FAO fears long-term food price hike due to biofuels

By Jess Halliday

- Last updated on GMT

Related tags: Food prices, Futures contract, Biofuel, Food and agriculture organization

The burgeoning use of cereals and other commodities to satisfy
appetite for biofuels could keep food prices high for the next
decade, says the FAO, impacting developing countries, the urban
poor, and farmers' livelihoods.

The UN's Food and Agriculture Organisation (FAO) last week published its latest Agricultural Outlook 2007-2016​, in partnership with the Organisation for Economic Co-Operation and Development (OECD). It said that while the recent price hikes in farm commodity prices are due to temporary factors like drought in wheat growing regions, structural changes, such as increasing demand for biofuels, is casting a cloud over the long-term picture. The growing use of cereals, sugar, oilseed and vegetable oils to produce fossil fuel substitutes are underpinning both crop prices and, indirectly, livestock product prices due to higher animal feed costs. The changes, says the report, "could well maintain relatively high nominal process for many agricultural products over the coming decade."​ The FAO and OECD predict that the impact will be felt most keenly by net food importing countries and the urban poor. And for farmers who need feed for their livestock, it means mounting costs and lower incomes. Moreover, the belief that high prices are here to stay could spur more policy reforms away from price support, the report predicts, "reducing the need for border protection and [providing] flexibility for tariff reduction".​ The report will come as no surprise to those with an eye on the commodity markets. For instance, soybean prices have risen by 37 per cent since September 2006, according to the Chicago Board of Trade, a futures and options on futures exchange. Corn prices rose 18 per cent between September 2006 and March 2007, but have since sunk to a mid-way point. Wheat prices have steadily increased 50 per cent over the past 12 months. Last week Nestle chairman Peter Brabeck expressed his fears for the future of food prices in the long-term. Braback was quoted by the Financial Times as saying that "will have a long-lasting impact on food prices".​ The FT said the comments were "among the starkest warning that a long period of rising food prices could stoke broader inflationary pressures".​ The Nestle chairman also said that population growth and rising demand for commodities from India and China are exerting an impact on prices. According to the FAO and OECD, annual maize-based ethanol output is expected to double in the next ten years. Likewise in Europe oilseeds for biofuels are predicted to grow from just over 10m tonnes to 21m tonnes. It is a similar story in emerging economies, too. In Brazil ethanol production is expected to increase from 21bn litres to 44bn litres by 2016; and in China from 1.8bn to 3.8bn litres. However in June the Chinese government laid down a moratorium on the use of non-food crops for bio-fuel production, in an effort to stem further food price spikes.

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