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Monday 19 Feb 2018 | 09:16 | SYDNEY
Monday 19 Feb 2018 | 09:16 | SYDNEY

Grain prices: Who's afraid of the US farm lobby?



21 April 2008 10:56

While Canberra is focused on 2020, a much more pressing problem may go unaddressed: the world grain shortage. For all sorts of reasons (weather, higher living standards, inadequate investment in productive capacity, speculative activity, diversion of grains for bio-fuel production), there is a severe demand/supply imbalance which has caused a doubling, in some case tripling, of most grain prices over the past year. People living on less than two dollars a day (eg. nearly half of Indonesia’s population) were already spending around half of their income on food, and now it’s twice as dear. Those of us in developed countries will still eat our loaf of bread, so just about all the adjustment will be in the poor countries.

The policy response so far has been largely unhelpful. A number of producer countries have banned exports, which might cushion their own populations but exacerbates the overall imbalance. Some countries are subsidizing food prices, which is understandable but adds to demand. The UN is calling for bigger contributions for food-aid programs, which would alleviate some specific problems but adds to overall demand and price pressures.

It’s supply that needs to be addressed, and quickly. Why not put grain-to-ethanol conversion on hold for a few years? The US, for example, is using 30 percent of the US corn crop to make ethanol. Of course it is true that this is only one of the factors in the imbalance, but this is the one thing that can be changed right now. If necessary, compensate the producers. There is enough substitutability between demand for various kinds of grain that extra corn will help the shortage of wheat and rice as well. The World Bank’s 12-page paper exploring policy options mentions bio-fuels as one source of the imbalance, but says nothing about them when it offers policy responses.

In the longer term, we can argue over whether grain-to-biofuel conversion makes much sense anyway, in terms of net energy saving or in carbon saving (see footnote 13 in the World Bank link). But that’s for another day. Why doesn’t the Australian Government loudly urge that mandatory quotas of ethanol in petrol should be suspended, and that the US should cease subsidizing domestic ethanol production and open up its market to Brazilian ethanol imports (where it’s made from sugar)? This would put us up against not just the US agriculture lobby, but some green groups as well. But we’re used to head-butting with US farmers, and those greens need to check that they are on the right side of this debate.

Photo by Flickr user Bernat, used under a Creative Commons licence.

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