FOOD IN FUEL TANK, HUNGER ON ROAD - April 24, 2008

FOOD VS. ENERGY IN VICIOUS CYCLE

  
What is dramatically increasing malnutrition and raising the risk of mass starvation on a global basis? 100 million people are under threat of hunger according to the United Nations and possibly 20 million starving. Many more infants and children could be handicapped for life from a lack of needed nutrients at the critical time in the development of bodies and minds. Social and political upheaval is already reality, as decades of small but relative progress is reversed. Violent conflict is unfolding in the form of food riots that soon could give rise to rebellion in already unstable regions. Much of it comes down to the competition between food and energy, as the world has been increasingly going into the deficit in terms of food produced to that consumed.

A MALIGNANCY OF HUNGER

 
The last few decades we came to see hunger as caused by more temporary disruptions such as drought or war. We responded with an urgent appeal, a concert for Bangladesh or a video of celebrities for the suffering in the Horn of Africa. As horrific as those examples of starvation and deprivation are, the current crisis is not temporary but indicative of a growing malignancy that would only be further exasperated by new wars or droughts.

Today, we already have an emergency need for food, from Africa, to Asia to the Americas. The United Nations World Food Program, the World Bank and many other international and national institutions are crying out for urgent help and increases in allocation of capacity to provide immediate relief. The price of food has soared by around 80% over the last 3 years, 40% or more within the last year. Logistics costs, including transportation, have also escalated. The cry for emergency is rightfully focused on saving lives now. It is also critical not to allow this to transform into violent conflict or a recruiting tool for terrorists. This is temporary relief, costly and impossible to maintain unless more lasting remedies are developed to address the chronic causes now embedding into our shared global future.

CUTTING BACK IN MIDDLE CLASS, HUNGRY PENSIONERS

  
The problem is not just in the poor or developing countries. Middle class families from the US to Japan are feeling the pinch, the squeeze, and degrading the quality of their calorie intake. The pensioners are an especially vulnerable and already degraded segment of our society. Even in wealthy societies, pensioners are cutting back on the quantity and quality of their nutrition especially when essential for a remaining quality of life.

However, the stark difference is that the “US poor” will spend less than 20% of income on food while the citizen of a developing country in Africa or Asia has to commit 50% to 75% for daily meals. Regardless, food shortage is intruding upon most of the globe’s sense of basic security, affecting quality as well as quantity, marginalizing physical and physiological health and, for more than some, putting us on the verge of physical survival.

CASH CROPS & BIOFUELS

  
The eruption in food prices is not tracking a similar increase in demand, (driven by rising birth rates nor by some supply interruptions due to an unprecedented spike in catastrophic weather or war). The globe’s population continues to grow and conflicts and weather are causing local or regional interruptions. There is adequate supply of all cereals grown. However, this is being undermined by producing countries curtailing exports and warehousing of excesses. The variation most responsible though is conversion of food to fuel production.

Supply deficit is caused by crop production being directed toward “cash crops” designed for ethanol and biofuels. The soaring price of oil and other forms of fossil fuel energy have spurred a demand in perceived alternatives. Further, the rise in petroleum has also substantially increased other costs in the food production and distribution chain, from fertilizer to transportation. In fact, it had been distribution and transportation efficiencies evolving over the last century or more that deserve credit for the increased availability of food, from cosmopolitan consumers to the far away subsistence wage earner.

The efficiencies of biofuels, especially ethanol are subject to considerable doubt. Nonetheless, ethanol has now become a rhetorical and political deity. It is politically marketed in the US as “freedom from foreign oil.” And now that this rhetoric has taken hold to fuel enormous government subsidies powerful political interest groups are not about to let it get away. Of course, the continuing rise of oil prices only fuels the myth and political agenda of biofuels. In reality though, the whole rise of oil prices is fueled by its own mythology. The price of oil has little to do with OPEC and much more about the vulnerabilities in the so-termed “free markets.”

