Healthy soil and sustainable growing

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http://www.ipsnews.net/news.asp?idnews=42134

AGRICULTURE:  What is Really Causing ‘Agflation’?
By Mario Osava

RIO DE JANEIRO, Apr 25 (IPS) - The old laws of the marketplace are no longer 
working. Food prices have been rising for six years because of surging 
demand, and increased production is not restoring the balance as it used to 
in the past. In fact, prices have been going up even faster over the last 
year.

The so-called "financialisation" of commodities markets, that is, the influx 
of investment funds seeking safer and more lucrative assets, has intensified 
the trend and "at the moment impinges more than the law of supply and 
demand," said analyst Fernando Muraro of AgRural, a consultancy firm in 
Brazil.

There is no way to measure the influence of speculative forces on 
"agflation," the new term coined to describe inflation provoked by the 
agricultural sector, he said.

But the role of speculation is undeniable, as commodities funds are involved 
in 40 percent of the futures and option contracts at the Chicago Stock 
Exchange, the highest proportion ever. Ten million tons of soybeans were 
bought in March 2007, compared to 21 million tons last month, Muraro pointed 
out to IPS.

There is a global excess of dollars, and holders are transferring them to 
markets and products wherever sustained price increases indicate good 
prospects for making profits, he said.

José Graziano da Silva, United Nations Food and Agriculture Organisation 
(FAO) regional representative for Latin America and the Caribbean, echoed 
Muraro’s views in a statement prior to the FAO regional conference, held Apr. 
14-18 in Brasilia.

The rising price of food, which exacerbates hunger in the world, is the 
result of "a speculative attack," he said.

Agricultural prices rose between 2002 and 2006 due to higher food consumption 
in developing countries, and to crop losses over that period, but since 2007 
financial speculation has been responsible for most of the price inflation, 
according to Graziano da Silva.

In contrast, Sergio Vale, a consultant with MB Asociados, said "it’s not true 
that a financial bubble exists for agricultural commodities." The price 
increases are "concretely based" on sustained growth of demand in China, 
India and other Asian countries, as well as in Latin America, he told IPS.

This is a "structural, long term trend," due to greater consumption as 
incomes have risen in several poor populations, reduction of supply caused by 
climate problems, and the diversion of several crops, like maize and 
soybeans, to biofuel production, he said.

Financial participation in the commodities market creates "greater 
volatility," making prices rise and fall more sharply, but "it is not the 
decisive factor" in the price increases, he said.

As an example, Vale mentioned the temporary fall in prices of primary 
products in mid-March because of investment capital flight, caused by the 
banking crisis in the United States, which nevertheless did not affect the 
continuing upward trend this year.

To blame the price rises on speculation "is foolish and unrealistic," because 
there are "clear, fundamental causes that are keeping prices high," said 
Ricardo Cota, technical manager for the Brazilian Confederation of 
Agriculture and Livestock (CNA), an association of large rural producers.

As well as expansion in demand, Cota said expensive oil-based fuels, the cost 
of farm inputs, which is also rising, and biofuels are among the fundamental 
causes of "the new levels of agricultural prices which we will have to learn 
to live with," given the problems of increasing food supply.

Brazil is an exception, in that it has plenty of land available to expand its 
agricultural frontier, but its inadequate logistical infrastructure, 
especially the limited capacity of its ports, stands in the way of a rapid 
increase in production and exports, he said.

Other limitations are the growing cost of fertilisers, soaring oil prices, 
and red tape. Ideological" pressure is also blocking progress in 
biotechnology aimed at boosting productivity by using genetically modified 
seeds, Cota said.

The cost of fertilisers has doubled since early 2007, and may rise further 
this year, but in spite of this the high prices of grains, especially maize 
and soybeans which account for 70 percent of Brazil’s total grain production, 
still ensure healthy profits for farmers, Muraro said.

In his view, financialisation has accentuated the rise in commodity prices to 
"unprecedented levels," benefiting farmers but also giving them headaches 
because of the difficulty of setting prices for their produce.

"Prices are no longer set by supply, demand and climate," as they have been 
skewed by the mass entry of investment funds into the markets, he said.

Market analysis has become more complex, requiring "instruments that are more 
technical, professional and modern" in order to assess macroeconomic factors 
like exchange rates, interests and capital flows, Muraro added.

Environmental regulations are the main obstacles preventing a rapid increase 
in output to balance global demand and supply, he argued.

Flávio Turra, technical manager of the Organisation of Cooperatives of the 
State of Paraná (OCEPAR), said that financial speculation plays a "relatively 
small part" in determining prices, although "anyone following the market must 
always take into account the participation of investment funds."

Such flighty capital may accelerate trends, but the underlying price 
increases are basically due to shortages in world stocks and to the imbalance 
created by the steep increase in consumption in countries like China and, 
more recently, India, he said.

The swift rise in prices at present is also due to countries banning or 
surtaxing exports in order to control inflation and secure domestic food 
supplies, as Argentina has done in the case of wheat, he maintained.

Brazil has just suspended exports of government-owned rice, amounting to 
close to 1.5 million tons, although it has not imposed any export 
restrictions on the private sector. However, the quantity of rice that could 
be sold by private farmers would barely make a dent in the world shortage, he 
said.

Recovery of world food stocks may take five or six years, even with prices 
well above the historical average, Turra concluded.

One exception to the general upward trend in food prices is sugar. More than 
ample production is bringing retail prices down, in spite of Brazil’s 
increased ethanol manufacturing and the fact that the food and biofuel 
sectors compete in this country for the same raw material, sugarcane.

This example contradicts the wave of accusations that biofuel production is 
to blame for sparking the food price crisis. (END/2008)