Food vs. Fuel: The argument continues... - Views on News from Equitymaster

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Food vs. Fuel: The argument continues...

Jun 6, 2008

High food prices bad news for world's poor...
The world's is moving towards a long period of rising food prices, if one were to go by a report released by the United Nations (UN) and the Organisation for Economic Cooperation and Development (OECD). The reports states that while food prices should ease from their recent record peaks, they are expected to average well above the mean of the past decade over the next 10 years.

This should ring alarm bells for policymakers, especially those in developing countries who are net importers of food. The UN-OECD reasons that drought in some of the world's main grain-producing regions (like Australia, which is one of the largest exporter of wheat), changing diets, urbanisation, economic growth and expanding populations, are likely to be the factors that will keep food prices higher in the coming ten years.

  • India offers world food

    In the meanwhile, Reuters has reported a top farm ministry official saying that India will see its rice and wheat output to increase by 2 m tonnes (MT) and over 1 MT next year. As reported, the country already has more than adequate stocks of wheat, and is expected to meet its target to buy 27 MT of rice this year, thereby raising hopes that curbs on grain export will be eased. So, are you taking the government's word this time around, considering that the policies have created a menace in the food market leading to low agriculture yields and sustained higher food prices over the past so many years?

    ...as also for biofuel manufacturers
    Apart from the factors mentioned above, the UN-OECD reports also attributes rising demand for biofuel as another key factor contributing to higher prices over the next 10 years. As per the report, world fuel ethanol production tripled between 2000 and 2007 and is expected to double again between now and 2017 to reach 127 bn litres a year. Bio-diesel production is seen to expand from 11 bn litres a year in 2007 to around 24 bn litres by 2017. The growth in biofuel production adds to demand for grains, oilseeds and sugar, so contributing to higher crop prices.

    Interestingly, one Indian ethanol equipment manufacturer sees itself on the other side of this debate pertaining to 'food versus fuel'. In a recent interaction with us, the company's management maintained that this debate is being exaggerated in many cases. Towards this, it has indicated that the subject is far more complex than has generally been presented since agricultural and export policy and the politics of food availability are factors of far greater importance in rising food prices than diversion of crops to produce clean fuels like ethanol.

  • Read how recent hike in fuel prices with impact oil companies

    One interesting example that management gave was that of a cereal company that makes some variety of corn flakes. The value of corn going into a box of corn flakes was previously estimated to be 2.2 cents. Even if the cost of the corn doubled, it is not likely to have a major impact on the price of the box of cereal. Time to 'munch' some thoughts on this issue?


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