Sunday, May 28, 2006

Prices rise as demand for food for fuel grows

Earlier this week I gave evidence to an informal session of the House of Commons Environment, Food and Rural Affairs Committee. One issue that was raised was likely future trends in food prices, particularly after a further reform of the CAP.

However, long before that happens, mounting competition between fuel and food could drive up the cost of food. It would be a nasty shock for western consumers who have been used to falling real food prices for a long time, but the real hit would be on poorer people living in developing countries.

The US, the world's largest exporter of corn (maize) will convert as much or more of the grain into ethanol next year than it will sell abroad according to the United States Department of Agriculture. As petrol (gas) prices climb, farmers are diverting more of their harvest towards producing fuel rather than food or feedstock for animals.

Prices of corn have risen by close to 20 per cent as world grain stocks have fallen to their lowest level since the early 1970s. There has also been a substantial impact on world sugar prices which have doubled over the past year to a 25-year high. About 10 per cent of world sugar output is now used to produce ethanol. The figure is just 3 per cent for corn but it is rising fast.

Good world harvests over the past few years have concealed the impact of rising demand for ethanol. US energy legislation requires ethanol production to increase to 7.5bn gallons by 2012, requiring about 68 million tonnes of grain, more than the total grain harvest of Canada. Keith Colins, chief economist at USDA, noted, 'We are embarking on a profound change in our agricultural economy.'

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