Short-sighted cuts at NSERC

     The Globe and Mail (12 January, 2011, p. A8) reports that the Natural Sciences and Engineering Research Council (NSERC) has removed food-related research from its target funding areas this year. This means that research into new plant breeds and better farming techniques will continue to be slowed. Of course, this comes just as several organizations, including the United Nations, are warning that we are entering a period of global food crisis.

In the first half of this century, as the world’s population grows to around 9 billion, global demand for food, feed and fibre will nearly double while, increasingly, crops may also be used for bioenergy and other industrial purposes. New and traditional demand for agricultural produce will thus put growing pressure on already scarce agricultural resources. And while agriculture will be forced to compete for land and water with sprawling urban settlements, it will also be required to serve on other major fronts: adapting to and contributing to the mitigation of climate change, helping preserve natural habitats, protecting endangered species and maintaining a high level of biodiversity. As though this were not challenging enough, in most regions fewer people will be living in rural areas and even fewer will be farmers. They will need new technologies to grow more from less land, with fewer hands.

     NSERC insists, in a statement, that "food-related research, despite not being listed as a target area, continues to be a priority for NSERC funding." NSERC funding has been commonly in the areas of traditional plant breeding--like canola, which was developed by Canadian scientists in the 1960s with government funding, and led to increased oil yields per acre.


     The government clearly expects large agricultural-based corporations like Monsanto to pick up the slack. But the large agricultural gate-keepers have not conducted this type of research, preferring instead to concentrate their research money on making currently grown crops more profitable: canola again being an excellent example. Rather than investing in breeding programs to increase drought-tolerance or broaden the climatic range in which canola can be grown, money was instead spent on genetic resistance to glyphosate (trade name: Roundup), a modification which could be patented and used to generate an increased return on investment (ROI).
This comes at a bad time in world food production. The United Nations Food and Agriculture Organization (FAO) has reported that the world food price index has hit an historic high.

The FAO Cereal Price Index, which includes staples such as rice, wheat and maize in its composition, rose to 238 points in December 2010, up 6 percent from November and as much as 39 percent from December 2009. The December average was the highest since August 2008 but still 13 percent (or 36 points) below its peak in June 2008.

Beside cereals, international prices of other commodity groups in the FFPI, with the exception of meat and dairy products, also recorded sharp increases in 2010. The FAO Oils and Fats Price Index jumped by 55 percent in 2010 and in December 2010 averaged 263 points, up 8 percent from November and the highest since its June 2008 peak of 283 points. The FAO Sugar Price Index rose 19 percent in 2010 and in December 2010 averaged 398 points, up 7 percent from November and the highest (in nominal terms) since the start of the index in 1990.

     One of the problems related to current food price volatility and concerns is that foods have, like attracted the attention of speculators who, having moved away from the hyper-inflated US housing market and credit default swaps, CDOs and the like, have been looking for new areas in which to create froth and maximize profits. Like food.
The World Bank fingered international speculation in August 2010, quoted as saying : "A EU-World Bank analysis of the causes of the 2007-2008 food price crisis blames energy prices and financial speculators for the hikes, downplaying the role of biofuels and increased demand in developing countries". And last month (December 2010) EU financial services commissioner, France's Michel Barnier, attacked "scandalous hyper-speculation" on basic food prices, and vowed to impose new "transparency" on the sector.
Short -sighted In the New York Times, William Pfaff writes that :

The food crisis is a real one, with rice - basic to the diet in much of Asia - rising in price by 75 percent in two months, and the rise in wheat, equally important to most Western countries, rising by 120 percent over the year. This risks famine in vulnerable countries.

The conventional explanations for the flare in prices are population growth, diversion of corn and soybeans to biofuel production, rising Asian and Middle Eastern demand for high-value foods, higher transport costs and crop failures. Oddly little has been said about the role of speculation in the rise in commodity prices generally and specifically in food.

On the Chicago CME Group market, which deals in some 25 agricultural commodities - it is a merger of the former Chicago Mercantile Exchange and Chicago Board of Trade - the volume of contracts has increased by 20 percent since the start of the year and now has reached the level of a million contracts a day. This will soon exceed the rate of growth reached in all of 2007.

The hedge funds are now active in commodities and are playing the futures contracts, where upwards of 30 million tons of soybeans for future delivery are contracted for every day. They are also buying the companies that stock.

The argument sometimes is made that this speculation is unimportant because the futures speculators will never take delivery; but this is precisely the problem. It is why this speculation is highly destructive of the true market.

Futures purchases of agricultural commodities classically have been the means by which a limited number of traders stabilized future commodity prices and enabled farmers to finance themselves through future sales.

Speculative purchases have no other purpose than to make money for the speculators, who hold their contracts to drive up current prices with the intention not of selling the commodities on the real future market, but of unloading their holdings onto an artificially inflated market, at the expense of the ultimate consumer.

     The results of this speculation are more than a simply inflation of your weekly or monthly food bill. There are real and immediate on-ground effects from rising food prices, as is being seen in Egypt. Mike "Mish" Shedlock writes (over at Mish's Global Economic Trend Analysis):

Most of the increases in food prices are due to droughts in South America, floods in Australia, and poor growing conditions in many places.

However, Bernanke's "Quantitative Easing" policies combined with rampant credit growth in China and India have led to increased speculation in commodities. That speculation has forced up food prices.

     Egypt differs from Tunisia in that it has a large number of well-educated citizens, but is similar in that the county suffers from high unemployment, high underemployment, and a large portion of he population living under the global poverty line of less than $2/day.  The International Business Times has noticed that there is an Egyptian precedent for the current political action occurring there; the "Bread Riots" of 1977, when Anwar Sadat was forced to remove food subsidies by the IMF. to quote from the article:

Ammar Ali Hassan, director of the Middle East Studies and Research Centre, told the paper: “The atmosphere that prevailed before and during the 1977 bread riots is similar to now, especially in that there is no confidence in the government. The desire to protest has overwhelmed a large sector of society."
Hassan added that while current living conditions in Egypt are “much worse than in 1997, the ordinary Egyptian nowadays is unable to stage wide protests because he has become fragile. Egyptians in 1977 were more politicised than now and the regime's security grip was less strong.”

     As international speculation in food futures continues, prices will continue to climb--whether or not this rise is justified by the underlying economic fundamentals in worldwide food production. The goal of speculation is to create froth and uncertainty in the marketplace, making it possible to realize greater profits. Under such circumstances, disruptions in the global food supply, like oil price spikes and drought, cause wilder than usual swings in the price of foodstuffs and futures contracts.
      Continued speculation in global food markets will quite naturally continue to breed greater uncertainty and food price inflation. With global climate change as yet unaddressed, the normal level of uncertainty in the global food supply will face increased threats from drought, monsoons, etc., driving food prices up and supply down. With so much of the world below the global poverty line, threats to national and international stability will continue to grow. Tunisia and Egypt are just the beginning of things to come.  The Harper government's cutting of basic research into new plant varieties and farming techniques is, in these circumstances, extraordinarily shortsighted at best, and criminally corrupt at worst.


Additional Links:
Speculation
More on the Berlin meeting and speculation