Thursday, October 2, 2014
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The Rising Cost of Nature

A fundamental global trend nowadays is growing natural resource scarcity. Oil and natural gas prices have soared in recent years. This past year, food prices have also skyrocketed, causing hardships among the poor and large shifts in income between countries and between rural and urban areas.

The most basic reason for the rise in natural resource prices is strong growth, especially in China and India, which is hitting against the physical limits of land, timber, oil and gas reserves, and water supplies. Thus, wherever nature’s goods and services are traded in markets (as with energy and food), prices are rising. When they are not traded in markets (as with clean air), the result is pollution and depletion rather than higher prices.

There are many reasons for the dramatic increase in world food prices, but the starting point is increased food consumption, again strongly powered by China’s economic growth. China’s population is eating more, notably more meat, which in turn requires the importation of higher volumes of animal feed made from soybeans and maize.

Moreover, rising world energy prices has made food production more costly, since it requires large energy inputs for transport, farming, and fertilizers. At the same time, rising energy prices create a strong incentive for farmers to switch from food production to fuel production.

Indeed, in the United States, two billion bushels of maize production out of a total harvest of 12 billion bushels in the 2006-2007 marketing year are being converted into ethanol. This is forecast to rise to 3.5 billion bushels in the coming 2007-2008 marketing year, and more than 70 new ethanol plants are under construction, which will double the amount of maize consumed for ethanol production. The squeeze on maize supplies for food will only intensify.

The situation is exacerbated by another basic constraint: climate change. During the past two years, a rash of climate-related disasters have hit global wheat supplies. Total wheat production fell from 622 million metric tons in the 2005-2006 planting season to an estimated 593 million metric tons in 2006-2007.

Each market impacts the others. With wheat markets tightening, more land is used for wheat planting, reducing maize or soybean production. And, with more maize and soybeans being used for fuels rather than food, the food supply tightens even more. The triple threat of rising world demand, conversion of food into fuel, and climate shocks have conspired to push world food prices much higher than anticipated even a couple of years ago.

So far, there has been no global leadership to start addressing the many implications of these changes. One implication, for example, is that the heavy subsidies given in the US for fuel production from maize and soybeans are misguided. Another is that the world needs a much more serious cooperative effort to develop long-term environmentally sound technologies to substitute for scarce oil and gas and for fuels produced from farmland.

Moreover, there is an urgent imperative to raise food productivity in poor countries, especially in Africa, which needs its own “Green Revolution” to double or triple its food production in the coming few years. Otherwise, the world’s extreme poor will be hardest hit by the combination of rising world food prices and long-term climate change.

While commodity prices for food and energy will rise and fall, the underlying crises will likely intensify in the coming years. As a result, sustainable development will rise to the top of the world’s agenda. We will need leaders who are knowledgeable about the challenges and who are prepared to work cooperatively toward global solutions.

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