ISSN: 1391 - 0531
Sunday May 11, 2008
Vol. 42 - No 50

Food crisis: Is Lanka sitting on a volcano?

By Prof. Jagath Wickramasinghe

A dramatic unprecedented soar in food prices in the last few years; and in particular most dramatically over the last few months, has provoked riots in many countries, mainly in the developing world. US wheat export price rose from $375 in January to $440 in March, an increase of 17%. In a period of 36 months leading up to February 2008 the world wheat price increased by 181% and overall global food prices rose by 83 %.

According to the FAO, global food prices rose by 40% in 2007, producing the highest food cost level on record making 2007 as a year of food price hyperinflation. The world's most vulnerable millions of people are facing starvation.

The biggest problem in Sri Lanka is the low productivity of paddy

WFP executive director Josette Sheeran said recently that a "silent tsunami of hunger is sweeping the world's most desperate nations". The poverty reduction trend, which was emerging over the last couple of decades, has reversed -- and poverty and hunger in the near future will increase. The University of Minnesota revised its earlier poverty projection upward; taking into account biofuel effect on food prices. Earlier estimates that the world's hungry and malnourished people would fall to 625 million by 2025 were revised upwards to 1.2 billion. The World Bank reports that 1% rise in food price means calorie intake of among poor drops by 0.5%.

Although recently there have been some supply issues that have played a part in the recent surging of prices, a key driver has been the strength of global demand. World food prices have risen strongly over the period in question, primarily by the surge of oil prices to record heights, exceeding $120 a barrel recently, (as food production world wide is oil intensive), which again has been due, among other things, to speculation on depleting world oil deposits and weakening of the American Dollar.

The economists and the heads of the international financial institutions world over have cited at least four reasons for the price increase: Oil prices, climate, market speculation and economic boom.

According to Wikipedia, up till 1983 inflation-adjusted price of a barrel of crude oil had been $25. Prices near $100 in 2007 were equal to the inflation-adjusted maximum in1980. In April 2008, it reached a record high $120 per barrel, which exceeded the inflationary rate creating a bonus.

This price increase is attributed to combination of well known factors; decline in petroleum reserves, worries about oil peak, Middle East tension, and oil speculation. The most important factor contributing to the current rise in worldwide oil prices has been an increasing demand from expanding economies, mainly China and India, in the context of the supply artificially curtailed through OPEC oil cartel due to reasons given above, in particular, pushed by the speculation that oil peak has reached.

Efforts are underway, for example through a number of mines in Canada's oil sand region. But the progress has been too slow to arrest the price surge. Regulation and environment efforts too have contributed to increase shortages and prices. Some analysts point out that major oil exporting countries are rapidly developing and because they are using more oil domestically, less oil may be available in international markets. Faih Birol, chief economist of International Energy Agency said in October 2007 that oil prices would remain high for the foreseeable future due to rapid increase in demand. Apparently, the inevitable outcome would be a world economic recession, second only to the great depression in 1929.

There have been some supply constraints that have played a part in the price surge in food. For instance, the prolonged drought in Australia, the second largest exporter of wheat. Here too, as in the case of oil, the major driving factor has been the strength of the global demand, generated by rapidly growing economies such as China and India, with more than 600 million new middle class between them, who have dramatically increased consumption of more quality food, and the needs of the rapidly expanding industrial base, absorbing the large chunk in the increase in demand in energy.

Food prices globally are rising; particularly those of wheat and edible oils owing to global demand increase; in the scenario of the short supply resulting from some crops and land being diverted for use in bio-fuels to reduce dependence upon fossil fuels.

The weakening of the dollar has also contributed to this surge of oil prices as the producers are attempting to maintain the real value of oil in other currencies. High levels of meat demand in developed countries and rapid growth in meat demand in developing countries have caused concern that diverting cereal to feed livestock leads to an inadequate cereal supply for direct human consumption.

This diversion has created water problem in affected countries and some feel sale of water is more profitable than growing food. According to Prof. Paul Krugman 700 calories worth of animal feed produce a 100 calories piece of beef ie, 7:1. This explains the extra demand for grain to produce animal food for human consumption.

