Long era of cheap food is over

By David Loyn
International development correspondent, BBC News

Peering just a few months ahead to estimate food prices has been a tough game recently.

As food costs rise, there is debate over whether biofuels should be encouraged

Peering 10 years ahead might seem impossible, especially when some of the assumptions made for the new UN Food and Agriculture Organisation report already look questionable.

For example, one key assumption made is that crude oil prices will peak at $104 a barrel by 2017, within variations along the way.

The price is already well above that, and some reputable analysts are now predicting oil will go to $200 a barrel.

High oil prices push up costs for farmers in the developed world.

Fertiliser needs oil for its manufacture, while shipping costs have risen substantially.

But it is the poorest in the world who face the bleakest future - 800 million people who did not have enough to eat on a daily basis even before the recent huge rise in prices.

The report emphasises the need for humanitarian aid to fill the gap in the short term, and the World Bank has now announced major support to help developing countries.

Farewell, cheap food

Poor people in cities, who can spend half of their income on food, are the most vulnerable.

Governments across the world - particularly in a belt of countries across North Africa, from Mauritania to Egypt - are looking nervously at rising food prices and wondering about the political impact if things do not ease soon.

The main conclusion of the report, that prices will fall from the high spike seen at the end of 2007, will console them.

UN warns about rising food costs

But there is a sting in the tail: prices will level off at a far higher average level than seen before the crisis erupted. The long era of cheap food is over.

There is an opportunity here, too. The higher prices mean that investment in agriculture will become more attractive, although the report emphasises the need for spending in training, education and infrastructure to exploit the available talent.

But the increased interest in agriculture also has a downside, as "non-commercial traders" - speculators in normal language - have come into the agricultural commodity market.

Apart from drought, speculation was the other factor named in the report as being responsible for the record highs and the recent volatility in markets.

From 17% in 2005, their share of the futures market rose to 43%. And the FAO report says they could leave as fast as they came.

Biofuel battles

The report is a glimpse into a new world of trading relationships. There has been a lot of notice taken of China's new involvement in Africa, but less attention paid to its equally intense interest in Latin America.

By 2017, China will have become the world's second-largest oilseed and vegetable oil importer, and Brazil will be easily the largest exporter, outstripping the US.

Biodiesel production (mostly from soybeans) is entirely dependent on government subsidy, since the report emphasises that its production cost will remain higher than the cost of conventional diesel production.

So the political battles will increase over whether biofuels should be encouraged.

Biofuels are here to stay, with or without state support. Again, Brazil is the main engine of growth here, both in terms of production and consumption of biofuels.

But the US is catching up, with as astonishing 40% of US maize production predicted to go on biofuels by 2017.