Saturday, May 15, 2010

DYNAMIC DEVELOPMENTS IN GLOBAL AGRICULTURE THREATEN TO HURT THE WORLD'S POOR

INTRODUCTION

Our contribution below is based on an excellent article by dr Mae-Wan Ho, geneticist and director of the Institute of Science in Society (ISIS). ISIS is a UK-based nonprofit organization that promotes the use of science in an effort to improve public welfare.

Three different developments in Agriculture have had a large impact on global land and crop prices and the situation for the world's poorest people, often farmers in subsistence farming areas. These three developments are:

1) Ongoing specialization and internationalization of Agriculture for food purposes ('outsourcing' production abroad)


The Gulf nations at the Arab peninsula, Japan, China, India, Korea, Libya and Egypt are large importers of food products, notwithstanding the fact that 2 of them (China and India) are - together with the USA - also in the top3 of global Agricultural production giants. The increased availability of capital in these countries has - in combination with depletion of local farm land, soil erosion and water problems -  resulted in a situation in which they have decided to not simply act as net buyers in international import markets. 

Instead, they have decided to invest and buy foreign farm land in poor countries. At first one tends to belief that this is purely positive, since it represents new demand for land in other - often poorer - nations. But the acquisition of farm land in Sudan, Cambodia, the Philippines, Kazakhstan, Mozambique, Burma, Laos, Thailand, Vietnam, Turkey, Uganda, the Ukraine, Georgia and Brazil has resulted in increased land prices in these countries and a so-called crowding-out effect that made it almost impossible for local small farmers to keep their land. It is no surprise that the Asian Peasant Coalition protested in 2009 stating that - with wealth in the world growing on average - the number of landless peasants was higher than ever before in its poorer member states.

With 1 billion people across the globe living in hunger, and with 24,000 a day dying from hunger, this is a more than worrisome mismatch.

The poorest suffer from a dynamic set of developments in Global Agriculture.


2) Land and agricultural commodity speculation

 
The mismatch is not only the result of the international demand for farmland abroad from the aforementioned food importers (see point 1). No, what also happened since 2007/08 is a growing interest in farm land and agricultural commodity derivatives from the side of financial services providers. Several of them have created specialized investment funds for institutional investors. In a period when stock market returns were bad because of the Global Crisis - and Globalization has led to increased correlations between Western and Emerging stock markets - this new asset class represented diversification and a new way of investing in financial securities that represented more stable and steady cash flows. But obviously this net demand for speculative purposes did help increase land prices even further. No problem for the Arabs, Chinese, Japanese, Indians, Koreans and Libyans, but making things even tougher for the subsistence farmers from poor countries.

Agriculture: Not just Food, but also Asset Class
 

3) And to make things eve worse: the bio-fuel scam

 
And the story gets worse. Under pressure by environmentalists, Western governments are seriously stimulating durable/renewable energy projects to such an extent that they seem to have forgotten to calculate the 'real' NET effect of investment projects. One group of investments where the net effect is not necessarily that positive is Bio-fuels. Of course it would be great if bio-fuels could help in making the world less sensitive to 'unstable regions' (former president George W. Bush's argument for subsidizing investments in it) and/or make the world a cleaner place (the point stressed by most Western governments). But we should never forget that for one 1 gallon of ethanol we need 1,700 gallons of water. All but one type of bio-fuel (ethanol from sugar cane, grown in Brazil) has a negative net energy score when taking all aspects of it into account. At the same token the production of bio-fuels - with government subsidies - 'eats away' land that otherwise could have been used for or by the poor subsistence farmers. In most cases it would be better to forget about bio-fuel and just go for the fossil fuel that it is supposed to replace.

EVALUATION: WHAT IS NEEDED

With growing world populations and increased wealth in the middle classes of China, India and other successful Emerging Market nations, without accompanying collapse in the wealth of Western nations, demand for food products will increase rapidly. Supply will at best grow in a more linear fashion. This will translate itself into increasing food prices AND increased land prices. Countries like China have tried to mitigate the problems by using above-average amounts of fertilizer, but in most cases this has led to other problems like for instance increased risk of soil depletion.

So as to make sure that the aforementioned trends will not lead to political problems between have's and have-not's, governments and supranational organizations need to make sure that longer-term structural factors - including protection of the poorest - are not ignored. When leaving the market completely free, the risk is more than real that short-term potential profits might lead to situations in which private sector investors will more or less ignore the long-term negative side effects of their actions.

Corruption has also played a role in the poorest countries of Africa, Asia and Latin America. Even when there were systems in place that tried to ensure focus on longer-term macroeconomic and societal goals, corrupt government officials nonetheless gave licenses to foreign corporate agricultural giants. Either through the FAO or some other - maybe new? - supranational body do we need to ensure this long-term agenda.

As long as this is not the case, agricultural commodity and land prices will continue to rise in more or less linear fashion, correlated with growth in Emerging Market nations. But this short-term benefit for investors will be risky, since the growing problems for poor subsistence farmers will translate into societal unrest.

An analysis of bio-fuels based on a NET energy indicator and NOT based on some 'hot' government agenda (including silly subsidies) will also help avoid problems, albeit that the alternative - go back to less environment-friendly initiatives like nuclear energy and/or coal is not popular with most Western observers and political parties. If we avoid that and don't do anything else, increased fossil fuel prices will sooner or later lead to a situation in which the net present value of investment in bio-fuels does become interesting (even without subsidies). But before we end-up in that situation, we should stimulate governments to avoid their expensive bio-fuel hobbies.

 Click here for Dr Mae-Wan Ho's original contribution (as published on web portal AllAfrica.Com.

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