Food for thought – subsidies that encourage starvation

I’ve never been involved in the agricultural futures markets but it’s hard to ignore the staggering rise in the prices of wholesale prices for foodstuffs some of which have more than doubled in a year. These increases have been exacerbated by rises in oil prices and freight costs, with the result that basic foodstuffs are becoming more costly.

Demand forces can can be identified in some cases eg Higher import demand by China and India have driven up the price of powdered milk, which in turn has driven up the price of fresh milk. However, the price of foodstuffs such as maize have been directly hit by the introduction of US Government subsidies aimed to encourage the production of bio-fuels using these commodities.

The subsidies were intended to stimulate a switch to bio-fuels, the hope being that this would provide triple benefits:
– answering environmental critics by lessening the use of oil
– boosting investment in bio-fuel technologies spurred by the growth in demand
– encouraging less dependence on oil

The size of subsidies have resulted in 4% of global maize production being re-directed to bio-fuels and away from foodstuffs. This has distorted the market and pushed up prices. Whilst Government intervention is not unprecedented in order to social and environmental objectives, aside from retail consumers, this action has directly hit food aid programmes. Faced with higher basic foodstuff prices, they face the choice of asking donors for more money to maintain capacity or reducing either the volume of food distributed or number of people fed.

One man’s subsidy is another man’s empty bowl.

Commodities Last Price/
Contract
Today’s Change Year Change
Corn: CBOTAs of Feb 25 2008 20:51 GMT. 533.25

Mar 08
+11.00 +2.11% +25.40%
Wheat: CBOTAs of Feb 25 2008 20:51 GMT. 1,124.50

May 08
+60.00 +5.64% +133.06%
Soybeans: CBOTAs of Feb 25 2008 20:51 GMT. 1,469.25

May 08
+31.00 +2.16% +88.49%
Soybean Meal: CBOTAs of Feb 26 2008 09:12 GMT. 372.9

May 08
-1.60 -0.43% +63.84%
Cocoa: LIFFEAs of Feb 25 2008. 1,354

Jul 08
+8.00 +0.59% +42.83%
Coffee (Robusta): LIFFEAs of Feb 26 2008 09:07 GMT. 2,572

May 08
+80.00 +3.10% +65.83%
Coffee (Arabica): NYBOTAs of Feb 26 2008 08:50 GMT. 163.10

May 08
-0.90 -0.55% +38.46%
White Sugar: LIFFEAs of Feb 25 2008. 376.00

May 08
0.00 0.00% +12.57%
Cotton: NYBOTAs of Feb 26 2008 08:52 GMT. 79.25

May 08
+0.44 +0.56% +43.13%
Orange Juice: NYBOTAs of Feb 25 2008. 126.00

May 08
0.00 0.00% -38.86%
Cattle: CMEAs of Feb 25 2008 22:44 GMT. 94.83

Apr 08
+0.85 +0.90% -0.13%

source FT.com

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