THE MYTH OF THE FREE MARKET FOR FOOD AND FUEL

 
Undoubtedly the growing affluence of China, India, Russia, Brazil, and many other newly developed economies has given rise to greater demand for more and better foods as well as energy. The demand for both food and energy is rising, but the price for fuel is escalating even more convincing the farmer to convert crop types and production ever more to bio-fuels.

The free market advocate might normally suggest that prices will ultimately bring down demand. That’s not working in a global economy when a liter of gasoline costs multiples of what the poor citizen of our world has available for his/her daily food subsistence. Food is not a discretionary purchase. The only way to reduce demand for food is to starve several millions of people.

Increasing food production though is now directly countered by the demand for biofuels. And, petroleum prices will dictate that most farmers grow palm oil or corn or rapeseed or whatever can serve as raw material for biofuels. From the US to Brazil, Liberia to Indonesia the focus is on biofuel crop cultivation, taking millions of acres out of food production.

The relevant question: What continues to drive the price of oil and gasoline? The price of a barrel of oil has gone up by around 500% since 2000 and by almost $50 in just the last year or so. This can be attributed to several factors including:

- booming economies of such developing states such as China and India;
- drop in the US Dollar by almost 50%
- threats of supply disruption
- speculation

THE SPECULATION PREMIUM ADDED TO OIL PRICE

 
Despite all the perceived risks, there really has not been a definitive disruption of petroleum supply. There certainly is the risk of demand outstripping supply, but that is still several years in the future. For now, the storage of both oil and gasoline is at levels well exceeding historical precedent in the US and globally. And, the slowing US economy should be driving down prices now. However, the opposite is happening, and for reasons that might be expected to even have the contrary effect:
 

- The drop in equity markets and lower returns on debt investments are prompting investors, particularly

   hedge funds, to seek out real assets, such as metals, grains and oil, as alternatives to seek higher returns.
 

- In order to avert the US economy from going into a deeper and longer recession, the US Federal Reserve

   has significantly lowered interest rates. Falling interest rates are also contributing to the devaluing US

   Dollar, thereby further driving up oil, which is priced in US Dollars.
 

- Low interest rates are also allowing hedge funds to borrow at relatively cheap cost of funds to buy and

   speculate on more petroleum products and other real assets, such as grains.
 

- The relatively low US interest environment has helped establish a new type of “carry trade,” US Dollar

   borrowing to speculate in real assets such as oil or grains, (unlike a few years ago when investors borrowed

   in US Dollars and invested in higher bearing interest currencies, such as the Euro or British Sterling).
 

- As speculator drives up the price of oil, more agricultural production is converted to bio-fuels thereby

   driving the price up for his/her other bet on grains. Speculator is now hedged.
 

- Regardless, the speculator believes that even if there is a temporary drop in prices, he/she can afford to

   hold on to the oil contract, in view of the low carrying cost, until the Chinese and Indian economies

   presumably are consuming more.

It is estimated that the speculative premium added to the price of oil is between $30 to $50 per barrel.

"THE TREND IS YOUR FRIEND"

 
There is another factor adding to the speculative feeding frenzy: Traders, speculators in the commodities and currency markets especially are inclined to follow the herd, or the prevailing trend. It is not dumb herd mentality though as it is an understood fundamental of so termed technical trading, which reflects the mentality of the trader community as a whole rather than market and supply and demand fundamentals. It is termed as “the trend is your friend,” but it as close to market collusion as possible. The “trend” continues to be up, until it is broken by an overwhelming outside force or the market fundamentals become impossible to avoid.
 
BONO'S, (AND PROFESSOR SACH'S) EFFORTS TO QUELL GLOBAL POVERTY

  
A decade ago, Bono and Professor Sach’s, (then of Harvard now of Columbia University), initiated an effort to reduce and eventually eradicate global poverty. The focus of the initiative was to erase the debt of the world’s poorest countries, and thereby reducing their outlays for debt service and enhancing capacity for sustainable development.

