Interpreting the World Food Crisis-Between Pessimism and Optimism

By Masayuki Kashiwagi
Professor, Faculty of Human Sciences, Waseda University

1. The 1973 Food Crisis and the subsequent trend of excess farm produce

The world has faced food crises twice since the latter half of the 20th century. The first one took place in 1973. The world end of term grain stock ratio, which had been on the decline for some years because of the worldwide grain failure, sank to a record-low of 15.4% in 1972. In the same year, the Soviet Union became a net-importer of grain due to the increase of livestock products consumed by the Soviet people. The 1973 crisis was caused by factors such as the bulk purchase of grain by the Soviet Union under the circumstances of poor harvest, and the U.S. placed an embargo on soybeans, albeit for a short period of time. The impact was so enormous that they named it the Reappearance of the Ghost of Malthus, and grain was referred to as the third strategic material behind nuclear weapons and oil.

After that, however, not a few countries including the European Community (EC) back then steered toward the enhancement of agricultural production, which considerably alleviated the condition of grain supply and demand. While protecting national borders by levying import surtaxes under the Common Agricultural Policy, the EC protected intraregional agriculture through generous support for farm product prices. As a result, they were plagued by excess produce in the 1980s. The EC implemented the raw milk quota system in 1984, and the U.S. also undertook the set-aside. The world grain market substantially shifted to the tone of excesses. The EC, which had failed to eliminate such excess, exported excess agricultural products to developing countries with export subsidies, and the U.S. used the said subsidies in defiance, causing a dumping battle with financial burdens. The agricultural negotiations in the Uruguay Round of GATT started in 1986 under the theme of removing the market distortion through agricultural protection by such developed countries, and the parties reached an agreement in 1993 based on the basic rule of reducing production-stimulating agricultural policies including price support. It was the 2008 crisis, however, that made us realize a change to the long-lasting tone of alleviating the conditions of supply and demand.

2. The 2008 Food Crisis

Although the world end of term grain stock ratio, which rose to 35.7% in 1986, subsequently maintained a high level, it dropped rapidly at the beginning of this century, and in 2006 got quite close to the cautionary zone of the stock level (17.1%) stipulated by the FAO. In 2008, nine countries including Brazil and India enforced bans on food exports, and five countries including China, Vietnam, and Argentina imposed export taxes and set the export ceiling. Also, food protests and riots occurred in 20 countries including Tunisia and Egypt in the same year. After the latter half of 2008, grain prices fell sharply and seemed to calm down, however they skyrocketed again after July 2010, and as of September 2011, they have been elevated to levels 2.6 to 3.3 times, as compared with the fall of 2006. Corn set a historic high of $309.8/ton on June 10, 2011.
The backdrop of the recent food crisis is the economic growth of emerging countries such as China and India. It brought resource price hikes including crude oil, as well as a rapid increase of livestock product consumption due to an income increase among the people in emerging economies.

Sophistication of diet entails a surge in the demand for feed grains. Although Beijing makes it a basic policy to maintain self-sufficiency of three kinds of staples (i.e., rice, wheat, and corn), it became a net-importer of corn due to a soaring feed demand in 2010. Being a super-populated country, China’s future import expansion will wield an impact on the world market. Meanwhile, export expansion of soybeans, which are not the three kinds of staples, is astounding. The import volume of 290 thousand tons in 1995, when China became a net-importer, was boosted in 2010 to 54.8 million tons (60% of the global soybean trade volume). However, as Lester Brown pointed out in his book, Who will Feed China? (Diamond), in 1995, there is a question as to whether the sophistication of the Chinese diet will lead to a U.S.-level livestock consumption.

Experts argue that the income elasticity of demand for livestock in Chinese urban areas has been dropping sharply in recent years. Also, the fact that per-capita annual meat consumption in Japan as a high-income nation stays at 34% of that in the U.S. in feed grain equivalent suggests the change pattern of diet in China, another country in the same East Asia, may be different from those in Europe and the U.S. On the contrary, Chinese agricultural production has been stagnant. It should be noted that cultivation areas have been significantly decreasing at present because of farmland diversion, water shortage, soil erosion, and the conversion of cropland to forest policy.

