Whose Fuels

Reminded me the cover story at TIME 2 issues back, about biofuel and crops production.

Food price surge a blessing, not a curse
Tom Holland
South China Morning Post, 21 April 2008

To most people, the current surge in global food prices is a disaster in the making. Just last week, for example, United Nations Secretary General Ban Ki-moon called for urgent international action to tackle rising prices. Meanwhile, Premier Wen Jiabao ordered his government to step up efforts to fight inflation after food prices on the mainland rose 21 per cent over the year to March.
But despite the widespread air of panic, not everyone agrees that higher food prices are a bad thing, at least for China.
According to Stanford University agricultural economist Scot Rozelle and his collaborator Huang Jikun of the Centre for Chinese Agricultural Policy, rising food prices represent nothing less than "an opportunity for China to eliminate rural poverty completely".
Dr Rozelle has no doubt at all why Chinese food prices are rising so steeply. He blames the US government's misguided subsidies for biofuels.
With the price of oil at a record high of US$117 a barrel, as much as 40 per cent of the US corn crop is now being used to produce ethanol, says Dr Rozelle, crowding out food and animal feed cultivation.
As a result, prices are going up. "What happens to the oil price happens to food prices," he says (see the first chart below).
And what happens to international food prices happens in China. Dr Rozelle has little patience with the often cited argument that because China only imports 1 per cent to 2 per cent of its food, domestic prices are not affected by international fluctuations.
He points out that although the state interferes in the pricing of some staples such as wheat and rice, most food prices are set by the market and there are few barriers to international trade. As a result, prices in China closely follow global food prices (see the second chart below).
With energy prices expected to remain high indefinitely, that means China had better get used to more expensive food for the foreseeable future. Unlike most observers, however, Dr Rozelle and Dr Huang believe higher food prices have positive implications - provided Beijing can resist the temptation to tinker with the market.
Although higher food prices are not popular with city-dwellers, with wages rising at close to a 20 per cent annual rate, few urban workers have been left substantially worse off by the recent increases, says Dr Rozelle.
In contrast, the structural shift to more expensive food driven by rising energy prices will encourage investment in the agricultural sector and significantly raise rural incomes.
So far, Beijing has sought to keep a lid on grain prices by selling from reserves. But that is short-sighted, argues Dr Rozelle. For one thing, the policy cannot continue indefinitely and, for another, by artificially holding down the price of grain, the government is encouraging farmers to switch to other crops such as soya bean, which risks creating a grain shortage in the future.
If Beijing would just butt out and leave the market to do the work, the fundamental structural shift in global agricultural markets driven by energy prices will help narrow the income gap between China's cities and countryside and go a long way to alleviating rural poverty. Now that would hardly be the disaster so many observers are predicting.