The Hindu Business Line : Fuelling thought

In the last edition, we saw how the emerging bio-energy sector is in the process of effecting profound changes in the global agricultural markets. The years 2006 and 2007 have witnessed extraordinary price performance by some major farm goods such as grains (wheat, corn /maize) and vegetable oil (soyabean oil, palm oil) and cotton. In particular, the prices of grains wheat, corn, soyabean and palm oil doubled in about a year’s time. These are the very food commodities now being diverted for use as fuel. What is likely to happen in the coming years?

World market prices

Admittedly, the world market prices for many farm commodities in the international trade are, due to temporary factors such as drought-related supply shortfalls and low stocks. For instance, wheat prices have risen from about $220 a tonne to over $400 a tonne following a sharp reduction in global wheat output (drought in Australia, for instance).

Food versus fuel debate

Taking a cue from the physical market, the futures market has remained highly volatile due to the substantial scale of speculative activity at a time of continued general nervousness about the level of global grain supplies. But, more important, structural changes such as the increased feedstock demand for biofuel production, and the reduction of surplus due to past policy reforms, may keep prices above historic equilibrium levels during the next 10 years.

Higher commodity prices are particularly of concern for net food importing developing countries as well as the poor in urban populations, and will evoke an on-going debate on the food versus fuel issue, according to the OECD. While higher feedstock prices support the income of producers of these products, they imply higher costs and lower income for producers that use the same feedstock in the form of animal feed.

One of the main drivers of the agricultural markets in the coming decade would be the growing use of cereals, sugar, oilseeds and vegetable oils to satisfy the needs of a rapidly increasing biofuel industry. Over the next 10 years or so, substantial quantities of corn/maize in the US, wheat and rapeseed in the European Union and sugar in Brazil will be used for ethanol and biodiesel production. This is underpinning crop prices and indirectly through higher feed costs, the prices of livestock products as well.

However, this scenario is based on certain assumptions. First, State support. In most temperate zone countries, the production of ethanol and biodiesel is not economically viable without State support; and the second, crude oil (mineral oil) prices will remain high enough to encourage support to biofuels.

Technological development

Technological developments too can impact the biofuels sector — for instance, cellulosic ethanol from biomass. Under normal conditions, supplies will respond to prices. Will current high food commodity prices lead to higher output in future? No doubt, strong economic growth, coupled with a rise in per capita consumption, will result in higher imports in the developing and emerging economies. It will also provide impetus to the development of domestic production capacity.

However, much depends on the farm-related policies of developing countries and the level of investment that flows into the farm sector. The latest is that concerns over global warming and climate change have added a new dimension to global farm production growth prospects. If action is not taken to address the issue, scientists warn of dire consequences. Technological breakthrough can also potentially alter production dynamics.

As a general rule, over the next 10 years, imports are expected to grow more strongly in developing countries for all agricultural products. Vegetable oil could be an exception, the consumption of which is likely to expand faster in developed countries, not as food, but as fuel for biodiesel production. For all products except wheat and coarse grains, the growing markets would be increasingly satisfied through larger exports from other developing countries.

Global scene

Two of the South America’s large food producers — Brazil and Argentina — will have growing presence in the global food export market. Brazil’s growth is mostly concentrated in sugar, oilseeds and meats, while Argentina’s export performance covers cereals and many dairy products.On the import front, there will growth will be much more widely spread across countries. However, China’s dominance of oilseeds and its derivative products is likely to be striking over the next 10 years.

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