Since the beginning of this century, demand for bioethanol derived from corn (U.S.) and sugar cane (Brazil) has drastically increased against a backdrop of the crude oil price hike. The Energy Independence and Security Act enacted in December 2007, following the State of the Union address delivered by the former President Bush in the same year, states that the renewable fuel standard (RFS) shall be 36 billion gallons by 2022. In the U.S., a soaring demand for corn as a raw material of bioethanol resulted in boosted prices of wheat converted to animal consumption due to the price hike of feed corn, and the drastic increase of corn acreage in turn decreased soybean acreage, causing an increase in soybean prices. This is a chain of grain price hikes starting with the skyrocketing crude oil price.

As mentioned above, it seems that the world has entered upon a new phase of demand for agricultural products. It can be said that against this backdrop, the inflow of speculative money triggered the recent crisis. It has been pointed out that the year 2008 goes far above the negative correlation line between the ending stock ratio and prices.

3. Solving shortage, and undernourished population problems in low-income countries

If the demand structure of agricultural products shifts to an increase, prices will rise, causing an adjustment to be made through increase in supply and drop in demand, and no shortage of agricultural products. Furthermore, promotion of technological advancement due to the price increase will change the supply structure, causing the prices which have remained high to decline. Therefore, simple pessimism is not appropriate.

However, there are two points of contention here. The first is an effect of eliminating the shortage accompanied by decrease in demand on low-income countries. Unlike high-income countries, the price elasticity of demand in poor nations is not low. The rate of decline in demand of low-income countries is higher than that of high-income countries with low elasticity.

Despite great need for food, demand considerably declines. It is alarming that this makes more people in poor countries unable to secure the minimum nutrient level to preserve their health. We must keep in mind that the number of undernourished people in the world at this point amounts to 850 million, and 96% of such population lives in developing countries.

4. Is a rapid change in the supply structure possible?

The second point to argue is whether the shift of the supply structure through rapid technological advancement is feasible. Unlike industry, cultivated land with soil suitable for farming is essential to agriculture, and the land expansion is limited. The limits of land expansion are supplemented with increased crop yields per unit area (yields per unit). Man obtained chemical fertilizers through a fixation of atmospheric nitrogen at the beginning of the 20th century. This released man from the limits, i.e., agricultural production under the conventional constraint of material circulation within regions.

For 40 years from 1960 to 2000, whereas the world harvested area has hardly increased, yields per unit have risen 2.2 times, and grain production has increased 2.3 times. However, the average annual rates of increase in yields per unit and production volume have consistently dropped rapidly since the 1960s. In addition, the world arable land area has been decreasing recently due to soil erosion, overgrazing, salt damage, and water shortage.

Meanwhile, it can be pointed out that slowing in the increase of yields per unit and devastation of arable land were caused by weak prices of agricultural products, i.e., real depreciation during this period. For example, the gap of yields per unit, existing between the cultivated land in developed countries and that in developing countries, indicates the possibility that there is high potential for increase in yields per unit by capital intensification in areas with low yields per unit due to rises in prices. Also, with regard to the production slump in the former Soviet Union such as Ukraine which used to be known as a breadbasket, realization of irrigation facilities in places with prices increasing raises the possibility of moderating fluctuation due to increases in yields per unit and drought.

Furthermore, as the vast cerrado region in central Brazil has acid soil, it was used for grazing but not for cultivation. However, the soil improvement projects in collaboration with the Japan International Cooperation Agency since 1979 have enabled soybeans and other crops to be cultivated. The vast unimproved area may be improved and turned into cultivated land with price increases. Sub-Saharan Africa may witness land improvement and cultivation in the future.
Price increases help push out the marginal farmland where differential rent is zero beyond the boundary to broaden economically-viable arable land. Farmland whose cultivation was abandoned because of its low productivity could return to within the marginal farmland. Also, the price increase made the European Union (EU) lift set-aside.

