Jerry Hirsch, "Farmers can't cash in on soaring food prices",Los Angeles Times, May 13, 2008.
In an oil-addicted world, most pundits share the view that from now on things can only get worse.
Every day, headlines news talk about "all-time highs." You read a lot about scapegoats, too. Thus, high prices at the pump can reflect a weaker dollar, political unrest in Nigeria, economic growth in China and India, market speculation, greedy U.S. and Russian oil companies, shortages of drilling rigs in Venezuela, or all of the above.
The hard fact is that, according to the International Energy Agency, in five years global demand for oil will exceed 94 million barrels a day. Current production is somewhere between 82 million and 86 million barrels. Keeping up with demand will need something more drastic than just lifting the ban on hitherto off-limits U.S. areas.
On the other hand, food prices that have already doubled during the last two years, are very likely to keep moving upwards in the next decade. UN experts recently estimated that, in some cases, food prices might, in some cases, get to be 80 percent higher than in the 1998-2007 period.
The emerging biofuel industry, as well as the protectionist policies that rich countries have implemented in order to boost it, have been blamed by many economists for the unprecedented current food price hikes.
Indeed, prices for basic foods are soaring. To make matters worse the cost of planting some crops is rising just as fast as their prices. This curtails any incentives to increase production. The result is that many basic foods have remained in high demand the world over. It is truly a paradox that, in some countries, farmers are not cashing in on the price boom by planting corn, wheat, rice or soy beans.
I just read a report, recently run by The Los Angeles Times, stating that in the United States, "corn and rice, for example, require more fertilizer to grow and fuel for farmers to tend than other crops. As the prices of those supplies rise faster that the price of some commodities, farmers are shying away from some expensive crops."1
Quoting Wells Fargo & Co. estimates, the same article points out that, owing to fuel and fertilizers price hikes, the cost of farming an acre of corn has risen almost 47% over the last year. These cost hikes surpassed in speed the 35% increase in the price of corn during the last year.
Still, how about Latin American food production in the wake of a US $200 oil barrel world and non-stop food-prices hikes? Let us review the performance of some countries in the region.
Oil-rich Venezuela has long had a policy of fuel subsidies that probably makes a gallon of gasoline the cheapest fuel money can buy. At 30 US cents a gallon—much cheaper than a bottle of spring water!— it's no wonder that neighboring Colombian farmers see great incentives in buying Venezuelan smuggled gas.
Smuggling Venezuelan gasoline into Colombia involves some 800 million daily gallons, yielding upon US $300 million worth a year. Nevertheless, fertilizers are sold at international prices in Colombia, so the "advantage" of cheap fuel prices more often than not fades away. The interesting thing is that Colombian basic foods currently make for the second largest share in Venezuelan imports, verging on US $1,300 million dollars, an almost 125 percent rise from the same period last year. Venezuela's first commercial partner is, you guessed right, the United States, with 28.9% of the total.
Great-scale public spending, typical of a petrostate going through a windfall, has gone hand in hand with relentless harassment of a large private food-producing sector by way of snidely confiscatory "land-reforms." Thus Venezuela's economy has become terribly inflationary—26% percent, the highest in the continent. The paradox here is that while it is collecting huge oil-revenues, high global food demand has put Venezuela in deep trouble to import local staples such as black beans, corn, milk and eggs. According to recent polls, basic food scarcity is, along with growing crime-rates, the main public concern.
Argentina, a large farming exporter that last year sent abroad US $13.2 million in basic foods, is probably the one Latin American country where the tragedy of farmers who cannot cash in on soaring food prices is most pronounced. But in Argentina's case it is not just high fuel and fertilizer prices that keeps them from chasing the great global grain market, but a bullying government intent on pushing both large and small farmers into submission.
Last March, just as oil prices went over the US $100 fence, Argentina's president, Cristina Fernández, seeking to restore fiscal surplus caused by her predecessor's outlandish public expenditures, decreed a sliding scale of tax rates on most agricultural commodities.
