Standby for further problems with food prices around the world:

  • planting of the 2008-09 US corn crop is running slow because of bad weather and futures prices are already looking at new records in Chicago;
  • rice prices are rising because more and more producers are cutting back supplies to the global market;
  • commodity funds are investing heavily and the energy isolationists in the US and Europe are inflaming the situation by pursuing short sighted policies that boost ethanol and biofuel production at the expense of food costs.
  • drought in Australia for two years running has slashed global wheat stocks — global stocks of every major grain are at their lowest level for 20, 30 or 60 years.
  • And, the Chinese and Indian middle classes are evolving, changing their eating habits, cutting the amount they spend on food each week, but wanting more energy intensive foodstuffs.

Welcome to the crazy world of international food pricing. Last week, the Prime Minister of Haiti was sacked because of the rising price of rice and other foods: five people died in riots.

No wonder the Chinese Government has introduced price controls on oil, food and host of other commodities, but even that didn’t stop prices rising at an annual rate of 8.4% in March, down from 8.7% in February.

America remains the major influence — the biggest influence on world food prices in coming months will be the size of the US winter wheat harvest and the corn, wheat, rice and soybean crops in the summer. Corn is the most important and American plantings are down on last year because wheat and soybean prices have hit record highs and farmers are switching crops.

And the rising cost of corn is hurting … even in the US. Pilgrim’s Pride, a big chicken processor, is cutting the amount of chicken it produces because feed costs are too high (perversely the stockmarket loved the news because reduced supply will raise prices and the company is effectively cutting costs).

Meanwhile, America’s subsidised and tariff protected ethanol sector will consume about 25% of America’s estimated 13.1 billion bushell corn crop. Five years ago most of that 3.3 billion bushels would have gone into world markets.

And some analysts are predicting that without the rationing effect of a huge price rise, the US could exhaust stocks of corn in 2009.

Corn for ethanol is said to be economic at $US4 a bushel, so at current prices of more than $US6 a bushel it’s a loss maker and most existing ethanol plants are running at less than capacity, while dozens of new plants are being cancelled or delayed. Not even world oil prices of $US114 a barrel can make ethanol competitive with petrol, even with the subsidies and tariff protection.

But as it strive to reduce dependency on oil imports, the US is sticking to its 45% biofuel target for corn by 2015, while the European Union has targeted a 5.75% biofuel share by 2010, even though there’s probably not enough canola (rapeseed canola) grown in Europe annually to meet this and leave enough to make canola oil for human consumption. Canada and Australia are other big producers of canola, but the drought here has boosted prices to the point where many European biodiesel plants are uneconomic.

Rising demand for soybean and canola oil has also dragged up the price of palm oil, the main raw material for biodisel plants in Asia (and Australia). They’re now uneconomic too, even with oil prices at all time highs.

Despite this the Europeans are determined to push ahead with their target, especially the French.

Finally, some NGOs are blaming “speculators” for boosting food prices. According to Citigroup analysts, an extra $US70 billion has been invested in commodities through index funds, hedge funds and directly from the financial sector so far this year, but it’s still old fashioned supply and demand, not speculators, which drives commodity prices.

The rise of China and India, the extended drought in Australia and the pigheaded approach to biofuels in the US and Europe are far more influential factors.

Peter Fray

Inoculate yourself against the spin

Get Crikey for just $1 a week and support our journalists’ important work of uncovering the hypocrisies that infest our corridors of power.

If you haven’t joined us yet, subscribe today to get your first 12 weeks for $12 and get the journalism you need to navigate the spin.

Peter Fray
Editor-in-chief of Crikey

JOIN NOW