Where Food And Energy Compete

Since 2007, global food and energy prices have been increasing steeply, hitting economies reliant on energy and food imports with great force like a "silent tsunami".1 Rising food costs have led to social unrest in some 30 countries. Food and energy security is more closely connected with political stability than ever before. How to balance food security and energy needs is becoming a burning topic in the international community.2 China, India and other Asian countries have responded promptly to the global food and energy crisis with a number of measures, including export bans, price intervention and subsidies. However, despite the short-term effect of reducing inflationary pressure by export and price intervention, very little seems to slow the momentum of rising prices. In fact, the intervention would probably distort subtle price adjustments and mislead resource allocations, which could in turn be the potential cause for a real crisis at a later stage.

Based on available statistics, this paper primarily studies the competition between food and energy resources and its impact on consumption among China's low-income groups and the poor. In addition, it will also focus on the public actions necessary for balancing food security and energy needs.

Driving force in the food-energy competition
Increases and fluctuations in the price of energy are some of the factors driving up food prices and creating instability. This leads to higher costs of agricultural inputs such as farm machinery, irrigation, fertilizer and labour. At the same time, the more obvious competition between energy demand and food needs is the production of bioenergy from corn and rapeseed.

The International Grains Council reported an overall 32-per cent growth in 2007/08 in the use of cereals to produce biofuels of which 80 per cent occurred in the United States. World corn production amounted to 777 million tonnes, of which 95 million of the 100 million tonnes traded were used for biofuels. The International Food Policy Research Institute (IFPRI) estimated that the growing demand for ethanol was responsible for a 30 per cent rise in food prices during 2000/07.3

Furthermore, due to population growth, higher incomes, industrialization and urbanization, people shifted to high-value commodities, further pushing up food prices. Other causes of the price surge include unmet demand and lower food output due to insufficient investment in agricultural research and infrastructure and sluggish productivity. In the years 2000/07, total world food production fell short of global demand, leading to a fall in food stocks. In addition, climate change, scarcity of water resources, poor harvests in major food-producing countries such as Australia and a cut in food exports all added up to worsen and drag out the problem (Figure 1).4 In China, government intervention ensured lower domestic food prices even as international prices kept rising.

In addition, exceptional institutional factors and patterns in economic growth relevant to the food price issue are worth noting:

First, cultivable land is rapidly shrinking, and farmers only hold the usufruct right to land ownership, which has been practiced since 1978. (Usufruct refers to the legal right to use and derive profit or benefit from property that belongs to another person, as long as the property is not damaged.)

During the 30 years of rapid industrialization and urbanization, land development was inevitable. However, today, farmers in China have weak bargaining power if they seek to commercially develop their land. They encounter a coalition of local government and developers. Since farmers lack ownership rights to farmland, their usufruct rights are even more precarious.

Thus, scarce farmland without a true price tag results in institutional and widespread land abuse and wastage, with a consequent accelerating decline in the total area of cultivable land. In 2004, it transpired that 147,700 hectares of farmland had been cumulatively developed for commercial use. The figure for 2006 was 91,200 hectares.

Second, there are fewer agricultural labourers. The number of workers -- mostly young and middle-aged -- migrating from villages to cities and employed in non-agricultural jobs is estimated at 200 million. Limited farmland has been a strong constraint on rural settlement, and workers can earn more in non-agricultural jobs. In the 1980s, the average farm size was only 0.5 hectares. Today, more and more farmers are looking for city jobs as their land is put to commercial use through deals made between the government and developers. Another problem is that migrants cannot take their families to the cities because of the permanent residential registration system. The aged and women are left behind to take care of the household and the farm, and this creates a rural-urban polarization. At the same time, for migrants and their families, the limited farmland is their security, especially since social protection for rural people is fragile. Workers restricted in their knowledge and use of new technologies contribute to a further decline in productivity, which is evident by a fall in the cropping index, from 155 per cent in 1990 to 129 per cent in 2006. Even after taking into account statistical corrections on cultivable land in 1996, geographers discovered that the fall in the cropping index is evident in the middle and lower reaches of the Yangtze River and in south China,5 which had been renowned for the highest grain yield per unit in the entire country.