5. Sustainability of modern agriculture—resource and environment issues—

The problem of an increasing number of undernourished people in low-income countries could be headed to resolution, if the demand curve moved to the upper right with income increase due to economic growth, or the supply curve moved to the lower right due to technological advancement. As for biofuel issues, if biofuel is made unprofitable due to a rise in corn prices, technological advancement of the cellulosic second-generation biomass not in competition with food may be promoted. Can the market, then, dispel the pessimism by adjusting functions?

Seen from the aspect of sustainability, different figures of modern agriculture come into sight. Three points are pointed out here. First, agricultural resource problems of soil erosion, soil deterioration such as salt accumulation, and lower groundwater levels, have been aggravated even in super agricultural powers including the U.S with high productivity and solid assistance from the government, and Australia with its top-level productivity. It is said that the production of one ton of wheat results in one ton of soil erosion in the U.S., despite the fact that it supposedly takes more than 100 years to allow the 30-centimeter topsoil on the surface of the ground to be formed by soil microorganisms. Loss of cultivated land by soil deterioration has swept away effects of new agricultural land development.

Secondly, unlike conventional agriculture bound by the constraint of material circulation within regions, modern agriculture with high land and labor productivity depends on exhaustible energies and materials. Not only agriculture in advanced countries, but also the green revolution in South East Asia triggered by prolific breed development was realized by a large input of chemical fertilizers and chemical agents in addition to the control of bountiful water resources by irrigation. At present, exhaustion of phosphate and potash ores has been growing into a serious problem. As for energies, according to the research by Dr. Taketoshi Udagawa of the National Institute of Agro-Environmental Sciences, whereas paddy rice yields per unit rose 1.53 times, the input of energy sharply increased 5.15 times for 25 years from 1950 to 1975 in Japan. Also, 1 kilocalorie of input energy produced 1.27 kilocalories of rice in 1950, but only 0.38 kilocalories in 1974. The energy balance shows a heavy deficit, and there is nothing left of agriculture as the only energy-producing industry. While the Japanese rice cultivation in 1950 is a conventional form of agriculture dependent on manual labor and animal force, 1975 is the time when the mid-size mechanized systems including rice planters were boosted, and both mechanization and chemicalization progressed far ahead. An ecologist, E. A. Odum, pointed out that “in order to double crop yields, it is necessary to increase the fertilizer, pesticides, and work energy by about 10 times.”

Thirdly, it is the environmental destruction brought on by modern agriculture. Without mentioning Silent Spring (authored by Rachel Carson), pesticide problems are serious. Also, Europe faced a serious excess of agricultural products in the 1980s. This surfeit was brought on by excessive intensification such as too much input of chemical fertilizers and increased livestock breeding density, causing serious environmental problems including contamination of soil and groundwater. Under the Common Agricultural Policy in Europe, it was in the late 1980’s that the agricultural environmental policy to reduce such problems was introduced, which subsequently grew into the mainstream of the EU agricultural policy. It was the policy to internalize external diseconomies of agricultural environmental load, and what lies behind are mainly excess farm produce and promotion of understanding of the people toward agricultural protection. Again, it is not certain whether it can be effective enough to hamper environmental destruction by modern agriculture.

6. Agricultural modernization of global agriculture—“Cornucopia or Pandora’s box” —

Agricultural modernization developed considerably in developed countries’ agriculture in the 20th century, particularly in the latter half, led to a dramatic increase of productivity and serious limits at the same time. In the future, even in countries other than developed countries, the shift is required from relatively-stabilized (or stagnating) conventional agriculture to modern agriculture utilizing a large amount of exhaustible resources and water resources. Prolific breed developed by biotechnologies can be momentum for this shift. Fumio Egaitsu (in 2008) views such a shift, a typical example of which is a green revolution, as the “destruction” of some stability and order, the characteristics of conventional agriculture. He cites the expression, “Cornucopia or Pandora's Box,” saying that there is no consensus about this destruction being creative or merely resulting in confusion and conflict (Agricultural Economics, The 3rd edition [Nogyo Keizaigaku Dai San Pan] (Iwanami Shoten)).
With one globe-equivalent resources and environmental capacity, we need to observe with great interest whether adjusting the power of the market can promptly solve the problems, or whether there is a guarantee that the so-called overshoot in terms of the ecological footprint does not grow into catastrophe before these problems are solved.