Global Issue Paper No. 27
By Daniel G. De La Torre Ugarte, December 2005
» Download the Global Issue Paper No. 27 (24 p., 1,2 MB, pdf)
» Overview Global Issue Papers
Introduction
Higher and more stable agricultural commodity prices are a necessary condition for the agriculture sector to become an effective force in the socioeconomic growth of the less and least developed countries. Higher and stable crop prices are therefore a necessary condition for the success of other development efforts such as export promotion, diversification, and the production of value added goods. It is evident that the current strategy of trade liberalization—in and of itself—cannot deliver higher commodity prices. Contrary to some conventional thinking, this policy failure is not only the result of the agricultural policies of OECD member states, but more importantly one of the fundamental structural characteristics of agriculture.
The main characteristic of agricultural production is that aggregate demand for agricultural commodities does not vary greatly according to price – people must consume food no matter how high the price, and there is only so much a person can eat, no matter how cheap food becomes. At the same time, total agricultural supply does not significantly respond–in the short term—to lower prices because cropland in major producing countries cannot easily be moved in and out of production and has few alternative uses. Furthermore, growth in supply tends to outpace the growth in demand due to investments in productivity. This combination of factors, in a free market environment, tends to produce results characterized by structural oversupply and decreasing commodity prices (Ray, De La Torre Ugarte, and Tiller).
An effective contribution of OECD countries to find a solution to chronic over-supply and the resulting low world prices for crops is to reduce the amount of cropland planted with food and feed crops. In this context, the processing of crops into energy and other bio-products offers an unparalleled opportunity to address this imbalance. The shift of cropland currently used in the production of food to produce bio-energy and bio-products from dedicated crops would reduce the gap between the capacity to produce food and what the market can absorb at reasonable prices. The US and the EU spend over 20 billion dollars a year in direct support to their farmers. Introducing incentive mechanisms to promote the growth of energy-dedicated crops could reduce production of traditional crops, increase their price and reduce or eliminate the need to subsidize them; farmers would rely mostly on income from the market as the main source of support.
The concept of using agriculture to produce energy is not a new concept. In fact, humans have used agriculturally related practices to create power for centuries; “agriculture is essentially an energy conversion process – the transformation of solar energy, fossil fuel products and electricity into food and fiber for human beings” (Peart and Brook). As late as the 1950s, many farms ran mostly on sunlight, relying on draft horses and using crop rotations for soil fertility instead of commercial fertilizers. Nowadays however, agriculture uses far more energy in the form of farm inputs. Traditionally, up to 60 percent of cropland was devoted to energy production in the form of feed and green manures (Stanhill, 1984). But even today, biomass feedstock continues to be the most important source of energy–especially heat—in many developing countries (Smil, 2003). With the advent of the petroleum age, farmers could purchase energy more cheaply from fossil-fuel derived sources such as fertilizers, tractors and fuel. This allowed crop production to increase at the cost of reduced energy efficiency. Today, we are once again looking to our agricultural lands to become producers of energy.
One of the biggest advantages of the utilization of biomass for energy is its good fit with the current distribution infrastructure of liquid fuels, and with the use in internal combustion engines. When co-fired with coal or other sources, it is also a good fit to the current electric distribution infrastructure. The growing overcapacity in agricultural production reduces concerns of dramatically affecting the food supply. Moreover, well managed biomass production based on native grasses offers environmental gains when compared with the current monoculture and high input use of cropland in food and feed production in the US and EU.The goal is to reduce agricultural supply of traditional food and feed crops from the US and the EU primarily to drive commodity prices to increase to allow less developed countries to energize their national agricultural productive capacity, which would increase rural employment, enhance national food security and possibly result in increased foreign exchange, both from decreased import dependence and potentially from increased agricultural exports. For the US and EU, the benefits would be reduced fossil fuel dependence, production of environmental goods (e.g. cleaner air) and higher prices within a more market-oriented, less taxpayer dependent production and trading system. While a strong price for agricultural commodities is not the only condition to ensure the development of the countries of the South, higher prices are a precondition for the success of domestic policy reforms, such as tax reforms, to direct some export revenues to rural development programs.