Third, China is facing a water crisis. North China traditionally is drought stricken. The rapid expansion of industries and cities has only worsened the situation, which is evident from projects to redirect water from south China to the north. In addition, treatment of waste emission into heavily-polluted rivers in China, as well as into major lakes which are slowly deteriorating, is lagging. Studies show that it is highly likely that pollutants in water are absorbed in crops through irrigation, therefore threatening food security. In 2006, some 28 per cent of surface water was found to be of the poorest quality nationwide.6 Various water contaminants have caused a shortage of drinking and irrigation water in south China, distorting its long history as a land of abundant water.

Fourth, agriculture is always boxed into an unfavourable position when competing for fiscal resources. Although the budget for agriculture has been growing in real terms, i.e. actual purchasing capacities after removing the effect of inflation, the share of total expenditure has fallen from 10 per cent in 1990 to 6.5 per cent in 2006.7 This shows a weakening of public investment in agriculture, with a fractured rural infrastructure as one of its consequences.8 In recent years, under the slogan "feeding back farmers through industry -- cities support the countryside", the Chinese Government has abolished agricultural tax, funnelled subsidies for growing crops and imposed negative tax on purchasing farm machinery, diesel and chemical fertilizers. In 2007, benefits to the farming community exceeded 150 billion yuan. However, this could not match the oil subsidy of Y220 billion.9 Considering that only 7 per cent of total oil demand is from the farming sector, and that per capita energy consumption by urban dwellers is much higher than in rural areas, oil subsidies imply that cities and non-agricultural sectors have greater benefits from fiscal resources.

As world economic growth has been over-reliant on fossil fuels at the cost of reduced investment in agriculture and fewer development opportunities, so China's case further demonstrates that at the cost of a development policy biased towards industrialization, food security and the environment will be at risk and farmers' interests undermined.

Food-energy crisis and impact on the poor
Today's globalized market is concerned with the balance between energy supply and demand, including petroleum, natural gas and electricity.10 Despite differences of opinion among major food importers and exporters, there has long been a consensus on what constitutes "food security". According to the Food and Agriculture Organization of the United Nations (FAO), "Food security exists when all people, at all times, have access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life".11 Rising food and energy prices have had a significant impact on people in almost every country. However, social unrest in some developing countries shows that the poor feel threatened. Therefore, priority measures to deliver sufficient and timely food and energy assistance include the necessity to identify those most severely hit, as well as the extent to which they have been affected. Studies covering the period 2006/07 illustrate the issues in China.
The State Statistics Bureau in China reported for 200712 that the per capita annual disposable income of urban residents amounted to Y13,786, while per capita annual net income for rural people was only Y4,140. Food prices rose annually by 12.3 per cent: grain, meat, edible oil and eggs rose by 6.3 per cent, 31.7 per cent, 26.7 per cent and 22.9 per cent, respectively. Noticeably, the meat market led the price surge. In December 2007, pork, beef and mutton prices increased by 57.7 per cent, 48.0 per cent and 44.5 per cent, respectively,13 compared with the same period in 2006. However, the price of freshwater fish remained almost unchanged. This information helps to explain the changes in household income and consumption, as shown in tables 1 and 2.

First, allowing for the price rise per capita, the disposable income of urban households generally increased, while the income growth of rural households fell behind the price increases in rural areas.

Second, the bottom urban twentile changed its food consumption pattern: less rice, wheat flour, cooking oil, pork, duck, egg, fresh vegetables and melon, but more chicken, beef, fruit and dairy products. The impact of higher food prices led to a "substitution effect" -- a change in diet. A similar variation can be discerned with the third urban quintile in terms of meat consumption, but it is not seen in the consumption behaviour of the top urban twentile (Table 1).

With the third urban quintile, only 1 per cent change in the share of food expenditure in total consumption was found. But with the bottom urban twentile, a 1.52 percentage point increase in the share of food consumption was evident. This means that perhaps those in the lowest urban income group have not faced a survival challenge. And, as their income increased by 13.2 per cent in real terms, and at the same time the prices of non-food consumer goods and services fell slightly, they are spending more on non-food consumption, with only a trivial decline in spending on education and energy.

Fourth, Table 2 shows that the rural households whose total consumption expenditure exceeded their income -- a per capita net income of less than Y1,000 -- fell below the official poverty line. On the one hand, these households belong to migrant groups, due to a negative income for more than 40 households in the survey, except in terms of the possession of capital and savings. On the other hand, the households that are chronically poor tend to live on loans for part of their consumption. Furthermore, both the value of average annual income and total consumption in real terms decline after deflation by price.

