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Bad policies, greed for profit behind grain crisis

By Jiang Yong (China Daily)
Updated: 2008-07-14 07:12

The world grain reserve has been on a steady decline in recent years due to the failure of grain production to match consumption and thus a continuous drain on grain storage.

The grain price in the world market skyrocketed by one time between 2005 and 2007, and even twice in some places, and the momentum has only become much stronger into this year. As a result, the "agflation", a new definition to describe a lasting, widespread and drastic increase in the prices of grain, has become popular among economists.

In addition to complicated factors behind the supply and demand relations, grain market manipulations and expectations of consumers have also been responsible for the new round of grain crisis.

Thanks to economic globalization and development of the financial industry, the prices of bulk commodities become increasingly correlated. The rising price of crude oil has pushed up the prices of such agricultural materials as fertilizers and pesticide, and transportation costs, which have in turn fueled rises in costs of food production and their prices.

Climate change now plays an increasingly important role in affecting grain production, although it is not the key factor behind the current grain crisis. Because of a lower economic profit in the agricultural sector and especially in grain planting, grain production and reserve have been undermined in more and more developing countries. All these factors have been less than beneficial to a stable grain supply.

Elementary living demands, and especially industrial demands, are an important factor that affects the fluctuation of grain prices. With economic development and the improvement of people's living conditions, grain consumption in developing countries has been on the increase. The upgrading of consumption as a result of the increase in the number of middle-income populations has fueled demands for meat products. Studies show that the production of one kg of beef needs about eight kgs of fodder grain, and the production of one kg of pork and chicken also needs three and two kgs of fodder grain respectively. The upgrading of people's diet structure has led to a surging demand for fodder grain, which is currently increasing by 21 million tons annually.

According to the UN estimate, the world population is expected to increase to 9.2 billion in 2050 from the current 6.6 billion, which also means an ever-increasing demand for food.

The gradual increase of people's grain demand is not the main factor driving the widespread, lasting and drastic rise of the food prices in recent years.

Lester R. Brown, president of the US Earth Policy Institute and a prestigious grain expert, attributed this round of the rise of grain prices to the wrong energy policy of the US government. To reduce its oil dependence on overseas markets, the US has gone all out to develop bio-energy. In 2007, 25 percent of corn produced in the US was used to develop ethanol, and the quantity is expected to reach 28 percent this year. The EU has consumed about the same quantity of grain with the US every year to manufacture biofuel. The annual "machine consumption" of grain in the US and EU is equal to the amount for 500 million people.

Flowing capital is another factor pushing the rise of the global grain prices. After energy, such bulk commodities as grain have become a new field in which international floating capital speculates for profiteering.

The latest round of grain crisis is also closely related to the monopolization of grain production and trading by certain countries and grain dealers. The US, Australia, and Brazil hold a monopolistic position in the world grain production, with the US grain export taking about 35 percent of the world grain market. The ADM, Bunge, Cargill and Louis Dreyfus, the world's four grain tycoons, currently monopolize about 80 percent of the world grain transaction.

The grain policy of developed countries, the US in particular, has a direct bearing on the grain prices in the world market.

Just like in a financial crisis, the "self-realization" effect also works in the grain crisis. The fermentation, formation and deterioration of a crisis are closely related to people's psychological expectations, which in return will result in the further deterioration of the crisis.

Economically underdeveloped countries fall the largest victims to the world grain crisis. Robert Zoellick, president of the World Bank (WB), believes that the rise of food prices will deal a serious blow to poor populations, since among their diet structure, food consumption takes as high as 75 percent. The high-perched prices of grain are now pushing some impoverished countries, especially those in the south-Sahara Desert, to the verge of starvation and social turbulence. For poor countries with weak purchasing capabilities and with difficulties in maintaining stable grain supplies, the issue of grain will possibly provoke geopolitical tension and even war, the IMF and WB warned.

The world grain crisis is in essence the crisis of the US-dominated international political and economic order, other than the one superficially caused by tensions in the grain market supply and demand. The efforts made by the international community to reduce poverty over the past seven years would be stranded without a timely solution to the current crisis in the world grain prices, UN Secretary-General Ban Ki-moon said.

Facing the widespread crisis, international multilateral bodies, from the FAO, IMF, WB, the Doha round of the WTO, to the coordination mechanism between the Organization for Economic Cooperation and Development (OECD), seem to have no effective solutions to offer.

To deal with the ever-rising grain prices, the EU has decided to reform the agricultural policy of the community and call off its previously laid restrictions on grain production. Members of the West African Economic and Monetary Union said they would take joint actions to aid agricultural projects in this region to maintain regional grain security. The Common Market for Eastern and Southern Africa also called upon member-states to improve productivity to increase grain production.

The grain crisis that damages all will prompt more and more countries and regional organizations to pay more attention to grain security and increase grain production and reserve through tapping innovative measures and improving grain circulation and distribution systems.

Regional and bilateral cooperation is playing an increasingly important role in solving the grain crisis, although multilateral establishments have encountered difficulties in solving the issue. All these efforts will surely help promote the establishment of a more just and reasonable new international political and economic order.

The author is a researcher with China Institute of Contemporary International Relations

(China Daily 07/14/2008 page4)