Tuesday, April 08, 2008

Biofuel, food prices and poverty

Biofuels have been getting a lot of bad press recently - lots of it justified I'm sure (many schemes seem to have at best a marginal net energy surplus) but there's one aspect I'm a bit puzzled by - the worry over increasing food prices and the effect this will have on poverty.

I had always thought that the standard received opinion was that poorer countries were basically agriculturally-based and food-exporting, and indeed that it was primarily the hegemony of the evil West that kept them this way by suppressing the global market price of their outputs (by subsidising their own agricultural sectors and/or imposing various trade barriers).

But if that is true, then rising food prices should be a good thing, surely? They'll get more for their exports, and our technology will be (relatively) cheaper.

I have this probably naive view of subsistence farming as the bottom rung of economic development - and anyone below that rung in economic terms is already dependent on aid. At the national level, if a poor country is a net food importer, then I have to wonder what it is they are exporting to pay for that food in the first place. Of course there will always be some poor people within the poor countries who will struggle to buy food - but the existence of (much) poorer and richer people within a specific country is surely first and foremost a local issue to do with national governance, not an international one to do with food prices.

I hope an economist (or indeed anyone clued-up on these things) can point out what I'm missing.

10 comments:

Tim Worstall said...

Quite true, to an extent.
But even in poor countries, food producers are not everyone: there's plenty of urban Third World poor, for example.
(No, I'm not an economist, just an interested amateur).

ICE said...

Not an economist neither, but tim (previous comment) is right: third world countries have lots of urban poor, who do not produce any food and spend 70% or more of their income on buying food. They rely partly on cheap import from abroad: in Dakar (Senegal) for example, cheap rice probably comes from asia, or chicken from europe or brazil. Actually, to put it very (overly)simply, i believe it is often these kind of greatly-subsidized exports (dumping) from developped nations (who got poor third world countries to lower their trade barriers, on the claim that "free-trade is good for you") that helped to "destroy" local staple agriculture (by making it non-competitive), replacing it partly by "cash crops" for which the country has a "comparative advantage" ( vegetable, fiber, oilcrops, etc), and finally pushing the growing population towards the cities.
Thus, i guess some countries now dramatically rely on the global market to supply food to their poulation.
However it is true you don't hear a lot about food (mostly cereals, for now) producers who take advantage of these increasing prices (in poor countries, but also in developped nations - although farmers are only a few % of the population there).

Brian said...

Poor fishermen are another large category that won't do well with higher cereal prices. And as ice suggests above, poor farmers producing cash crops that can't switch easily into cereals will have problems.

I wonder if we'll see an upswing in opium production. A lot of poppy growing land is useless for anything else, and the farmers there are quite poor already.

I think James is right though that subsistence farmers growing cereals are one of the largest and poorest categories in the world, and they should do a little better with higher prices.

Simon Donner said...

In my observation from working overseas, the problem is few places truly practice pure subsistence farming anymore. First, you have the migration to cities, which creates a huge number of people depending on imported grains. Second, former subsistence agricultural communities, whether in Fiji or Africa that used to grow staple crops for themselves often end up focusing on niche crops (maybe vanilla in Madagascar, or sugarcane in Fiji) when they enter the cash economy, since they can't generate the economies of scale to compete with global staples like, say, US corn or Brazilian soy. So yeah, shifting from subsistence to the cash economy connects these communities to the global marketplace and thus should in principle provide some "cushioning" from resource collapse that would happen back in the subsistence days (drought = no food). But, since the communities are not very diversified, they are vulnerable to price increases. It can be "positive", like you mention, high prices for their particular crop raising incomes. But as we are seeing now, it can also be negative -- the imported staple crops (rice, corn, wheat, etc.) are more expensive.

Ok, I'll stop pretending I'm an economist now

James Annan said...

OK, well everything posted (and also here) seems to support my contention that it's not an issue of high food prices per se, but rather the rate of adjustment to them (and allocation of resources at a local level), as it should basically help the poorer countries.

