Oil Prices Drive Cost of Food

MOSCOW. (RIA Novosti economic commentator Yelena Zagorodnyaya) - Oil prices have reached the mindboggling level of $100 per barrel.

Analysts wonder when they will soar to $110 or even $120, while exporting countries are counting future revenues, car owners shuddering at the prospect of prohibitive gas prices, and macroeconomic specialists are trying to forecast the rate of inflation adjusted to the potential growth of gasoline prices.

Expensive oil means above all more food problems. We will soon have a crisis on the food market with fat years, when industrialized countries looked for a suitable way to get rid of surplus food, giving way to lean years.

On the other hand, there would have been problems on the global food market even if oil prices had not risen so high.

First, arable land is a finite resource. The global population is increasing exponentially, with more land being taken over by enterprises and housing.

In the past decade, the area of farmland in China has dwindled by nearly 20 million acres. The area of arable land in Russia, which has 10% of the world's total, has dwindled from 290 million acres to 284 million over the last three years. Over the same period, three major agricultural producers - Russia, Ukraine and Kazakhstan - have lost 59 million acres of cropland, according to the Institute for Agrarian Market Studies.

It is almost impossible to increase the area of arable land, which could enhance the effectiveness of crop growing, because of the lack of water. In short, the world cannot increase crop production, although crops are a vital element at the base of the food pyramid. It takes 7 kg of grain to produce 1 kg of beef, and 3 kg to produce 1 kg of pork. But it takes 900 liters of water to grow 1 kg of grain.

The second negative factor is the changing diets of China and India (already referred to as Chindia). A minor increase in proteins in their diets has provoked an explosive demand for food; they now need more and more grain to produce meat, which the Chindian middle class has come to love so much.

The growing food demand - and prices - has had its first effect on China. On February 19, the Chinese Central Bank announced that record inflation of 7.1% was registered in January, the highest in the last 11 years. It was fuelled by the growth of domestic food prices by 18% (prices of pork went up 59%, cooking oil 37% and vegetables 14%).

To curtail inflation, the Chinese authorities are importing more grain. According to the February 21 report by the Chinese Food Information Center, the import of soy may more than double in February year on year, to 2.5 million tons.

On the whole, the Chindian demand is spurring the growth of global grain prices and exhausting grain reserves.

And the last factor increasing food prices is climate change, namely draughts, floods and unusually severe frosts.

The situation will be seriously compounded by the growing oil prices. Scared by the skyrocketing oil prices, humankind has initiated the production of biofuel, which only dreamers advocated a decade ago. Oil crops are used to produce biodiesel, while beets, sugar cane and maize are the raw material for ethanol. But if we start using plants for the production of biodiesel, we will have no palm oil and rapeseed for cooking oil, flour maize for flour, and beet and sugar cane for sugar.

The situation for the part of the human population that regards grain as food has not become catastrophic yet. The International Grain Council has calculated that only 107 million tons (6.5%) of grain out of the 1,650 million grown in the 2007-2008 agricultural season will be used to produce biofuel. However, the "inedible" share may increase to 30% within two or three years.

Grain brokers can fuel the demand for grain, just as it is now happening with oil, whose growing prices reflect not so much the balance of supply and demand, as the balance of oil traders' fear and greed.

Exchange traders have already gauged the capabilities of the grain market. Jim Rogers, of Rogers Holdings, said: "If you're in agriculture, you don't know that there is a recession, you don't care."

Food quotations are growing so fast that the $100 per barrel of oil looks laughable. According to Bloomberg, soy prices on global exchanges have grown by 17% since the beginning of 2008, wheat prices went up 18%, and maize prices, 14%. The U.S. Department of Agriculture reports that the global grain reserves have plummeted to the lowest level since 1960, when the world started to monitor them.

Taken together, this spells hunger, if not famine, for many. Jean Ziegler, the UN Special Rapporteur on the Right to Food, has said that a hasty development of the biofuel industry will leave 1.2 billion hungry by the year 2025.

Now here is the good news: in view of the huge area of arable land in Russia, as well as substantial water resources, Russians may escape the food trap.

The opinions expressed in this article are the author's and do not necessarily represent those of Trend.

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