Homework #2 Global Food Price

Homework #2
Global Food Prices Case
Aída Areli Magallán Morales
BSM404_MM International Business
Professor Carla Weaver
March 2nd, 2014

Global Food Prices
Case Study
* Problem Definition.
This case covers a topic that affects the world population in a big scale. It is about the rise in food prices. It is explained, that over the last 25 years, the trend was, (and seemed to keep being) a decline in the food prices due to the advances in the agricultural techniques, technological innovations, and general efficiency of the producers. However, during the year 2007, the global food prices reached its highest (and sudden) peak in the whole history: the prices of wheat and corn rose over 60% from the average for year 2006; the food prices index kept by The Economist reached its highest level ever by the end of that year.

There are several explanations by this sudden rise in prices, now the information provided by the case itself will be complemented with some other data.
1. One of the reasons for the rise in food prices was the augmentation in the demand for nourishment, caused by the economical boom of the developing countries, like China and India. The demand rise was mostly for meat products, inducing to a vicious circle. Why is it a vicious circle? Well, because due to the demand on meat, more grain needs to be cultivated in order to feed the cattle; but here comes this system inefficiency: in order to produce one kilogram of meat you need to invest 8 kilograms of grain. According to PETA, the rise in the world meat demand has lead to the misuse of than 260 million acres of U.S. forest that are being used for growing grains to feed the cattle; and according to scientists at the Smithsonian Institution, “the equivalent of seven football fields of land is bulldozed worldwide every minute to create more room for farmed animals”. What does it mean? It means that the majority of the agricultural production in the world is aimed to the animal consumption, which leads to soil erosion by single crop farming, and the rise in the food prices, since in the USA alone, more than 70% of the grains and cereals are fed to farmed animals (PETA,2012).

2. Then it goes the problem of the subsidies given by the governments in order to produce biodiesels. In both Europe and the United States, the government has given financial support to the farmers, (between $0.29 and $0.36 in the USA, and in Europe $1, per every liter) for them to produce biodiesel. These subsidies were created to fight the global warming with the decline in CO2 when using fuels which come from corn and soybeans; nevertheless, a side effect these aids have created was the incentive for farmers to quit the production of other grains and focus on the highly subsidized crops: corn and soybean.
One other issue is that, the sugarcane, a much more suitable plant for producing biodiesel, has an import tariff of at least 25% in America and 50% in the European Union, leaving the Brazilian producers- the most efficient in the world for sugarcane- unable to compete against the domestic producers. In my opinion this import tariff for the sugarcane does not coincide with the primary purpose of the American Ethanol Policy, which was having an efficient alternative energy market and taking care of the environment, because according to the Worldwatch Institute, “ethanol may damage the environment when it is produced on a large scale from low-yielding crops such as corn.”
* Discussion Questions.

1. Who benefits from government policies to (a) promote production of ethanol and (b) place tariff barriers on imports of sugarcane? Who suffers from these policies?

The ones who benefit from the tariffs placed on the imported sugarcane and the subsidies given for the biodiesel production are the companies that produce ethanol in the USA and the European Union, including the new employees provided by the development of this industry. In the EU, there is one particularity since “government supports to biofuels are increasingly captured by non-EU suppliers rather than the EU farmers” (International Institute for Sustainable Development, 2013). The other beneficiaries are the Governments of the European States and USA, because of the taxes paid by the producers, who sometimes are agri-business giants, such as Archer-Daniels Midland.
The ones who suffer from this policy are a larger and most heterogeneous group. First of them, the directly affected Brazilian sugarcane producers, who cannot compete with domestic producers in the American and European biodiesel markets because of the tariffs imposed on their crops. This impedes the ethanol production to reach its possibilities frontier, and use less suited grains.
After them, the consequences of these regulations are wide-spread, because due to the use of corn and soybean for the production of fuel, the prices of food are increasingly rising. There is predicted that they will continue rising faster than incomes every year until 2018, with an increase of 3.8% every year. (Poulter, 2013). Besides, the US and EU ethanol policy are affecting the prices of the commodities not only in their territories, but in the rest of the world. For example, during 2007 the prices of tortillas in Mexico (made from corn) reached a top because of the high costs of this grain. Furthermore, the low income countries are predicted to increase the poverty gap if the prices keep rising. The producers of livestock are being affected too, since the price of the corn bought to feed the animals is increasingly high.
Despite what is being said, the environment may be affected too, according to the Stanford University specialist Mark Jacobson, “Ethanol is being promoted as a clean and renewable fuel that will reduce global warming and air pollution, but our results show that a high blend of ethanol poses an equal or greater risk to public health than gasoline, which already causes significant health damage.” (Jacobson 2007).
2. One estimate suggests that if food prices rise by one-third, they will reduce living standards in rich countries by about 3 percent, but in very poor ones about 20 percent. According to the International Food Policy Research Institute, unless there is a change in policies cereal prices will rise by 10 to 20 percent by 2015, and the expansion of biofuel production could reduce calorie intake by 2 to 8 percent by 2020 in many of the world’s poorest nations. Should rich countries do anything about this? If so, what?

