly is. But those prices are still much higher than the price last year and they are not going to come down to those previous levels. However you look at it, food prices are going to remain high for quite a while.

The price of oil is the big unknown in this equation. One thing people are asking is how much the current situation resembles the 1970s when the OPEC cartel caused a spike in oil prices. That's when it became clear how addicted we were to that product, and that we would pay whatever it costs to get it. Eventually, the OPEC action fell apart and the prices came back down. The difference between now is that, unlike the 1970s, you have a huge rise in demand for oil from places like China. So the situation will probably not follow the same path.

And you have to remember that in a market like food, a 5 percent rise in demand can cause a huge rise in prices. One reason for that is that food is not a discretionary purchase, it is something people have to have. They cannot live without it. So, people will pay any cost that they can afford.

A resident purchases local rice sold by the government at subsidized prices in the Philippines. Photo by Reuters/Romeo Ranoco, courtesy www.alertnet.org

There are some winners in these markets—those who export more food than they import because they are getting more money for those exports. In Africa, for example, the main winner is South Africa. In South America, it is Argentina and Brazil. There is the possibility that the rise in prices could lead to an increase in wealth in some poorer countries as their agricultural products increase in value. But in general, the winners are going to be the wealthier countries in the West, the same ones that are subsidizing their agriculture, while the losers will be the poorer countries in Africa and elsewhere that have to import food.

CRS:

There have already been some serious riots caused by these rising food prices. What sort of instability can this crisis lead to?

Ferris:

Somewhat cynically, many of these governments in poorer countries have used food aid to feed people in the rural areas and provided imported goods for the populations in the urban areas to purchase. And, of course, more and more of the population has moved to the urban areas, often living in sprawling slums. It is this population that is most affected by the rising prices. They cannot grow food, they must purchase it. And it is precisely this population—the urban poor—that has the most potential to destabilize a country. So there is a great prospect for growing instability there.

CRS:

What can and should be done about this food crisis?

Ferris:

You have to think both short term and long term. Food is not like oil in that it is not that easy to increase production. Any change requires at least an entire growing season to produce results. So that means it is a minimum of a year off.

Short term, the best idea is to provide people with cash or some sort of food vouchers so they can go out in the market and purchase food at these increased prices.

In the long term, in addition to assistance for agriculture at the local level, there should also be policy changes, particularly in the United States and Europe, that would reduce subsidies for agriculture and allow poorer countries access to these markets for their agricultural products.

Michael Hill is CRS' communications officer for sub-Saharan Africa. He is based at the agency's headquarters in Baltimore.