Paul Braks: The current high grain prices
will gradually bring supply and demand
in a more balanced situation and could
result in rebuilding of stocks
Wh at causes
the high foodprices
Biofuels: the new kid on the block
More meat
lower stocks
more demand, due to:
growing population
more meat consumption
higher demand for bio fuels
less production, due to:
weather conditions
land availability
speculation
higher production costs
(WTO) as well as budgetary pressures due to the
enlargement of the EU.
Another factor that caused stocks to shrink was bad
harvests due to poor weather. For example, Australia
(the second largest exporter of grain, after the U.S.)
has seen its harvests fall by halfin certain areas, due
to droughts over the past few years and due to un-
favourable weather food crops in Europe have been
damaged too.
A relatively new factor playing an increasingly im
portant role in the rising demand for commodities
is biofuels; ethanol produced from starchy crops
like sugar and grains, and biodiesel produced from
vegetable oils derived from oilseeds or the oil palm.
Although the U.S. and Brazil have produced ethanol for
decades from corn/maize and sugar cane, respec-
tively, the rest of the world has only recentlyjumped
on the biofuels bandwagon. This development is
primarily driven by policies aimed at addressing
greenhouse gas emissions from traditional transport
fuels (biofuels are believed to emit net less green
house gases); at addressing the growing depend-
ence of oil (biofuels are currently the only alternative
to mineral oil in the transport sector); and aimed at
providing new opportunities for rural communities.
These policies have fuelled a massive investment
wave in the biofuels sector in the past few years;
consequently production is growing at a strong
rate (albeit from a relatively small base for biodiesel).
Based on Rabobank's analysis, global production
of ethanol could doublé in the years 2007 to 2012
to about 97 billion litres while biodiesel production
could potentially more than four-fold in the same
period of time, to 32 million tonnes. This scenario
is based on the current policies and investments
planned and in place.
Recently there has been much hype and debate
about biofuels' impact on food prices, but at the
moment the impact is relatively low, in volume
terms. Yet, if the scenarios above would materialise
without a considerable supply response; biofuel
production could have a considerable future impact
on demand of oilseeds and vegetable oils in par-
ticular (>20% of total future demand) and on corn
and sugar (15% respectively almost 30% of 2012
demand). The impact on wheat and barley, on
the other hand, is expected to remain neglectable
at around 2%. Still, the actual future production
and demand for biofuels is dependent on a broad
range of factors, ranging from policies to feedstock
prices, and thus the real impact is hard to assess at
this point in time.
In the end, and more fundamentally, the shrink-
ing of the global food stockpiles is for a large part
due to the ongoing global population growth,
economie growth and rising incomes in emerg-
ing countries, says Paul Braks, commodity analyst
with Rabobank's Food Agribusiness Research
and Advisory (FAR). Not only does this cause a
surging demand for food worldwide, but also for
more high value foods like meat and fish. Braks:
'These consumers in countries like India and China
start to eat more meat and this has a large impact
on the use of agricultural products." For example,
urban households in China consumed about 33
kilograms of meat per capita in 2005, significantly
more than the 24 kilograms of meat consumed
per capita in 1998. And this holds for the whole
world, but especially for the BRIC-countries (Brazil,
Russia, India and China). In short: the world is
eating more high value foods and is thus eating
up the food chain. Braks: "For the production
of 1 kilogram of meat, you need about 4 kilograms
of grains." So as meat consumption increases,
demand for grains - vital for producing animal
feed for cattle, poultry and other livestock - also
rises, driving prices up further.
Another, often mentioned, reason is speculation
on the commodity futures markets. In fact,
Rabobank finds large capital inflows into the
commodity markets in recent years, which have
driven up trading volumes and commodity prices.
For instance, the futures industry saw an 8.7 per
cent increase in managed funds during the year
2007, which led to a figure of 184.8 billion US dol
lars by the end of the year. More recently, investors
have also tumed to commodities as an alternative
source of returns, in the wake of the sub-prime
crisis. Traditionally they would invest in gold, but
in recent years investors discovered agro-based
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