Demand for grains and oil

It was interesting to hear the government’s scientific adviser tell us this week that there is a problem with the long term supply of agricultural produce and energy, as if this were news! He thinks this ranks alongside the climate change issues which have been the sole worry they have talked about for a long time. Anyone who has been watching the markets in oil and wheat will know there has been a price surge despite the active talk of slowdown and recession in the western economies. It is a sign of how the balance of economic power is shifting to Asia. It is proof that many more people in world now can afford western standards on their dining tables.

There are two main causes of extra demand for food and energy. The first is a rapidly rising world population, and the second the increasing affluence of formerly poor countries. Each new birth brings another mouth to feed and another body to keep warm. Every increase in the average incomes of India and China brings more families who wish to eat meat and can now afford to. Meat production requires much more grain per head than if people ate the grains themselves instead of eating an animal which has eaten them. The richer countries are unlikely to increase their demand for food very much, although there can be substantial changes in food fashion. Very poor countries boost their demand for food as they get richer, as they tackle undernourishment and demand more foodstuffs that require more argicultural effort to produce.

The government’s adviser told us that the solution is greater agricutural productivity, because he said the amount of land available for agriculture is limited. That seemed a strange idea. If we are to be successful in allowing the world population to expand by a futher 3 billion people, and accommodate the reasonable wish to many of the poor to have a better diet, we are going to require more agricultural land as well as a farming revolution. As one cynic said, it sounded like a prelude to more government support for gm crops, when there are a range of options.

There are still many parts of the world where farming is not nearly as efficient as the best. Much of our grain comes from the US prairies, where huge farms yields big crops of grain, planted and harvested by enormous machinery that enables relatively low cost production on an industrial scale. In many other parts of the world small farms and small fields prevent using the largest machinery, and lack of capital forces farmers to use less efficient ways of sowing, tending and reaping. There may need to be an agrarian revolution elsewhere to feed the multitudes.

British agrarian history shows you that the cultivated area can expand substantially when prices go up and when there are shortages. Today we concentrate our farming in fertile valleys. There are signs that in past crises farming has worked its way up less promising hillsides. There are huge areas of the world that are unfarmed, where natural vegetation could be replaced by crops given the application of capital and in some cases irrigation. Some soils will need improvement, but that too can be achieved over time. We should not rule out the possibility that part of the answer to the growing scarcity of grains will be more acres under grain crops.

We may also have to accept that more people will have to stay on vegetarian diets, or more people used to eating meat once or twice a day will need to find substitutes and other dishes some of the time. There needs to be a twin response to more supply – more land and better techniques, whilst changes in demand patterns will achieve the rest.

We also see the impact of greater demand from Asia for energy. As people get richer they want to drive cars, run fridges, use more hot water, install more light bulbs. It’s what we have done, so naturally we should expect Asians to do the same. We need to remember there are many more of them than there are Americans and Europeans, so all things being equal we should expect a big price impact on energy.

Rising prices will force the rich west to be get smarter with energy use, just as it will delay the growth in energy demand in rising Asia. it should also begin to unlock a better longer term answer to the problem. There are three main components to a longer term solution.

The first is energy efficiency. Progress has been made creating more fuel efficient cars, washing machines and homes. There is a long way to go even to adopt the best modern technology into every western home, whilst there is every reason to believe there are huge gains still to be made through better design in the future. High prices for energy will accelerate investment in more fuel effiicent devices,and in innovations for more fuel efficient products.

The second is discovering and developing energy substitutes. There is a big expansion possible in renewables and combined heat and power, and we may be close to a breakthrough in the use of a variety of cleaner technologies like hydrogen.

The third is to find and exploit more of the carbon based reserves there are still available.Within the family of carbon based energy itself there is scope for developing clean coal technology, so we can use more of the large coal reserves many western countries enjoy. Many oil and gas fields have been run down or closed with considerable gas and oil still in them, as the means did not exist to take it all out. As prices rise so technology to manage reservoirs will improve, making higher extraction rates possible.

