Agricultural land was once used to grow oats to feed the horses that pulled the carriages and ploughs. The internal combustion engine then replaced the horse as a more efficient and more substantial way to harness power. Biofuels, arguably create a reversion of this trend. Bioplastics are representing a return to the land as a source of materials for all sorts of other uses. But there has been much debate over the ethics of using land to produce non-food crops when food insecurity remains an issue in many countries.The acceleration in demand for agricultural goods in the last decade has added considerable strain to the farming industry. The growth of non-food uses has fuelled the demand, notably for grains but also sugar and other biomass. There is no real question that the industry will be able to supply those who can afford to pay but as demand rises, more upward pressure is placed on commodity prices. Commodities, by definition are traded globally, and so share one pricing matrix, meaning the same price is used in all parts of the world, regardless of ability to pay or purchasing power (the local value of a currency). This means that agricultural commodities may become unattainable to some and others will spend a greater share of their income. They will be the ones struggling to feed themselves.The rise in grain demand puts additional strain on livestock farming, being the largest cereal consumer. In fact, as most meats require in excess of one kg grain to create 1kg meat, as the prices of grains rise, we would expect to see meat prices increase proportionately faster, possibly outpricing some of them from parts of the market. This will either push meat products out of the financial reach of the poorest consumers (although probably not many in the UK) or continue to squeeze the margins of those involved in their supply.The (political) interest in fuel from renewable resources has grown from both concern over peak-oil and the subsequent rise in value of energy, but also fuel security. It should be noted that those countries with biofuel industries are not those with large amounts of oil to mine, but those with concerns over those who do. Indeed, the countries that have developed significant biofuels industries are net agricultural exporters; those who have grain surplus to their consumption requirements. Thus non-food policies have become political issues of other countries; i.e. importing nations. Indeed, we have seen that some grain importing nations have re-written their food security strategy. China (who has always been very self-sufficient minded) has increased its food reserves and food production capacity, and other regions have sought to create food supply contracts or even negotiated land tenure from other countries. Non-food uses are not solely responsible, but the demands on agriculture are broadening.A link has formed between agricultural commodities and oil, partly through biofuels representing a substitute to fuels from crude oil, and also as a result of the link generated by agricultural goods becoming competing inputs for the likes of plastics and so on. As a result, the prices of some farm outputs have created a link to oil. Oilseed rape, in particular has a close price relationship and this is demonstrated in the chart below. It compares crude oil price (US dollars) with EU OSR futures price (converted into US dollars from euros).
In summary, the creation of a non-food industry using agricultural commodities has been largely created to offset the use of crude oil. This is part of the mad dash to secure sufficient energy for the future when oil is forecast by some to become less available. Currently, we see oil remaining as available as before simply because its price has increased, justifying dearer extraction methods such as from shale sands etc.
There is no denying the non-food industry has contributed to the rise in agricultural commodity prices. This is not necessarily a good or bad thing, it’s just the market at work; if a farmer can make more money generating electricity from grass rather than milk from grass, it makes commercial sense to the farmer to change the system. If all non-food used for agricultural commodities disappeared overnight, tomorrow the world would ponder over what on earth to do with all the spare food it suddenly had at its ‘disposal’.Graham Redman is a Partner of The Andersons Centre, agricultural and agribusiness consultancy. He can be contacted on gredman@theandersonscentre.co.uk 01664 503 200.
This article first appeared in Food & Drink Technology Magazine in 2014.