The Engineered Inflation of Global Food Prices

U.S. Crop Boom Not Enough to Rebuild Thin Supplies

February 25, 2011

Reuters – Huge U.S. corn and soybean plantings this spring will likely fail to refill razor-thin stocks enough to quell the surge in grain prices, the U.S. Agriculture Department said on Thursday.

In updated forecasts for the world's biggest crop exporter, the USDA warned that it could take several years to restore inventories to comfortable levels. It mostly maintained earlier forecasts on how many acres farmers would sow this spring, but said stocks at the end of the 2012 season would remain tight.

The U.S. government's forecasts are likely to fuel more concern globally that high prices could persist far longer than they did in 2008 when they hit record highs, as supplies remain too thin to cope with any further weather disasters.

"While it is often said the cure for high prices is high prices, even with additional supplies expected this year, it is likely that the tight stocks-to-use situation will not be entirely mitigated over the course of one or even two growing seasons," USDA Chief Economist Joseph Glauber told the department's annual outlook conference on Thursday.

The planting forecasts were unchanged from the department's projections made earlier this month, when it projected 92 million acres of corn -- the second largest since 1944 -- and 78 million acres of soybeans, a record amount. Analysts had expected the agency to trim both forecasts marginally.

LITTLE CUSHION IN US END STOCKS

The greater surprise was in projections for tight ending stockpiles for 2011/12. While both corn and soybean ending stocks will be higher than this year's levels -- with corn forecast to be the smallest since 1996 and soybeans amounting to a few week's supply -- they suggest very little cushion for unexpected shortfalls.

"It should be bullish all around even though the USDA stuck to their higher estimates than I probably would have done," said Jack Scoville, analyst for Price Futures Group.

"It seems to me they're implying some very strong demand here because the ending stocks estimates remain pretty tight, really across the board," he added.

USDA said 2012 corn ending stocks would rise by 28 percent to a still-thin 865 million bushels, and soybeans stocks by 14 percent to 160 million bushels. But USDA cut its outlook from a forecast made earlier this month for corn stocks by 23 percent and soybeans by 16 percent for 2012.

Contributing to the slim stocks will be soaring exports, which are expected to rise $9 billion this year to a record $135.5 billion.

"Today there are 7 billion mouths to feed and many of them depend on American agriculture," Debbie Stabenow, chairman of the Senate Agriculture Committee, told the USDA's annual outlook conference.

China will become America's top export market, surpassing Canada. China is seen importing 60 percent of the world's soybeans and 40 percent of its cotton this year.

While the tight stocks figures were bullish, grain futures at the Chicago Board of Trade fell on Thursday as investors continued to liquidate positions and seek safer havens on concerns over the turmoil in the Middle East. Wheat fell 2 percent, corn nearly 1 percent while soybeans were only slightly lower.

CORN FOR ETHANOL AT RECORD HIGH

Ethanol makers are expected to consume a record 5 billion bushels of corn this year, or some 36 percent of the harvest.

Despite criticism that using food for fuel was driving up prices and contributing to thin stockpiles, Agriculture Secretary Tom Vilsack told the conference the government had no intention of scaling back on ethanol.

"There is no reason for us to take the foot off the gas," Vilsack told the conference. "This is a great opportunity for us because we can do it all, make no mistake about it."

Tight global commodity stockpiles have pushed food prices higher, contributing to political unrest in countries with high poverty rates and unemployment.

Former U.S. President Bill Clinton [Editor's Note: for Bush's role in involving excessive speculation in food/energy markets and for Clinton's role in the depletion of grain reserves, see the following stories] struck a more cautionary tone on ethanol.

"We have to become energy independent but we don't want to do it at the expense of food riots," Clinton said in the keynote address.

In the United States, food prices are forecast to rise a sharp 3.5 percent this year -- nearly double the overall inflation rate.

"We're keeping an eye on this but I would suggest that as a result of what we went through in 2007 and 2008 we are better prepared to respond as a country and as a globe," Vilsack said.

