AGRICULTURE
a permanent feature of the future landscape, one that is highly sensitive to changes in energy prices. While the links between
Figure 1: Lower Production ... Stocks Drawdown
food and energy are clear when it comes to first generation biofuels, there is also a broader exposure to weather. The effects are harder to assess, but that exposure is increasing with the penetration of renewable energy sources. Hydro output is very dependent on seasonal rainfall and dams are often combined with irrigation schemes. Wind and solar depend on the weather, while the number one cause of electricity demand spikes in many markets is air conditioning use in summer. High temperatures affect both crops and energy demand. Food price increases and volatility
1% 2% 3% 4% 5%
0 2005 2006 2007 2008 2009 2010
Note: Net agricultural production is measured by summing country and commodity production covered in the Outlook, valued at average reference prices for 2004-06, net of feed and seed use.
Sources: OECD and FAO Secretariats.
also have socially destabilizing effects. Although revolutions require a multitude of factors, the fear of hunger, rather than hunger itself, has been a relatively constant hallmark of social unrest. According to John Thompson, head of Canada’s Mackenzie Institute, “The final trigger is the specific spark that turns a potential rising into a substantial
poverty levels. As a result, both the food and energy industries face significant challenges in keeping up with demand. They represent an increasingly interlinked and volatile commodity complex likely to create inflationary pressure over the long term, with all the ancillary concerns over security of supply that brings for both energy and food.
Rising Food Prices While the role of biofuels and biomass is significant and
Global stock levels are only seen recovering very slowly over the outlook period to 2020
one. As often as not, food is involved.” It is no accident that this year’s unrest in the Middle East and North Africa occurred at the same time that food prices were returning to record highs. Higher food price increases and volatility need to be factored into country risk profiles when considering energy investments. Moreover, the basic drivers
behind demand for food and energy are essentially the same: population growth, rising incomes and urbanization. Food and energy are the two things that people seek first as their income increases from
58 September 2011
growing, it is still a contributory rather than primary driver of food price volatility. The main cause of cereals, rice and wheat prices reaching the record highs of 2008 in early 2011, was, according to the FAO, a near 5% reduction in world wheat production – the largest drop since 1991 owing to severe drought in the Russian Federation, Ukraine and Kazakhstan; together with a hot and wet summer affecting maize production in the US; and floods in Pakistan and other areas of Asia hitting rice harvests.
This has coincided with a long-term reduction in agricultural
stocks, which for most cereals fell significantly in the 1990s as governments cut back on holding emergency supplies and private firms reduced operational stock requirements to minimal levels. As a result, the stocks available in 2007-2010 were “clearly insufficient to off-set the production shortfalls that contributed to the price surges in that period,” say the FAO. Global stock levels are only seen recovering very slowly over the outlook period to 2020, implying greater potential for price volatility. The report argues that a lack of stocks promotes a vicious
cycle of national level intervention in agricultural markets when shortages arise. Protecting national markets exports volatility to international markets and fails to pass through price increases domestically, undermining the potential for an adequate supply response to higher prices. There is a clear parallel to the economic effects of fuel price subsidies in the oil market.
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