Why milk is so costly – don’t overlook the biofuels business and its hunger for cattle tucker

It looks like our caucus has the price of milk on its agenda today.

We will be asked to approve a select committee inquiry to examine why the price is so high.

But maybe we should be looking at the effects of biofuels developments on food prices instead.

A recent report from the UN has highlighted the role biofuels are playing in pushing up food prices.

Dunno if they have read the UN report.

But it seems Cabinet ministers yesterday discussed milk prices and the idea of an inquiry.

Afterwards The Boss said there was a “widespread view we should support that action.”

And so –

The National caucus will be asked for its support for an inquiry today and Key said that assuming other political parties decide to support it, terms of reference will be drawn up in “maybe a week or two”.

It comes after a public outcry over the rising price of milk on the domestic market, when New Zealand is one of the world’s biggest dairy exporters.

Opposition parties have been calling for an inquiry for some time, but we Nats had been resisting the idea.

Things seemed to have changed last week when the Commerce Commission ruled out carrying out its own inquiry into milk prices.

This has prompted The Boss to the view that consumers want to be confident they are paying a fair price for their milk. Therefore we should go along with a select committee inquiry.

Fonterra is being portrayed as too greedy.

But what about bloody biofuels?

Alf suspects at least some of the explanation for the price of milk can be found in a recently published report from the Committee on World Food Security.

On the strength of the UN report, The Wall Street Journal says the food versus fuel debate has taken a new turn.

For years, commentators have blamed Asia’s rapidly-expanding middle class for pushing up the cost of food and creating markets so volatile prices have spiked to record levels two times in four years.

But according to new research for the United Nations’ food body, the increasing diversion of grain and oilseeds to create fuel—particularly in the U.S. and Europe, which spend an estimates $8 billion a year supporting their biofuel industries—has had a far greater effect.

The UN report says using grains like corn and wheat to create bioethanol, often blended with gasoline to create transport fuel, has added 0.5 percentage points to the growth in world cereal demand, pushing it to 1.8% a year from 1.3%.

It doesn’t sound like much but:

In vegetable oils, which are used to make biodiesel and dominate Europe’s market, growth has been even more pronounced. While their use for food slowed down between the 1990s and 2000s, from 4.4% to 3.3% a year, industrial use soared, so that in the decade to 2010 it grew from 11% to 24% of world use.

The really damnable thing about all this is that taxpayers are pumping good money into the biofuels industry’s growth.

“Such a spectacular development of the biofuel industry has been made possible only because of massive public support: subsidies, tax exemption and mandatory use in gasoline,” said the report.

What’s this got to do with milk?

Well, dairy farmers in Europe and the US feed their cows on corn.

As the price of cattle tucker rises, the price of milk goes up too. And our dairy industry is in the business of getting top dollar.

The price of other foods goes up, too, which probably explains why Mrs Grumble is dishing up sausages and mince rather than prime steaks nowadays.

At adamsmith.org, Tim Worstall has commented –

It really is the entirely stupid, damn fool, biofuels movement which is causing the food price rises.

That US and EU politicians have insisted that all fuel used must be made of a certain percentage of plant derived material.

It really is the entirely stupid, damn fool, laws, passed by our entirely stupid, damn fool, Lords and Masters which is killing the poor as we put food into cars not people.

The speculators, the commodity traders, the futures, options, the deep and liquid markets do their best to mitigate the effects of this damn foolery but the reason the poor are dying for lack of food is the actions of our own politicians.

That the proposed solution is for those politicians to be given more power over the food system moves me from rather to incandescently angry.

Could we all, please, just agree that biofuels are a damnably stupid idea that kill people and so just stop making or using them?

The Wall Street Journal notes that this is not the first time the UN has come down against the use of biofuels.

In a report for the Group of 20 meeting of agriculture ministers in June with other agencies, including the World Bank and the International Monetary Fund, the FAO urged the G20 to “remove…policies that subsidise or mandate biofuels production or consumption”.

We in NZ have gone into the biofuels business.

And into subsidising the developers.

It looks like maybe we should reconsider this development.

The Greens wouldn’t be happy. But they don’t much like the high price of milk, either.

2 Responses to Why milk is so costly – don’t overlook the biofuels business and its hunger for cattle tucker

  1. Michael says:

    The price of milk does not have a direct connection to the price of cattle feed. Farmers cannot charge more for their milk just because their feed costs more, they must take what the dairy offers them. If the farmer cannot make enough money to pay his bills he must sell his cows. Then because there are fewer cows the price of milk will go up.
    It’s a shame that this world values oil more than food. As long as cattle feed can be made into a cheaper substitute for oil, we will have fuel produced from corn, sugar cane, and other feed/food sources. Solution; pay more for your food, then we will not be able to afford to make fuel out of it.

    • Alf Grumble says:

      Thanks for your observations, Michael. Among Alf’s sources were some findings by three Purdue University agricultural economists, Phil Abbott, Chris Hurt and Wally Tyner. In “What’s Driving Food Prices in 2011,” a report commissioned by Farm Federation NFP, they say two key forces are driving commodity prices higher this year: the use of soybeans to feed a booming Chinese economy and a growing demand for corn to use in biofuels.

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