But some analysts caution a bad crop in the United States would change everything.

"There are speculators involved... but we've had the perfect storm over the last two years, and if we don't have a great crop this year in the United States, we are going to have an even bigger storm." said Pete Nessler, president of the brokerage FCStone LLC.

Commodity Futures Modernization Act of 2000

We may never know for sure the combination of circumstances that brought on energy crisis of 2008. But one factor was almost certainly the Commodity Futures Modernization Act of 2000, which allowed unprecedented levels of speculation in oil futures by investment banks and pension funds, bringing the familiar boom-bust cycle home to the gas pump. [Drill Now? Try Regulate Now, Wall Street Journal, April 7, 2010]

To lower international food prices and protect our social interests, the Commodities Futures Trading Commission must use its authority to curb excessive speculation in commodities futures and re-establish strict position limits on speculators (which were successful until removed by the Commodity Futures Modernization Act of 2000). We must regulate and bring transparency to all trading. We can also removing damaging speculative influence on commodities prices by prohibiting participation in commodities markets by those who do not produce, manufacture, or take physical delivery of the commodities. We must create a solidarity economy that puts compassion and care for one another ahead of short-term profits, in the United States and around the world. [The world food crisis: what is behind it and what we can do, WorldHunger.org, October 23, 2008]

The surge in world food prices can be attributed to the “financialisation” of commodities due to the Commodities Futures Modernization Act of 2000. The game changed for commodities the minute the legislation passed -- ten years ago. That doesn't explain the surge this year but it does explain the increased volatility of the last decade. [Don't Blame Bernanke: Here's Who's REALLY To Blame For Surging Food Prices, Business Insider, October 12, 2010]

The U.S. Has No Remaining Grain Reserves; China Stockpiling Grain

The United States has in the past kept a strategic grain reserve, but it was largely eliminated under the 1996 Freedom to Farm Act. Today, there are no remaining grain reserves in the U.S., and there haven't been since July 2008 [this was shortly after the sale of 18.37 million bushels of wheat from USDA’s Commodity Credit Corporation (CCC) to the Bill Emerson Humanitarian Trust, which left only only 2.7 million bushels of wheat in the entire CCC inventory]. In addition to having no grain reserves, the U.S. has nothing else in its emergency food pantry: there is no cheese, no butter, no rice, no corn, or anything else left in reserve except for dry milk.

Grain is the Foundation of the World's Diet

Since the beginning of agriculture, farmers have recognized the need to manage stocks of grain to prevent starvation in times of scarcity. In the Hebrew Bible, the Egyptians were directed to stockpile seven years of harvests in preparation for seven years of famine. The primary purpose of grain reserves is to help cope with food emergencies, but grain reserves are also used to stabilize grain prices and as a loan commodity.

Food security in the fullest sense would mean that all people at all times have access to adequate quantities of safe and nutritious food. To ensure food security, many countries stockpile strategic grain reserves (SGRs). Grains are an easy-to-store and nutritious way to provide the basic needs of a population facing a food emergency until alternative food supplies can be arranged. Food emergencies can result from natural causes, such as pest outbreaks sparked by drought, floods, storms, earthquakes, or crop failures, as well as from war and terrorism.

World Hunger and Grain Reserves

In 1977 the General Assembly of the Unitarian Universalist Association urged and called upon member societies to urge the governments of the United States and Canada to establish national grain reserves and to demonstrate willingness to participate in concert with other large grain-producing countries in a world food bank. The factors leading to this resolution where as follows:

• Millions of people may die in the next few years because of inadequate world grain reserves; and drought and other causes have rendered grain production unstable, which drives prices up and forces poorer countries out of the world grain market;
• It has been demonstrated that when adequate world grain reserves are maintained, price fluctuations are minimized even in times of small harvests;
• The United States, Canada and other large grain producers hold the key to stable world-wide food reserves that have been allowed to dwindle to a fraction of their former levels; and
• The United States, Canada and other large grain producers, through climatic and other circumstances, may themselves experience shortage.