I think that the richest countries, the ones that can absorb the rising in the food prices can do a lot to alleviate the situation of the poorest countries in the world. First of all, we need to remember that the problem is not necessarily a scarcity of food, because according to Dr. Gary Peters, author of Population Geography, there is enough food for the 6.9 billion people in the world, but not all of them can afford it. Some of the solutions from top to bottom of the pyramid could be that the government of the most powerful countries should consider reducing the tariffs and subsidies for biodiesel production that slow the free trade within the countries and cause the climbing of the prices of food.
Then, non-profit organizations can extend humanitarian help for countries in need, promote agricultural development and help to educate people in family planning area. One other thing that residents of first-world countries can do is to decrease the meat consumption, since its production methods create and contribute to the increase in the grains prices.

3. The argument for giving subsidies to ethanol producers rests upon the assumption that ethanol results in lower CO2 emissions than gasoline and therefore benefits the environment. If we accept that global warming is itself a serious problem, should we not be encouraging government to increase such subsidies? What are the arguments for and against doing so? On balance, what do you think is the best policy?

I think that it is really important to develop alternative energy sources, as petroleum has proven to be one of the most important pollutants in the world, and it is a not-renewable resource in its ways of extinction. However, not all of the biodiesels are as “green” as we think, and there is evidence that some grains are better than others in the ethanol production. For example, in an article found in National Geographic News, Jason Hill, biologist from the University of Minnesota, stated that “There are surprisingly large environmental impacts for corn-grain ethanol,” and ecologist David Pimentel discovered that that corn ethanol requires 29 percent more energy to produce than the fuel generates. In my opinion, in the battle “Food vs. Fuel”, corn belongs more on the food side. On the other side, we have the case of sugarcane, which produces a higher yield per hectare, in terms of its energy content, and the ethanol is also produced from the “waste” of the plant, so there is no real lost here. Yet, the sugarcane has high tariffs in the USA and EU.
In my opinion, if the real concern of the countries and governments is the climate, then they should worry about obtaining energy from a real viable option, one that proves to be really green, and not just benefit or protect a few giant domestic producers, which make big profits when the prices of corn and soybean go up. Therefore, the policy that I think would be better is more oriented to free market: cease the tariffs for imports in sugarcane, and allow the entrance of new competitors, which on the long term will make a better situation for the consumers of both ethanol and grains.

In conclusion, through this case we saw that in this globalized world, the policies that powerful governments adopt can affect a wide portion of the population, since nowadays supply and demand is interconnected. We no longer can see our country as an isolated market, and even though it may seem like a protectionist policy would make our situation better, in terms of global welfare, the best solution will always be the one who can help the most people.

Bullock, D. S. (2009). Ethanol Policy and Ethanol Politics. http://farmdoc.illinois.edu/policy/research_reports/ethanol_report/Ethanol%20Report%20-%20Ch%209.pdf: Illinois Edu.
Charles, C. (08 de May de 2013). How EU subsidies inflate biofuel prices . Euractiv, págs. http://www.euractiv.com/energy/biofuels-cost-subsidies-european-analysis-519610.
Charles, C., Gerasimchuk, I., & Bridle, R. (2013). Biofuels-At What Cost? A review of costs and benefits of EU biofuel policies. http://www.iisd.org/gsi/sites/default/files/biofuels_subsidies_eu_review.pdf: The International Institute for Sustainable Development.
PETA. (2012). Meat Production Wastes Natural Resources. Obtenido de PETA: http://www.peta.org/issues/animals-used-for-food/meat-wastes-natural-resources/
Poulter, S. (09 de December de 2013). Food prices to rise faster than salaries until 2018: Fresh produce could become a rare treat for poorer families. Daily Mail UK.
Roach, J. (11 de July de 2006). Ethanol Not So Green After All? National Geographic News, págs. http://news.nationalgeographic.com/news/2006/07/060711-ethanol-gas.html.
Xavier, M. R. (14 de February de 2007). The Brazilian Sugarcane Ethanol Experience. Competitive Enterprise Institute, págs. http://cei.org/studies-issue-analysis/brazilian-sugarcane-ethanol-experience.