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Monday, April 07, 2008

Paul Krugman: Grains Gone Wild

Can anything be done to alleviate the food crisis?:

Grains Gone Wild, by Paul Krugman, Commentary, NY Times: These days you hear a lot about the world financial crisis. But there’s another world crisis under way — and it’s hurting a lot more people.

I’m talking about the food crisis. Over the past few years the prices of wheat, corn, rice and other basic foodstuffs have doubled or tripled, with much of the increase taking place just in the last few months. High food prices dismay even relatively well-off Americans — but they’re truly devastating in poor countries, where food often accounts for more than half a family’s spending. There have already been food riots around the world...

How did this happen? The answer is a combination of long-term trends, bad luck — and bad policy.

Let’s start with the things that aren’t anyone’s fault.

First, there’s the march of the meat-eating Chinese —... the growing number of people ... who are, for the first time, rich enough to start eating like Westerners. Since it takes about 700 calories’ worth of animal feed to produce a 100-calorie piece of beef, this change in diet increases the overall demand for grains.

Second... Modern farming is highly energy-intensive... With oil persistently above $100 per barrel, energy costs have become a major factor driving up agricultural costs. High oil prices ... have a lot to do with ... China and other emerging economies ... competing ... for scarce resources..., driving up prices for raw materials...

Third, there has been a run of bad weather in key growing areas. In particular, Australia, normally the world’s second-largest wheat exporter, has been suffering from an epic drought.

O.K., I said that these factors ... aren’t anyone’s fault, but that’s not quite true. The rise of China and other emerging economies is the main force driving oil prices, but the invasion of Iraq ... has ... reduced oil supplies... And bad weather, especially the Australian drought, is probably related to climate change...

Where the effects of bad policy are clearest, however, is in the rise of demon ethanol and other biofuels. ...[E]ven on optimistic estimates, producing a gallon of ethanol from corn uses most of the energy the gallon contains. But ... even seemingly “good” biofuel policies, like Brazil’s use of ethanol from sugar cane, accelerate ... climate change by promoting deforestation.

And meanwhile, land used to grow biofuel feedstock is land not available to grow food, so subsidies to biofuels are a major factor in the food crisis. You might put it this way: people are starving in Africa so that American politicians can court votes in farm states.

Oh, and in case you’re wondering: all the remaining presidential contenders are terrible on this issue.

One more thing: Governments and private grain dealers used to hold large inventories..., just in case a bad harvest created a sudden shortage. Over the years, however, these precautionary inventories were allowed to shrink, mainly because everyone came to believe that countries ... could always import the food they needed.

This left the world food balance highly vulnerable to a crisis affecting many countries at once — in much the same way that the marketing of complex financial securities, which was supposed to diversify away risk, left world financial markets highly vulnerable to a systemwide shock.

What should be done? The most immediate need is more aid to people in distress: the U.N.’s World Food Program put out a desperate appeal for more funds.

We also need a pushback against biofuels, which turn out to have been a terrible mistake. But it’s not clear how much can be done. Cheap food, like cheap oil, may be a thing of the past.

    Posted by on Monday, April 7, 2008 at 12:36 AM in Development, Economics, Oil, Policy | Permalink  TrackBack (0)  Comments (145)

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