The livelihood of farmers -- and even of high-income groups -- is generally hit by food price inflation. This can be seen from the change in spending habits on basic needs: substitutions in food, clothing and fuel took place and spending on education and health care fell (not shown in the table).

To cut down on food expenditure, all three rural income groups shifted to a less balanced diet by reducing consumption of protein-rich, non-staple foods. The quantity of non-staple food consumed by the poor, originally low in 2006, declined substantially in 2007. Pork, poultry and egg consumption amounted to 11 kilograms, 2.5 kg and
3.6 kg in 2006, and when compared with the rural high-income groups they were 53 per cent, 75 per cent and 99 per cent less. In 2007, the consumption of pork, poultry and eggs by the poor decreased by a further 29 per cent, 28 per cent and 8 per cent, respectively, which will undoubtedly lead to a deterioration of nutritional standards.

In comparing urban and rural households, two points must be noted: First, food price inflation hit rural households with greater force than urban households, a finding that is significantly different from the mainstream opinion in China.14 Grain specialists in the country generally believe that farmers rely mainly on their own farm output, while urban residents rely on markets for food, rendering them more vulnerable in terms of food security than the farmer. However, farmers produce limited amounts of food, and what the poor grow is not sufficient to meet their own energy requirements. Farmers themselves now purchase more food to meet the diverse needs of their families.

Food security is indicated by more than just caloric intake. A diversity of food is essential to supply sufficient micronutrients for a balanced diet.15 If we look back on tables 1 and 2, it is clear that the urban middle and low-income groups managed a balanced diet with meat and starches. But the rural poor and middle-income groups considerably cut down on their meat consumption to cope with higher prices. This shows how vulnerable rural people are to food insecurity.

Second, city dwellers enjoy higher income and better social security, giving them more financial strength than their rural counterparts, a key determinant of food security. Moreover, government intervention on prices has resulted in slower food price inflation in the cities than in the countryside: in 2007, food prices had risen by 13.6 per cent in the countryside, which was 1.9 per cent higher than in the cities. State intervention in food prices has reduced farmers' access to food in two ways: as producers, they do not gain from price inflation, and as consumers, their purchasing power falls when prices rise steeply in rural markets.

Neither of these two surveys cover rural-urban migrants. After several interviews with migrant workers in a number of cities in south China, I found that since early 2007 monthly food expenditure had grown by Y150, while monthly wages had risen by only Y80. Food security for rural migrants has until now been a blind spot in food and nutrition policy in China. Accordingly, individuals vulnerable to food shortages are categorized as low-income classes prevalent throughout the entire population; rural people, who fall into the low-income group; the poor among the rural low-income group; and women, children and the elderly among the poor. Food aid and other vital social assistance should target these vulnerable people with priority.

Proposed strategies to cope with the crisis
International organizations and governments have responded with urgency to the current food crisis. They have pooled resources, extended humanitarian aid to countries threatened by hunger and poured investment into agricultural research and development. In addition, policymakers have noticed that the excessive speculation in the food and energy futures markets is, in essence, a response to the decline in the storage of foodstuffs and the decreasing capability for alternative energy production. Therefore, international and regional cooperation, adjustment in biofuel policy, elimination of trade distortion, greater investment in agriculture and energy production, promotion of energy-saving and emission-reduction measures are all at the forefront of various United Nations conferences and summits. Implementing the outcomes of these conferences would depend on feasible policies and actions appropriate to specific socio-economic conditions by governments and the general public. The case study of China shows that a sustained balance between food security and energy demand would be reached only if society as a whole acts together and pushes for policy adjustment and reform.
Among the policy options that follow, the first two are emergency responses, the third and fourth are for mid-term readjustment, and the fifth relates to mid- and long-term socio-economic policy reform.
First, minimum living standards should be raised in proportion to the consumer price index in both rural and urban sectors, together with a provision for food aid to targeted groups. The two projects that the central government is ready to implement, i.e. "Mid- and Long-term National Food Security Programme" and "Capacity-Building for Jilin Province to Increase Grain Output by 5 Million Tonnes",16 will undoubtedly promote food grain production in China. However, it may not strengthen the purchasing power of the poor, nor readily "quench their present thirst with the promise of accessible water in the future". It is therefore necessary to issue food stamps to deliver food aid to the poor and migrant families in cities. In the countryside, the existing aid programme could be reinforced to deliver meat and food to the poor to help increase their intake of protein and micronutrients. Due to irreversible damages caused by malnutrition at an early age, sustained nutrition intervention programmes, such as school meals, could be a highly cost-effective measure if implemented in rural low-income regions.