Consider only the tax on soybean, the most telling example of how steep these taxes would be: It rose from 27 percent to nearly 50 percent just when soy bean global prices peaked. Soybean farmers argued that planting, harvest and transport would eat away another 50% leaving them with only 6 dollar cents in profits per ton while nearly 44% of the revenues from sales would end up in the government's coffers.
Feeling outrageously taxed in the middle of a price boom and with inflation eroding their profits, incensed Argentinian farmers started a protracted campaign of protests, thronging many provincial city halls and setting up roadblocks all across the country in a deadlock that ended only four months later when the tax scale was derogated in Congress. How about Brazil?
The subject of sugar-based ethanol's prospects in the global scene deserves a full Econlib article, but let us note, for the time being, that Brazil, where 90% of new car engines can now run on a mixture of gasoline and ethanol, hopes to profit from the high energy prices by exporting up to 3 billion barrels of sugar-based ethanol to the United States. Though sugar-based ethanol favorably compares with corn-based ethanol, Brazil's expectations will largely depend on U.S. corn prices being high enough as to make it profitable to pay the import tariff.
Probably the most striking Latin American phenomenon associated with both global oil and food price hikes is going on in Peru, where surging prices for synthetic fertilizers have turned guano into a commodity almost as promising as it was for Peruvians in the mid-19th century.
The dried excrement of seabirds, known in Quechua as huanu, is highly rich in unleached nitrogen and phosphorus which makes it the best natural fertilizer known to humankind. Centuries before Columbus, Peru Inca rulers assigned certain times when guano could be harvested from the Chincha Islands—the richest ones—and prohibited, under death penalty, disturbing the island's birds while nesting.
As early 19th century chemists re-discovered guano's fertilizing qualities and railroads stimulated commercial farming all over the world, guano came into great demand. Owing to the right mix of natural conditions in its Pacific coast, Peru then lived through a staggering guano boom in the years that went from 1840 through 1880. Peruvian island dung deposits could be as high as 150 feet and exports proceeds accounted for most of the national budget.
These 40 years became the legendary Peruvian "age of guano."
Spread across the fields of England, France, or the southern United States, Peruvian bird droppings ignited one of the busiest global commodity trades recorded in history. The Guano Islands Act (1865), for instance, allowed American citizens to claim uninhabited guano-bearing islands as sovereign U.S. territory:
In 1865 and 1866 Chile, Peru and Spain fought an inconclusive war over a portion of the Andean coast that was rich in guan. In 1879 Chile defeated Bolivia in what came to be known as the Guano War (or War of the Pacific). The Bolivians are still sore about it. Official maps show the disputed Chilean coastline as Bolivian territory, and the country, though landlocked, maintains a navy, which is restricted to patrolling Bolivian half of Lake Titicaca.2
By the turn of the 20th century most large deposits of Peruvian guano have been stripped, only a few years before world's extensive farming system swiftly switched to inorganic sources of nitrate. The two definitive legacies of the "guano age" in Peru were an unpayable foreign debt of £s;40-50 million and a web of half-completed railways across the Andes.
Peruvian authorities are, nevertheless, quite vigilant about preserving the remaining guano deposits. Guano collection is restricted to only two islands a year and threats to the birds' natural ambiance are forcefully warded off. This has allowed Peruvian seabird populations to climb to 4 million from 3.2 million in the past two years. That figure seems tragic when compared to the 60 million birds at the height of the first guano rush. Seabirds can produce 15.000 tons of guano a year:
Guano in Peru sells for about US $250 a ton while fetching US $500 a ton when exported to France, Israel or the United Sates. While guano is less efficient than urea at releasing nitrates into the soil, its status as an organic fertilizer has increased demand, transforming it into a niche fertilizer sought around the world.3
Peru's economy counts right now among one of the most promising in Latin America, owing to a strong surge in exports, foreign investment and private consumption growth. An ambitious natural-gas project underpins good forecasts: an average of growth of 6.1% in 2008-2012. Peru certainly does not need guano to stand on strong feet.
But once again in fashion as an organic fertilizer, guano looms as an apt reminder of Latin America's historical paradigm of "boom and bust" mono-export experience and of growth without development.