Another factor responsible for price soaring is the cost of production; modern farming is highly energy intensive. Producing fertilizer, running tractors and transporting farm products to consumer; all these consume more energy now than earlier. With oil persistently above $100 per barrel energy costs have become a major factor driving up agricultural costs.

Concerns over oil prices, energy security and climatic change have prompted many governments to be proactive and encouraged the production of biofuel. From 1995 to 2005 world's grain consumption was driven largely by population growth and rising consumption of grain-based animal products, by about 21 million tons a year.

With the shift of grain to ethanol distilleries in the US this jumped to 54 million in 2006 and 81 million in 2007. By 2008 these distilleries would use 114 million tons of grain, 28% projected US grain harvest. According to University Illinois economists, at $50 a barrel of oil, a subsidy of 51cents and a price of $4 a bushel for grain is sufficient; at $100 a barrel distilleries can pay $7 and $140, $10 without any subsidy. Only viable biofuel without retail price distorting government subsidies is the ethanol produced from sugar cane. Brazilian sugar cane ethanol costs more or less the same to manufacture as gasoline made from crude oil, $35 per barrel.

In 2007 this led to increased demand for biofuel raw materials, such as wheat, soybeans, maize and palm oil, sugar cane, cassava and second generation crops such as switch grass and algae etc.

On December 19, 2007 President Bush signed into law the "Energy Independence and Security Act", which mandates that 36 billion gallons of biofuels be produced in the US every year by 2022, a nearly fivefold increase over current production levels.

Ethanol and "biodiesel" are made from food or inedible crops, which displace normal agricultural activities. In 2007, 54% of the world's corn was grown in the USA; ethanol production took 7% of American corn in 1998 and by 2007, it rose up to 38%. As a result poultry food prices also escalated along with the escalating cost of corn.

It was estimated that the corn requirement to fill a tank of a car with 18.5-gallon capacity could feed a human being for 270 days.

The UN states that its charity programmes can no longer afford to feed the starving people of the world because of the high cost of food. Jean Ziegler, the UN Special Rapporteur on Right to food, has repeatedly denounced biofuel as a crime against humanity, quoting that 60-90% of the poor people's income is spent on food. More biofuel we produce less food we have to eat because we grow bio-fuel crops using the same land, water, fertilizer, farm equipment and labour we use to grow food. Biofuel production will contribute to the early, avoidable deaths of at least between 10 and 20 million people in the year 2008 alone. By 2020 the US and the EU biofuel policies will divert 400 million tons of grain each year into ethanol production, which is equal to entire current global annual rice harvest. The good bio-fuel policies of Brazil make ethanol from sugar cane accelerate the pace of climatic change by promoting deforestation.

The US alone has vast untouched oil reserves in Alaska and in Bakken Oil Formation just waiting to be pumped, but unfortunately the President decided to trade food and thus human lives for oil instead.

Shell oil physicist Harold Vinegar believes that by the year 2015 oil can be extracted from Shale for about $30 per barrel. Colorado alone has massive shale reserves reported to contain more oil potential than the entire Middle East did before the British began drilling in Iran in 1908.

It is said that without subsidies there would be no free market demand for biofuel. Ethanol contains 30% less energy than gasoline; so that new ethanol blended fuels reduce gas mileage, increase engine maintenance cost and lower engine reliability. People are starving in Africa so that American politicians can court votes in farm states. Biofuel production harms environment by needlessly eroding topsoil and encouraging the destruction of forests.

Biofuel production speeds up global warming because the entire production process releases huge amounts of greenhouse gases into the atmosphere while destroying native forests. Journal Science confirms this, the production of biofuels from grains and switch grass greatly increases the release of greenhouse gases, nearly doubling emission in 30 years and increases greenhouse gases for 167 years, and is far worse than using gasoline.

What a crime! Corn produced at large expense of fossil energy is then transformed, with even more fossil energy into pure ethanol.