Second, food security should be of the utmost priority when allocating public resources. The government already stopped issuing new licenses to biofuel projects that use food grain as input. However, biofuel factories currently in operation have not been shut down yet. The government may consider compensating investors or stopping subsidies and, with preferential treatment, encourage the use of non-food grains for biofuel production.

Third, by taking "smaller steps at a faster pace", the government must release its control on prices and food exports and re-establish the function price in balancing supply and demand. The government limits food exports and subsidizes energy production in order to secure domestic food and energy supply while controlling price inflation. However, history has shown that such measures only suppress supply and stimulate demand, making the shortage even worse.

Nevertheless, in the transition towards a market-oriented economy, whenever an imbalance between supply and demand re-emerges, the government is likely to intervene and set a fixed price. The question is whether such intervention would not only distort the relationship between supply and demand and eventually bring about a price hike, with differences between the government-controlled and the market price, but would also encourage rent-seeking behaviour and corruption. In a globalizing market, it might further stimulate speculation and smuggling.

Lately, there have been instances of smuggling of food in China because of cheap domestic prices. Also, when coal is artificially undervalued, other industries dependent on coal tend to increase exports and cut domestic supplies, leading to frequent power shortages. Similarly, when gasoline price is subsidized, international airliners and shipping vessels try their best to fill up their tanks in China. All these cases tell the same story, that is, the welfare of the domestic consumer is sacrificed because of price controls and the ban on food grain exports.

Fourth, the government should take immediate action to curb monopolies and encourage competition. In China, the oil industry has the highest level of monopoly; the three giant companies are all State-owned. Under a market-oriented economy, the incentives to such companies do not necessarily reflect national goals. The companies' own interest is a stronger driving force in guiding their behaviour. Without fair competition, monopoly enterprises grow into interest groups. When doing business, these oil giants are acting under the name of the "State", taking away any opportunities that private players must have of exploring potential petroleum deposits and of developing, trading, processing and retailing new business. The growth of the oil and gas industry as a whole has thus been stunted. It is obvious that industry monopoly not only impeded the efficiency in the supply of goods and services but also narrowed consumer choice.

Fifth, the price formation mechanism should be rectified for production factors and the pattern of economic growth must be transformed. China's fast economic growth and the subsequent increase in employment and incomes are closely connected with the process of globalization. In the beginning, China could only enter at the lower end of the global economic chain, because of constraints on capital, technology and human resources. Firms with high-energy consumption and high pollution shifted their operations from developed countries to China. One of the most important reasons for this shift lies in the supply of undervalued labour, land, environment and water resource that translate into low production costs. This has driven the rapid expansion of the manufacturing sector in mainland China and created huge demand for energy and raw materials. As a result, China has become a net importer of petroleum since 1993.

The International Energy Agency's World Energy Outlook 2007 predicts that the daily global demand for energy in 2030 will increase by 38.9 per cent over 2005 figures. About 43 per cent of this increase will come from China and India alone. Clearly, China's share of energy consumption would be significant in the world energy market. Against this background, and with a large manufacturing base, China has increasingly become a net energy importer and runs the risk of escalating carbon emissions on its own territory.17

Environmental pollution, global warming and worsening terms of trade have influenced policymakers and the general public to see the necessity in transforming the pattern of China's growth. Notions such as "saving energy and reducing emissions" and "building a society based on thrift" have emerged as the main objectives in national socio-economic planning. However, so long as the system for determining prices remains unchanged, scarcity of resources will not be apparent and misallocation of resources will continue, making it more difficult to adjust the pattern of economic development.