Meaningful success was realized, even if the world’s big economies and related institutions, (including Paris and London Clubs), have not fulfilled initial expectations. However, the steady progress in poverty eradication gained through debt relief is now rapidly being unwound by the food crisis.

SAVE LIVES NOW, DETER TERRORISM AND CONFLICT IN THE FUTURE

 
The lives of millions and the future are at issue right now. It is not just the hungry though at risk. Most poor have no opportunity to influence the free market, and may resort to violence, conflict and terrorism.

We must be responsive, and urgently, to the immediate needs of the poor and hungry and address the longer term market discrepancies that diminish food production and raise prices beyond the reach of pensioners, the middle class as well as the working poor. The growling stomach must also be translated into a credible political voice to give the poor a forum for communicating their agenda and prioritizing needs. (Ironically, some poorer states have converted food producing land to biofuel presumably to enhance economic advancement. Others are decimating nature and forests essential to slow global warming in favor of biofuel cash crops, presumably again to minimize fossil fuel emissions as well as for economic prosperity).

The emergency call has already gone out for food and funds to keep millions from starvation. Much is about competing for grains, such as corn, to steer it toward food rather than ethanol. However, the real issue is what to do to remedy the imbalance over the medium and longer term.

REMEDY FREE MARKET EXPLOITATION

 
There is no such thing as an absolutely free market. Production, supply and demand in developed states is explicitly and implicitly effected by such non-free market tools as government subsidies, tax breaks, regulatory incentives and disincentives. For example, some food production in the United States has been dis-incentivized to presumably keep prices from going too low. On the other hand, biofuel cash crops have been increasingly incentivized presumably to lower dependence on foreign oil.

Below are some measures that should be considered to make more food available, at more affordable prices, on a sustainable basis and disconnect the vicious connection between energy and food.
 

- Reverse regulatory/tax incentives that favor agricultural production for fuel and explicitly or implicitly

   discourage food production, (for example Europe should reverse its adopted target to have 10% of

   petroleum supplies replaced by biofuels by 2010);
 

- Adopt stricter regulations and/or legislation banning capital markets investors from borrowing, “margin

   buying” or otherwise, and thus speculating in energy and grain commodity markets, (and especially now

   abusing lower interest rates designed to stimulate economic growth);
 

- Encourage true sustainable energy alternatives versus less effective or purely politically motivated

   options;

- Biofuel can also be made more effective and environmentally sound by using waste material and more

   efficient crops;

 
- Enable the poorest countries and farmers to become more efficient in agriculture to produce more;
 

- Free trade is not a problem. To the contrary, food exports from the excess producers are being

   undermined as some divert crops to fuel and some have halted exports altogether out of fear of shortages.
 

- Promote fund for longer term efforts to create sustainable food supply. (OPEC may not be to primarily

   blame for the current crisis or even unprecedented high energy prices; however the budgets of most oil

   producers are being cushioned by unexpected revenues. Political and even economic self interest should

   already dictate a generous response, but regardless, there is a moral obligation);
 

- Promote specialized forum of relevant governments and NGOs, potentially within United Nations

   framework, to allocate resources, evaluate incentives and disincentives for food production and, most

   importantly to give the hungry and poorest a political voice, (as an alternative to conflict and terrorism).

A PLACE AT THE DISCUSSION AS WELL AS DINNER TABLE

  
It is not just about handouts, but also about being fair and smart in producing and providing food to all of the globes citizens. Now, too much of the responsibility for the priorities of food and fuel production is on the hands of the “haves” while the “have nots” still lack a seat at the discussion table as well as the dinner table.
       
  

Muhamed Sacirbey

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Mr. Muhamed Sacirbey holds B.A. degree in history and J. D. degree from Tulane University in New Orleans. He also holds M.B.A. degree from Columbia University. Prior to becoming Bosnia’s Foreign Minister and Ambassador to the United Nations, he practiced as an attorney in New York City and worked for several years as an investment banker. He presently writes his book “A Convenient Genocide, in a fishbowl ” and is a commentator on human rights and political issues.

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