Worst development is the decision made by China and India to produce biofuel from irrigated maize and sugar cane; this could aggravate water shortage and undermine food output. It is said China aims at producing 15 billion litres of bio-fuel by 2020, 9% of the gasoline demand. Some 2400 litres of irrigation water are necessary to produce 1 litre of ethanol from maize in China. For the same amount of ethanol from Indian sugar cane 3500 litres of irrigated water is required. Biofuels now account only 2% of the gasoline output.

British scientist James Lovelock has said nuclear power is the only way out. All these points to one dismal conclusion; there is no likelihood that either oil price or food prices will fall in the foreseeable future. Economics has proved to be a dismal science!

How do these developments affect Sri Lanka? According to the Central Bank Annual Report of 2007, total paddy production was 3.1 million metric tonnes in that year. This works out to 2.2 million metric tons of rice. Imported quantity of rice was 88,000 metric tonnes. On the top of it 952,000 metric tonnes of wheat was imported. Domestic rice production alone works out to be 2 kg of rice per head, per week, which is adequate for an ordinary person. This, with wheat and about 50,000 metric tonnes of subsidiary food crops should ensure sufficient calories for the population.

These figures point that at macro level food security would be ensured, however, at micro level, i.e, at household level, mal-distribution would keep some people malnourished. However, in spite of this glut, food security was not achieved, with the skyrocketing imported grain prices, it is alleged that the bulk of rice has gone as animal food.

Sudden food shortage arose because of this shift in grain use, it is alleged. This divergence between domestic and international prices would remain in the foreseeable future; according to the above analysis, hence, such shortages and jacking up of prices will be more real in the future.

Current world market price of rice range from $600 to $1000 per metric tonne, which works out to be Rs. 60 to Rs. 107 per kg; which the government is trying to stabilize at. However, the productivity in paddy sector in Sri Lanka is not satisfactory. The average yield per hectare in Asia was 5 tons, but in Sri Lanka it was 4.4 tons per hectare.

On the face of it Sri Lanka does not face a food shortage in the short run, provided an alternative is found for animal food. However, that does not mean that every thing is in order. The biggest problem is the low productivity of paddy. As the population grows, we need more land for housing and roads. Cultivated areas will shrink. Hence, the solution is increasing productivity.

To increase the productivity of paddy more, petroleum based inputs have to be utilized. In a scenario of drastically rising price of oil, this achievement is questionable. If we were to maintain the existing level of production we may have to spend lot more for imported inputs, as practically our entire agriculture and industry are oil intensive. Urgent policy intervention is that we may have to look for more indigenous low import intensive inputs for agriculture, if we were to get out of these shackles.

The world food crisis affects Sri Lanka in a different footing. It is inevitable that this oil and food crises eventually results in a world recession, as it happened in mid 1970s and 1980s. This time rise in the price of oil was so dramatic that the ensuing recession would be worse than those two. Such a recession can create devastating effects on our economy. More than fifty percent of our GDP is externally contributed.

The biggest foreign exchange earner, remittances from workers abroad can be adversely affected, except in the Middle East. In the scenario of restricting housemaid's employment abroad that avenue is also severely restricted. Past experience shows that tea exports have a high degree of relationship with the changes of income in the developed world, except the low grown tea sold in the Middle East.

The current booming rubber market can also be affected by this recession. Not to mention that tourist industry can be another casualty. Garment export is already facing problems; GSP concessions offered by EU are hanging in balance.

One solution for this problem is to look for alternative energy sources. The euphoria about indigenous oil deposits is high, if oil is found it would go some way in mitigating the chaotic situation. Another alternative is the production of ethanol from sugar cane. There the problem we may have to face is shortage of water. Going by Indian estimates 3500 litres of water are required to produce 1 litre of ethanol.

Although our people have not taken it seriously, we are sitting on a rumbling volcano, which could erupt at any moment. Now we are feeling its heat.

No doubt, rationale of capitalism selfish rational behaviour — is responsible for all these sufferings passed on to the world’s poor, as it provides theoretical underpinning for the super power's inhuman selfish approach to economic decision making.

The solution is the rationale enunciated by the Buddha in Anda-Dwichakku Sutta. That is something one should give serious thought to in the Vesak month. My latest book, The Buddha, The Peerless Economist, explores this problem.

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