Not that that helps the people who can't pay the bills right now. But surely keeping prices low and thereby impoverishing whole countries is hardly a reasonable alternative.

Tom C said...

James -

Thanks for your fair and open-minded approach to climate questions.

Regarding biofuels and food prices, subsidies in rich countries cause farmers in poor countries to lose their comparative advantage. This will be true no matter what price level prevails at any time. So rising prices would benefit poor farmers only if the subsidies disappear as well.

Also, not everyone is a farmer, so higher food prices cannot be seen as benefitting the economy as a whole.

Heiko said...

I think there's an ingrained tendency to see the negative side of Western farming or oil consumption only, even when this leads to some obvious contradictions.

High prices for grains will benefit some poorer people and hurt others, and vice versa for low prices caused by export subsidies.

There are a lot of urban poor in OPEC nations and their grain prices tend to be heavily subsidised from oil receipts . Yet how often will you hear that your purchase of a fuel efficient vehicle will hurt OPEC's urban poor?

The fact is, as you say, the level of food prices is a blunt instrument and it's more specific policies that make a difference for poor people. Likewise, it doesn't matter whether OPEC states get their income from develoment aid, sales of solar hydrogen or sales of oil. What matters is that they spend the money wisely.

Finally, combining low food prices with zero subsidies is the perfect way to undermine sensible investment in farming, and cut spare capacity. It's quite easy to switch corn from cattle or ethanol production to food overnight, and rather more difficult to raise food production quickly after farmers have been driven into bankruptcy.

I like the idea of world agriculture producing enough food for 25 billion people, while there are only 8 billion that need feeding, but that's only gonna happen when there's a sensible use for all that surplus/spare food and prices are kept at levels where farmers can make a living.

David B. Benson said...

Some countries in Africa have economies based on mineral wealth extraction. Some of the taxes from that then help support the urban poor.

From the little I know about Namibia and Nigeria, the system works corruptly.

On the other side of affairs, Malawi decided to support farmers by subsidized fertilizer and to some extent seed. They had a bumper maize crop, enough to export some. So most people there are better off than they were.

dirty dingus said...

Actually there is another subtlety that seems to have escaped the biofuels are bad folks (IMO biofuels are silly and not ready for prime time but not bad/evil) is that rising oil prices hits the cost of fertilizer since a lot of fertilizer is made from oil. Fertilizer is one of the major cost inputs into factory farming and theother one is fuel for tractors etc. So the cost of food is bound to rise with the cost of oil.

[Note that non factory farming techniques cannot feed 6 billion people and would result in destruction of even more prisitine wilderness areas.]

You want to reduce the price of food? Find a way to make fertilizer and drive tractors from something other than oil such as straw or wood chippings

Justin said...

I'm no economist either, and not overly well versed in food price issues. But I believe the following is an important factor: many developing world countries were effectively forced by the World Bank, IMF, etc. to 'liberalise' their economies, removing agricultural supports/protection and the like. At the same time they were actively encouraged to shift from grain and food production to cash crops such as sugar and coffee. Coupled to this is the massive subsidisation of US and EU agricultural exporters, which historically suppressed the world price and drove many poor world farmers off their land. End result is that such countries very much are exposed to extreme fluctuations in the world price of grain and staple foods.

Further, I saw an interview on ABC Australia with a US-based researcher in this field who listed 5 factors causing the emerging food crisis:
1. increasing price of oil and its flow-on effects to industrial agricultural inputs (fertilisers, pesticides, transport);
2. diversion of food crops such as corn to biofuel production, esp. in the US;
3. profit-taking activity by speculators on the world market;
4. failed harvests in Australia (rice) and elsewhere (wheat, I forget where);
5. and just as importantly, the rapid increase in diversion of grain crops to animal feed for meat production.

In fact, George Monbiot, in a recent post, puts the blame squarely on the latter, showing that while '100m tonnes of food will be diverted this year to feed cars, 760m tonnes will be snatched from the mouths of humans to feed animals'...