The effects of Australia’s continuing drought on the wine industry are well known; I wrote about drought and other problems that Australian winemakers now confront last September in a post titled Big Trouble Down Under. An article on the front page of yesterday’s New York Times explains how the crisis is deepening and evolving in frightening ways.
The Global Food Crisis
The article is part of a series on the global food crisis. If you haven’t been paying attention, food supplies around the world are drying up (both literally and figuratively), causing chaos in many places. Food riots are reported in the press almost every day. The crisis has many causes. Drought and climate change have reduced supplies in some areas, for example. Increasing demand is part of the problem, too, especially in China where, rising incomes have encouraged greater consumption of pork, which in turn increases the demand for grain. Rich countries like the U.S. are not helping the situation. Our biofuel policies divert food to the gas pump. All these factors push up food prices and the poorest people are the most affected.
As prices rise and surplus supplies shrink, food-exporting countries have begun to impose export taxes or even export bans in an attempt to keep domestic supplies plentiful and relatively cheap. The effect, of course, is to drive international prices even higher and “beggar they neighbor.” The price of rice rose by 40 percent in a single day last week as these export controls kicked in.
The Rice-Wine Connection
What part does wine play in this problem? Australia was until recently a major exporter of rice, but rice is an especially water-intensive crop and the continuing drought in Oz has dramatically limited production there. The Australian drought is a key part of the global rice shortage story. Wine production, however, makes the problem worse.
As the New York Times explains, winegrape production uses much less water than rice and so, as irrigation costs have soared, farmers have shifted production from rice to grapes. The graphic above shows the economic reality of the situation. Even at today’s crisis price of $1000 per ton for rice, higher water costs make winegrapes the more profitable crop. So while drought has reduced production of both grapes and rice, the substitution effect has reduced the impact on grapes and made the crisis in rice even worse.
Many authors suggest that what we are seeing here is part of an important transformation in the global economy. Globalization linked up producers and consumers at the far ends of the earth in the 1990s and produced a world of abundance and falling prices. The growth this helped produced (plus the associated environmental effects, according to some) are now combining to turn surplus into shortage. It is easy to see this in rice, but it is true in wine as well, as I argued in my post on The End of Cheap Wine. Protectionist policies conspire to raise the problem to crisis level for those who are least able to deal with it.
I'm not sure that history will judge rice production in Australia in a kindly light. To provide the sort of water necessary for its production led to the damming of river systems that now have significant problems with salinity, ergo rural endeavors in general suffer.
Even so its is clear that water shortages are not having the dramatic effects expected. 2008 will apparently be a record year in the Riverina for grapes http://www.abc.net.au/rural/news/content/200804/s2219366.htm
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Australia represents only a percent or two of the world's rice market. Droughts are cyclic in Australia and it is silly in that country to use precious water resources for rice production. In the scheme of things hoarding and speculation have more to do with the current rice situation than Australian drought. The NY Sun reported hoarding going on in our own country in the big box stores.
Of course, the most idiotic thing is the U.S. policy on biofuels which is a politically based transfer of some of our wealth to the midwest in return for votes. (Yes, I know the line that these handouts have been necessary for the last two decades to allow poor weak ADM to compete.)To shut out the importation of ethanol from Brazil by tariffs while supporting the use of domestic corn for ethanol with subsidies is criminal. To make it even worse then we Federally mandate that the ethanol be used. It throws the whole thing out of whack. You have California rice growers looking to get on the biofuel subsidy gravy train. You have wheat growers converting to corn. And now, because of the price of oil the biofuel producers are suffering because of all the oil it takes to make and transport ethanol. If there was ever a case for a free market we have one here. And a prime example of the danger of politics to our energy policy. End of rant.
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