Monday, October 15, 2007

Water as the Biofuels and Social Fulcrum

As the food/fuel struggle continues to exert influence on the management decisions of growers and landowners, the availability and distribution of freshwater resources to support additional acres will become increasingly important in coming years. Currently, global demand (primarily for corn & sugar) is being satisfied, but future demand for energy from crops will start to put a strain on the supply side of the equation. Enter: water. Agricultural economies are often among the first to become affected when reliable sources of water (rainwater or groundwater) are not available for commercial crops. Further, in countries where the primary source of income comes from agriculture, these economies are particularly susceptible to fluctuations in temperature and rainfall. When weather volatility (read, heat stress and too little/too much rainfall) contributes to poor crop yields and exportable commodities decrease, many growers, particularly those who are recent entrants into the grains complex, face difficulties in securing a consistent income. Despite market based incentives such as weather derivatives and hedging mechanisms which are designed to protect the interests of growers against poor weather, these instruments are largely utilized by third parties or large commercial agencies. Small farmers often do not have direct access to market participation, nor do they have the resources to participate. These growers are truly situated at the first stage in the global raw material supply chain, and weather fluctuations which lead to volatility in raw material prices for food and other agriculturally derived products are reflected almost instantly via agricultural futures prices. Going further down the supply chain, as this volatility often causes an immediate rise in commodity prices, the prices that consumers pay for basic goods become more expensive. In addition, when the cost of producing goods faces increased pressure, the subsequent cost to distribute these goods rises as well. It is easy to see how the costs of basic commodities affect many other seemingly unrelated components of the global economy; at the base of rising commodity prices and resource availability, is the need for a reliable supply of freshwater. So there is a definite cycle, with water serving as the fulcrum. Those who are long on biofuels should keep this in mind.

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