The South African Civil Society Information Service

Food Security at Risk: What Do the Mozambican Riots and BHP Billiton Have to Do with Each Other?

By Saliem Fakir · 10 Sep 2010

The recent Mozambican food and fuel riots raise the spectre, in general, about food insecurity and social unrest in the future.

We certainly have the capability to feed all of the world’s population, but the political economy of agriculture, food production and distribution somewhat has a greater influence as to whether people can feed themselves or not.

Food security though is not limited to good rainfall, soils, or the ingenuity of breeding the right strains of crops. Food security is fundamentally about access to food by the poor in an affordable manner.

For a long time we have been buying cheap food because of cheap oil or the lavishing of subsidies to farmers in Europe and the United States that produced food mountains in the 80’s and 90’s.

Cheap food is no longer guaranteed, as oil prices are likely to rise. Oil is a key ingredient of fertilizer and enables us to move food easily from one part of the world to another in a globalised economy. That privilege is not likely to last for long and governments will be required to intervene more and more in the food market.

Those who can afford it may well easily accommodate cost shifts because they have higher income capabilities.

But, as the Mozambican riots demonstrate, for the poor any sudden shift in prices (for instance a 30% bread price hike alone) without major shifts in income or the state’s ability to caste a wider welfare net is a source of great anxiety and stress. Much of it overflows out into the streets with angry crowds looting and baying for the blood of senior officials.

The control of global food production is the subject of numerous books. It would be fair to say that neither consumers nor farmers have great influence on these chains of supply because they have come under the control of very large agribusinesses and retail outlets.

The average subsidy in the US accounts for 12% of total farm income. In OECD countries, it’s about 26% and in the European Union about 29%. These, in general, have favoured consolidation of farming into large agribusinesses, and in the US, virtually wiped out family farms -- once a strong feature of the US rural scene.

Food costs are also influenced by the movement of input costs and the rent ‘surcharge’ that is exacted by those who control the distribution, marketing and processing of food.

The greater the dependency of the global food system for oil based chemical derivatives and fuel for transport, the more vulnerable everybody is to shifts in prices of these inputs. We were witness to this when oil prices hit $140/barrel two years ago.

The future picture of oil does not look optimistic and despite the decline in the price of oil, it has not gone below the $40-$50/barrel range. This has already lifted the cost of food production. Oil price inflation is slowly seeping its way into the food chain.

However, where inflation of inputs increase the cost burden of food production they also eat away at the purchasing power of individuals and households. Their impacts assault the poor as a double penalty.  Their incomes can’t accommodate the sudden cost shifts and their incomes are unlikely to keep pace with inflation to absorb future cost increases.

And, as we can see from the Mozambican riots much of this was centred in urban areas, in particular, Maputo. Urbanization in Africa is happening at a much faster rate than anywhere else in the world. It makes dependence on the supply of affordable food even more of a strategic challenge for government.

Especially, governments that are dependent on food imports and where the growing urban population starts to delink itself from the agricultural food production chain and base. This urban population will increasingly rely on the markets or state schemes to supply food.

Africa’s own agricultural production has to be boosted in order to facilitate intra-regional trade in agricultural goods to reduce reliance and dependence on imports. These will require considerable investments in new infrastructure and assistance to farmers.

This will not be easily forthcoming in countries that have very depleted state resources or financial means. Even if the money were available, it would take a good few years for the benefits of such infrastructure investment to come through.

A good proportion of food inflation costs have been attributed to rising oil prices, biofuel production and control, by major food suppliers, of the supply chain. There has been little focus on the control of strategic input ingredients.

At the global stage, new acquisitions of critical input resources like potash may not hold a positive portent for affordable food production in general and Africa as a whole. BHP Billiton is making a $39 billion bid for Canada’s Potash Corporation.

The ‘PotashCorp’, as it is known in short, is the world’s largest producer of potash, and the second and third largest producer of nitrogen and phosphate -- three of the critical ingredients for the production of fertilizer. By the end of 2007 the company controlled 22% of the world’s potash industry.

Potash supply, the world over, is controlled by eight large companies who control 70-80% of the potash market and operate in a similar fashion as OPEC does with oil. They operate as a cartel that can manipulate prices.

During the 2008 food crisis, the price of potash went up from $150/tonne in 2006 to $1000/tonne in 2008.  This is possible because potash itself is not ubiquitous. The largest reserves straddle mainly four countries: Canada, Russia, Israel and Belarus.

The use of potash in the fertilizer industry is relatively obscure and known mainly to industry experts for its strategic importance.

BHP seeks market dominance. BHP is one of the largest mining companies in the world and has been seeking to dominate the mining and resource sector in the last five years or so (given that it is cash flush) and has been undertaking mergers and acquisitions left-right and centre.

BHP’s attempt to seek market dominance has not gone unnoticed. China has become wary of BHP’s acquisition strategies, as it may influence the price at which this strategic resource could be obtained from the market.

In an attempt to block BHP’s control over Canada’s Potash Corp, Chinese officials have ordered the state owned company, Sinochem, to launch a counter bid. China is seeking to acquire a blocking bid in order to derail the hostile take-over by the Anglo-Australian miner.

China has also invited the Singaporean sovereign wealth fund, Temasek, to join in on the bid. China did a very similar thing when BHP sought to take a large stake in Rio Tinto. It paired up with the US aluminium producer Alcoa Inc. to buy a 9% stake in Rio Tinto forcing BHP out of the race for the stake in Rio.

The Chinese government, like the Indian government, suspects the bid to control the potash market by BHP is an attempt to milk the Asian market through market dominance as most of the future growth is expected in this region. China is the biggest importer of potash and is concerned about how it will feed its very large population in the future.

The control over PotashCorp is viewed as a strategic buy because it is a swing producer. In other words, it can ratchet production up or down depending on demand and so keep prices relatively high.

The interest in potash by investors is a reflection of a wider interest by big players in the potential of the agricultural sector, which is expected to boom in the next decade because of the growth in the global population. The FAO predicts food demand will jump 70% from now till 2050.

The potash bid and the volatility of other input costs in the agricultural sector is increasingly being viewed with concern by governments and consumer groups.

Between, 2007-2008 when food prices went sky-high, riots were seen from Bangladesh to Mexico. If you start adding other variables like climate change, the unpredictability of oil prices and the degradation of the purchasing power of the poor, the potential for social unrest seems almost certain.

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