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Tuesday, July 31, 2007

Climatic Change, Bioethanol and Food Prices

This article in Portfolio Hungary caught my attention:

A likely damage in crop volumes induced by extremely hot weather and drought in Hungary will probably aggravate the situation in the food industry now that price hikes also seem to be hanging in the air. The rise of food prices, together with rising petrol prices, may cause some serious inflation pressure, Societe General has warned on Friday.

Now this article, which is basically about how food price inflation may interfere with the National Bank of Hungary's plans for monetary easing, put me in mind of two points I had recently come across elsewhere, and which are of much more general application:

In the first place Daniel Antal had been complaining about the heat in Budapest. So I began to ask myself, are we alreadt seeing an on-cost to global warming? Certainly Serhan Cevik over at Morgan Stanley seems to think so. In an article on inflation in the Turkish economy, entitled appropriately enough "heat wave",and wriiten back in June he made the following point:

Weather anomalies present a threat as challenging as liquidity-driven capital flows
. Nothing seems to bring an end to the Istan-bull’s breathtaking run, pushing the Turkish lira to its strongest level in years, thanks to the lure of carry trades and strong economic fundamentals. In turn, the lira’s strength may have accelerated disinflation, even against strong inertia in certain sectors. On our estimates, consumer price inflation will decline from 9.2% in May to 8.8% at the end of this month. However, with higher energy quotes, weather anomalies present a challenge through the volatility of food prices. Surface temperatures in Turkey have already been 4˚C above the seasonal pattern, while average rainfall is running about 60% below the long-term mean. These dramatic changes in climatic conditions are not just specific to Turkey, but reflect a global phenomenon.

He then went on to explain how he felt all of this was having an impact on the Turkish economy and the inflation problem they have there:

Global warming is not just about warmer weather, but also — more importantly — leads to unpredictable changes in variability patterns. One of the immediate consequences of extreme weather conditions is droughts with greater severity that cause agricultural supply shocks and higher volatility in food prices (see Stay Tuned to the Weather Channel, August 4, 2006). And we may now be observing such an event on a global scale, as the ratio of stocks to consumption dropped to its lowest reading on record, leading to a sustained increase in food prices. Indeed, virtually every country around the world has experienced a surge in food prices and consequently pressures on headline inflation rates. This is a significant risk, especially for developing countries where food has a greater weight in consumer price indices. In Turkey, for example, food prices account for 28.5% of the CPI and thereby can turn into a major source of volatility. Over the last couple of years, food price inflation declined from 12% at the beginning of 2004 to 4.9% at the end of 2005, but then surged to 14.6% earlier this year. Although the year-on-year rate of change in food prices eased to 10.6% last month, meteorological data still point to a volatile outlook for (unprocessed) food prices.

Then secondly, this whole argument also put me in mind of something I had seen in the Financial Times a couple of weeks ago about how the increasing demand for biofuels was consuming agricultural land rapidly, and hence driving up - indirectly - food costs (again, there would seem to be no free lunches on offer here):

Surge in biofuels pushes up food prices

A surge in the production of biofuels derived from corn, wheat and soyabeans is helping to push up food prices so sharply that the World Food Programme, the United Nation’s agency in charge of fighting famine, is finding it difficult to feed as many hungry people as it has in the past....Food commodity prices are surging because of a number of factors including rising demand from China and bad weather, but the potential consequences of the rising demand for biofuels has caught the attention of those in the business of feeding the world. Mark Spelman, head of Accenture’s global energy practice, said the biofuel industry was at risk of creating a public backlash similar to wind power generation as food inflation continues.

The BBC also had a similar story:

Several other biofuel plants are planned in the UK but biofuels are already big business in the United States, where bioethanol is seen as a greener and more sustainable alternative to traditional petrol.The downside is that land which until recently was growing crops for food is now growing crops for fuel.The United Nations says a third of the total US maize crop went for ethanol last year.The International Monetary Fund say there's no question that demand for biofuels is driving up food prices - and that it will go on doing so - though in the UK the National Farmers Union disputes that.

So back to Hungary, and food prices. According to Portfolio Hungary:

The price of wheat, bread and milk may increase significantly, up to 15-30% this year and the National Fruit and Vegetable Council expect that watermelon turnover will be reduced by 30-40%.

Daily egg production in the current heat is way smaller than usual, which may lead to even a 40% increase in egg prices. This can filter down to CPI through a number of channels.

“Maize harvest may be reduced by 40% or more from 8 million last year to 4-5 million tones until the end of 2007. The number is chilling, as 4 million is needed to feed animals alone, not to mention food production or industrial purposes," the analyst added.

Meanwhile, new bio-ethanol projects demanding hundreds of thousands of tonnes of maize are being unveiled week by week in Hungary. While only a few months ago the country was still struggling to deal with millions of tonnes of surplus maize, it is now facing a possible shortage of animal feed due to a drought.

Some experts, however, warn that the expansion of the bio-ethanol sector will be slower than expected, simply because investors will not find enough grain inputs. The draught may cause expansion-driven bio-ethanol plants to cover their input need from imports.

The announcement on new bio-ethanol projects “cannot be taken seriously", as they are “just to reserve a niche in the market", Imre Németh, state secretary at the Prime Minister's Office told Reuters earlier this week.

Hungary's bio-ethanol production capacity is expected to rise to 400,000-500,000 tonnes by the end of the decade and rise to 800,000 tonnes by about 2013, Németh added. The Agricultural Ministry said earlier this year that the 800,000-tonne output could be reached by 2009 or 2010.

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