The government’s adviser is right to warn of the importance of food and fuel. The big price increases we are witnessing will send strong signals to the market to do something to raise supply. Governments should ensure that their purchasing patterns and regulatory requirements reinforce the message that we need to do more to find alternatives and use energy more wisely.

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7 Comments

  1. Devil's Kitchen
    Posted March 8, 2008 at 12:20 pm | Permalink

    "There are two main causes of extra demand for food and energy. The first is a rapidly rising world population, and the second the increasing affluence of formerly poor countries."

    Well, yes and no. Two other, and very important, factors are biofuels and climate. The amount of agricultural land turned over to biofuels is actually fairly massive, and only going to increase.

    The climate has suddenly turned very cold and this, combined with the wetness of the previous two years, has resulted in ruined harvests and lower overall yields.

    The EU has, naturally, had a hand in this. It sold off most of its grain reserves a couple of years ago (at a very low price: learning from Gordon's gold experience obviously) so, at a time when a "grain mountain" would be very useful, we don't have one.

    Further, the change in CAP funding, which effectively pays farmers not to produce food — or, rather, to produce crops that are not edible, e.g. oil seed rape — has dropped the acreage turned over to food throughout the EU.

    A classic piece of EU mismanagement which I thought that you would have picked up on…

    DK

  2. Neil Craig
    Posted March 8, 2008 at 1:02 pm | Permalink

    World population is rising less than previously expected & most of it is in the pooere countries. China has not only got its population problem under control but possibly, to much so at least for their own interests.

    There is enormous potential for creating ocean thermal power by pumping up cool deep sea water – the side effects of this are that such water is nutrient heavy & can be used to absorb CO2 & grow algae & fish. It has the unique condition of producing CO2 negative power. http://www.nrel.gov/otec/what.html

    The way biofuels will fairly soon be produced is by GM plants which will produce enormously more efficiently than our current procesing of grain. At that point it may well be able to cost effectively replace the entire petroleum industry (& without Green subsidies). http://alfin2100.blogspot.com/2008/02/first-trill

    There are few of the "problems" government is currently worried about which cannot be solved by technology.

    John may I reccomend the Al Fin site to any politician who wants to be a generation ahead of the curve, though I acknowledge that would be a lonely position in UK politics. http://alfin2100.blogspot.com/

  3. Steven_L
    Posted March 8, 2008 at 7:14 pm | Permalink

    I can't help thinking that speculation plays some part is the price rises. People blame property price increases in the UK on basic supply/demand issues, but on this blog you've mention the possible effect of an increasing money supply before. As credit conditions tighten we are starting to see estate agents and surveyors report falls in property prices. This has not happened because several hundreds of thousand of people left the country. Now everyone is waiting with baited breath to see if the next sharp movement is up, or down like has happened in the US.

    You only have to do the rounds on the blogs of small-time traders to see that the words of everyones lips have been 'buy grain', 'buy sugar' and 'buy oil' for quite some time now. There have been reports in the national press of over 50% annual returns for hedge fund managers that bought grains and sold shares. Fifty per cent plus in a year when others are dropping like flies after bad bets on shares and debt. Gold is another one, I'm sure that actual demand in Asia plays a part, but everyone, from the small-time gambler with his spread bets to the high-rolling fund manager controlling several billions of pounds has been adding to this demand over the last couple of years. It is becoming the same with some agricultural produce if you ask me.

    There was no good fundamental reason for house prices to treble in ten years. Likewise there is not good fundamental reason why oil prices should nearly double in the space of a year. Has demand for oil actually doubled, or demand for bets on the price of oil?

  4. David Barron
    Posted March 8, 2008 at 8:20 pm | Permalink

    "and we may be close to a breakthrough in the use of a variety of cleaner technologies like hydrogen."