Federal Agriculture Improvement and Reform Act of 1996

In 1996, the Federal Agriculture Improvement and Reform Act of 1996 ("Freedom to Farm Act") called for elimination of government stockpiles of grain, except for a very small amount in the Emerson Humanitarian Trust Reserve intended for foreign aid. The misguided policies of the Bill Clinton administration and the Republican Congresses of the 1990s (as exemplified by the 1996 "Freedom to Farm Act") eliminated historic food-security provisions and handed over control of grain stocks to corporate agribusiness giants and commodities speculators.

The National Family Farm Coalition has for years been warning that a global trading system designed to enrich agribusiness conglomerates, while undermining the interests of working farmers in the U.S. and abroad, would lead to precisely the disaster that is now unfolding. Now, the United States government has no reserves of butter, cheese, barley, corn, oats, sorghum, soybeans, wheat, rice, sugar, honey, peanuts, canola seed, crambe, flaxseed, mustard seed, rapeseed, safflower seed, sunflower seed, peas, lentils and chickpeas. [Source: U.S. Farm Service Agency, Current CCC Inventory (PDF file)]

According to Patrick Woodall, senior policy analyst with Food and Water Watch:

“Consumers see cereal prices go up when input prices rise, but they never see the pass-through when input prices fall... When the crop prices collapsed in 1996 (due to the 1996 "Freedom to Farm Act"), the grocery store prices didn’t come down at all. In many cases, they went up for things like pork chops, ground beef and milk.”

In the developing world, Woodall said, the cereal price index rose 88 percent between March 2007 and March 2008. “Much of the global cereal trading below the cost of production was a deterrent to holding onto any reserves at all.”

Woodall says another factor driving stocks down in the Third World is that “the World Bank has pressured countries to eliminate their own reserve programs, much like the United States... Countries like Kenya and Malawi were forced by the World Bank to sell off their reserves. That was partly because of fiscal austerity reasons, but it was also partly to repay debt to the World Bank.”

As these programs have been eliminated to conform with World Bank directives, “we’re now in a situation where there’s no buffer to protect people from a severe food crisis.”

We are just one drought away from possibly seeing $10/bushel corn or $20/bushel wheat with absolutely no plan in place to deal with such a calamity. The President and U.S. Congress have irresponsibly ignored this issue throughout the entire Farm Bill debate, even as other countries such as China and India build up their strategic stocks. - National Family Farm Coalition

China's Grain Reserves 'Self-Sufficient'

China is aggressively building its grain reserves. Reuters reported that China will raise spending on reserves of grain, edible oils and materials by 61% in 2009, bringing the total to CNY 178.045 billion or 4.1% of its budget spending. According to the report, the spending includes CNY 78.341 billion to stimulate domestic demand by expanding reserves of important materials such as grain, edible oils, crude oil, non-ferrous metals and specialty steel, as well as developing storage facilities. Direct subsidies to grain producers will also rise 25.8% to CNY 19 billion.

New Wheat Crisis Plagues World Food Supply
China Adds 292 Million Tons to Grain Reserve in 2008
China, South Korea, Japan, Saudi Arabia, Kuwait Grabbing Land for Food
South Asian Nations Agree to Build Grain Reserves
China Says to Spend $26 Billion on Commodity Reserves; Veg Oil, Grain
China Boosts Rural Economy Spending, Power Reform
China Adds $10 Billion to Commodity Stockpiling Budget
Food Grain Export Ban by India, China Harming Third World

In the wake of global food issues in early 2008, a number of groups in the U.S. are lobbying to create a strategic grain reserve:

Family Farmers Respond to the Food Crisis
An Open Letter to Congress on the Need for Strategic Grain Reserves
Growers and Economists Push for Strategic Grain Reserves
U.S. Farm Group Backs World Grain Reserve Proposal
Final Declaration of Farmers at High Level Meeting on Food Security, January 27, 2009



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