Your loss my Grain.

biofuels blamed for corn shortage I have spoken in length about agflation in 2008 and as much as I’d love to to consign the whole topic to history, however much like a few choice people I know, it simply won’t go away, even though it would be great if it did.

Most of the coverage in the press is focusing on biofuels and the fact that they are using up human consumables to make car consumables, however this is really only a partial answer, what is likely the true driving force is the emergence of Western style diets amongst the BRIC nations (Brazil, Russia, India, China) and other emerging economies. The breakdown is simple, staple foods and their availability are under attack from biofuels but its animals and the increased consumption of them that are causing the most serious shortfall.

I’m not about to go all pro-vegetarian/vegan/macrobiotic or anything on people but there is a strong argument for a reduction in meat consumption apart from the obvious health risks that a meat heavy diet brings with it. The issue in the here and now is that we are seeing record oil prices (the recent high is in excess of $125) so there is a genuine incentive for farmers to use crops for biofuels. Why? Because in the past market prices were not the prices farmers earned, however, with the structure of how ethanol is produced in the USA (farmers have co-op ethanol factories) it means farmers get a better price for their corn.

There have been riots in Indonesia and Mexico to name but a few countries with food shortage problems, and this is during a time when there are actually record crops being delivered to market. In 2007 there were 13.1 billion bushels brought to market in the USA, that’s the biggest crop result for corn in US history, and the USA is definitely the corn basket of the world. The actual yield per acre is on average 151 bushels which is the second highest yield in all of history around the world.

BRIC nations diet westernisedThis is where we can start to tie the two together though, animal feed accounted for 42% of the corn produced, the meat-centric diet in the USA (and many other countries) means that farmers are growing food for animals and which are then in turn eaten, and it takes a lot of corn to feed a cow, it’s probably the most inefficient way to create food. Biofuel/ethanol accounted for 22% of all the corn used. Corn growers claim biofuels have nothing to do with shortages but that’s instantly a myth because if one fifth of all corn is being used to creat fuel (and this wasn’t the case a decade ago) then it means that over 20% of the market is not reaching humans or livestock.

Corn farmers have worked nothing short of a miracle when you compare production and output pre 1950 to today, on an identical amount of acreage they have increased the yield by 364%! Roughly speaking they turned 2.8 billion bushels into 13.1 billion bushels out of the same piece of land. That may be an argument for the betterment of farming practices around the world, indeed it may be an argument for the acceptance of Genetically Modified foods, however, according to the UN Food and Agriculture Organisation, the most likely cause of hunger is a lack of infrastructure and access to capital, not food scarcity, by this they are saying that it is actually more of a logistical issue rather than an actual supply issue.

The odd thing here though, is that the Corn Growers Association hopes to increase yields in order to meet shortages, but if the problem is logistical as they are lead to believe then surely yield doesn’t matter as much as distribution? They also hope to increase the production of corn substitutes for livestock so that more can go towards ethanol production. It is here that I have to wander into the territory of ‘cop yourselves on’. Seriously, it takes 8 litres of petrol to make 9 litres of ethanol, that alone is simply not worth it, however, a market where corn is scarce is definitely a good thing for corn growers and hence they are totally behind ethanol, I’m a biofuel advocate myself, just not an ethanol advocate.

biofuel causing food shortgagesAs an ‘alternative’ why not let the animals go out and eat grass? The meat from grass fed cattle has CLA (conjugated linoleic acid) in it – which is one of the benefits of a grass fed versus a corn fed cow – and free cattle lead a healthier life than when they are all crammed into mega-barns and corn fed. Naturally we won’t see a return to grass fed cattle as that takes more work and grass fed cows don’t fatten up as much as corn fed cows (which would reduce yields per head of cattle).

So it is more likely the combination of meat consumption at a time of high oil prices (and when there is also an incentive to manufacture ethanol) that is leading the agflation march. Below are some interesting statistics, it shows the amount of corn required to produced a certain amount of meat.

Beef: 1lb requires 2.8lbs of corn
Pork: 1lb requires 3.6lbs of corn
Milk: 1Gallone requires 1.8lbs of corn
Eggs: 1 dozen requires 4.0lbs of corn
Chicken: 1lb requires 2.0lbs of corn

meat prices soaringSo at the most efficient at least 2:1 corn input to meat output is required, and therein lies the answer, meat heavy diets mean more corn goes towards animals and the resulting output is not as much as the corn feed. The same goes for many other crops, and in a different example you can see that a reliance on meat leads to desertification in Africa, or the use of land as feeding grounds rather than for crops in Asia and South America.

One could also argue that big oil is to blame, to be fair we all know that oil is not going to last forever and that getting high prices today while supply is still flowing means that there will be money there tomorrow in the form of ongoing high prices when it comes time to drill for oil that is expensive to extract, and the effect of rising oil prices has a three times greater effect on the cost of all foods than the equivalent rise in the price of a bushel of corn.

The issue we will start to see is that US Fed rate cuts will result in a weaker dollar, the last time the fed cut rates so fast was in 1981 and that was coming down from a peak in short term rates of 18%, today rates were already low and we saw acceleration in the rate cuts in a move to stimulate the economy.

Rising food prices are a reality and not likely to go anywhere soon, coffee and sugar have increased in price by 37% in the last six months, corn, oats, and rice are up 51%, 53%, and 67% respectively, wheat has gone up by 133% in the last year. Populations around the world have exploded because of the ‘Green Revolution‘ which made more food available to populations that would have faced starvation in the past.

Investment is also heating up the commodity market because buyers are looking at the prices there and they feel that there is more gains to be made, when lots of money chases a finite amount of produce there is always a single result, an increase in the price of that produce, and to you and me that will spell inflation on the market shelf. Adjusted for inflation commodities are down 94% below the high prices they held thirty three years ago.

chinese population explodesThe fastest growing economies in the world are amongst the most populated namely China and India. And this puts the third peg in place, demand for the food itself, the shortages are being felt hardest in places where the staple foods are affected, such as rice in Asia. Its a triumvirate hit

1. The demand for the food itself is always present and growing with the world population.
2. The demand for food as animal feed to produce meat is growing.
3. The demand for food for the production of BioFuel is growing.

The Argentinian solution in all of this is to place heavy taxes on exported foodstuffs in an effort to keep the food at home, if the market elsewhere will pay more for produce than the local/native market you can be in a situation of food abundance agriculturally but food shortages on the store shelves nationally.

So if you are sitting in traffic munching on what you may think is an overpriced sandwich just remember, there is a very close relationship between whats in your hand and whats under the hood.

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