    Hydrogen doesn't occur naturally in its native form. The only way of producing it- electrolysis of water – requires large amounts of electricity generated by burning fossil fuels. Hydrogen is not a source of energy: it is a 'vector' which conveys energy from producer to consumer.

    And by the way, the overall efficiency of the electricity-to-hydrogen-to-fuel cell cycle is about 10%.
    (Roughly the same as the efficiency of a steam locomotive
    in the old days.)

    Reply:Yes, of course. Work is, however, advancing on renewable ways of generating the electricity to create the hydrogen.

  5. mikestallard
    Posted March 8, 2008 at 8:24 pm | Permalink

    According to Christopher Booker, who runs a column in the Telegraph, 11 million tons of grain are demanded by the EU for fuel from us to cope with global warming and to reduce imports of oil. Our total output is just 13 million tons. He warned about this last year. Pig farmers on the radio this morning (Farming Today) were warning that they were losing about £20 per pig owing to grain costs, they are trying to protest (700 turned out in London apparently) – but who cares? Demonstrations are simply ignored. (Unless they are planned by parliament itself??)
    In Africa, Rhodesia was "the bread basket of Africa" a few years ago. Today bread costs a lot of money out there? South Africa is distributing farms racially, I believe (there were hints of this in the Telegraph, but nothing specific yet). Already there are power cuts in Johannesburg. Kenya's little problems meant that food could not be shipped out through Kenya this year. This, of course, affected Uganda and all stations to the DRC. All in all, a rather sad outlook for a rapidly growing continent, don't you think?
    The EU, of course, is, as ever, blameless – oh, I nearly forgot the CAP and the protectionist policy towards ex-(English)colonies which drives developing nations to starvation.
    A lot of the trouble is, as usual, man made. And not, actually, with us Brits making it. Never mind, we shall, no doubt take the blame as usual and tighten our belts while other people grow even fatter – or thinner of course.

  6. Bazman
    Posted March 9, 2008 at 4:43 pm | Permalink

    Difficult to see how mankind can be realistically proactive instead of reactive in terms of energy. As long as oil producing countries can sell oil at reasonable prices then it id unlikely that other countries will stop buying. What can be done though is force companies to be more efficient.
    The ultra conservative car industry could do a lot more for fuel efficiency, so far only Toyota is talking about 'True to the earth' and 'well to wheel' efficiency instead of 'tank to wheel' efficiency which at the moment is about 16%. The 0ther 84% being lost in heat and friction.
    Anyone who thinks that the car industry is not ultra conservative should take a look at a Model T Ford and then compare it to the latest Mondeo.
    It could have been all so different.
    When the customer decides that SUV's are just not a realistic way to get from A to B. You can be sure the car industry will be slow to react and tooled up to build the wrong type of car, blaming everyone including even the customer for their poor sales. The Japanese manufactures will probably be on the ball as they are always focused on designing and building cars the customer wants, and not mergers and other financial deals.
    Take a look at the Mazda RX7. You might not buy one, but you want one. Almost affordable too! http://www.shiotsu-used-car.com/blogpics/mazda-rx

  7. lonympics spokesman
    Posted March 11, 2008 at 4:36 pm | Permalink

    We need the CAP to stop food shortages. It is the tory free market euro skeptics who continue to argue against the CAP, and for free market extremism. It was the sun newspaper run by Kelvin Mackenzie who got the EU to drop it's so called grain mountains. We would have far bigger problems if not for the EU. The EU guarantees our food security. It ensures we subsidise food production which would be farmed out (pardon the pun) to other countries if we did never subsidise our farming industries. The EU does not pay people not to farm. It pays deliberately for over production, so we have no famines. So we cannot be blackmailed by foreign nations for our own food. It is the free market that would leave us dependent on other continents, having to compete with the Chinese for food. I know Mr Redwood will not allow this view to be published as only euro skeptic tories are allowed on his blog.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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