At present, the worldwide food and energy crisis makes externally-oriented development more difficult to sustain. An opportunity exists to readjust the mechanism to determine prices, such as legally empowering farmers and workers with collective bargaining power in trading land and fixing wage contracts, and imposing environmental protection-related taxes at international rates on mining, water resource development and industrial pollution. These measures will surely frustrate vested interests and put many enterprises under great pressure to respond favourably. After all, this is the right way to cope with the global food and energy crisis. It fits the long-term strategy of sustainable economic development that will lead to the creation of a harmonious society.

It is essential to monitor and assess the power of the government and monopoly enterprises in determining prices, while at the same time empowering workers and farmers. In doing so, we can anticipate a transition towards a more balanced social structure in China.

(My sincere thanks to Professors Jiang Zhongyi, Wei Zhong, Jin Cheng-wu and Gu Xiulin.)

Notes

1 The Earth Institute, 2008, Food Crisis: A Global Emergency (www.earth.columbia.edu/articles/view/2196).

2 von Braun, J. 2008, "High Rising Food Prices: Why, and What Should Be Done?", background material for video conference with China, 12 May.

3 von Braun, J. 2008, "Biofuels, International Food Prices, and the Poor". Testimony to the United States Senate Committee on Energy and Natural Resources, 12 June 2008 (www.ifpri.org/themes/foodprices/foodprices.asp).

4 International Food Policy Research Institute (IFPRI)2008, High Food Prices: The What, Who, and How of Proposed Policy Actions (www.ifpri.org/chinese/PUBS/ib/FoodPricesPolicyActionch.pdf)

5 See Yan Hui-min, Liu Ji-yuan, Cao Ming-kui, 2005. Cropping Index: Variations in China during the period of 1981-2000, in the Journal of Geography (Dili Xuebao), vol. 60(4): pp.559-566, Beijing.

6 See the State Environmental Protection Bureau (The Ministry of Environmental Protection) P.R.C., 2007, "Bulletin on Environmental Status in China in 2006" (www.ipe.org.cn/dtfd.jsp?fdtplj=/uploadFiles/2008-02/1203865035981.JPG)

7 The Ministry of Agriculture, P.R.C., 2007, Agricultural Development Report of China, p. 142, Agricultural Publishing House, Beijing.

8 See Wan Bao-Rui, 2008. To Deepen the Awareness on Food Security, in Xinhua News Digest, Vol 12: 22-23, Beijing.

9 Long Ming, 2008, Do we have the ability to subsidize the whole world?, in Shanghai Securities News: p.5, Shanghai.

10 See Houssin, D.2007, Security of Energy Supplies in a Global Market (www.iea.org/textbase/speech/2007/Houssin_Prague.pdf).

11 See the FAO Special Programme for Food Security: What Is Food Security? (www.fao.org/spfs/en/).

12 The State Statistics Bureau, P.R.C., 2008 Bulletin on National Economic and Social Development in 2007 (www.stats.gov.cn/tjgb/ndtjgb/qgndtjgb/t20080228_402464933.htm).

13 The Ministry of Agriculture, 2008 Analyses on Price Fluctuations in Whole Sale Market for the Products Covered under the Food Basket Program in December 2007 (www.agri.gov.cn/pfsc/fxbg/t20080117_956379.htm).

14 See Lu, Feng and Xie, Ya 2008: Dynamics of Grain Supply-Demand and Prices 1980 -- 2007) -- A Discussion about Prices Fluctuation, Macro-Stability and Grain Security, partly selected by the Xinhua Digest, Vol. 13:51-55, Beijing.

15 See Hoddinott, J. and Y. Yohannes, 2002, Dietary Diversity as a Food Security Indicator, FCND Discussion Paper No. 136, IFPRI, Washington, D.C.

16 Xinhua News 2008 Mid- and Long-term National Food Security Programming and Capacity Building for Jilin Province to Increase 50 Million Ton Food Grain Output (news.sina.com.cn/c/2008-07-02/210314106568s.shtml).

17 According to the estimation by Chen, Pan and Xie (2008): "In 2002, the net export of embodied energy was about 240 million tce (tons of coal equivalent), which occupied about 16% of primary energy consumption in the same year, increasing about 150 million tce in China." "In 2006, the net export of embodied energy went up to about 630 million tce (tonnes of coal equivalent), 162 per cent higher than that of 2002." See Energy Embodied in Goods of International Trade in China: Calculation and Policy Implications, in the journal of Economic Research, Vol.7, pp.11-25, Beijing