Does Ethanol Deserve the Blame for Rising Food Prices?

Food prices have become the global warming of commodities. I say this not to start an argument, but to point out the problem with asserting causality. Like global warming, pretty much everyone agrees on the vector [up] and the impact on human life [bad], and that's where the agreement ends.

Food prices across the board are indeed up - rising almost 40% in 2007 according to the Food and Agriculture Organization of the United Nations [FAO]. A big jump, especially coming after a 2006 increase of 9 percent. Wheat, corn and rice have all risen dramatically - core staples that impact the poor and not-so-poor alike in every corner of the world.

The reasons are complex and we've covered them previously. Drought in Australia cut global wheat production. Floods in Bangladesh affected rice. The world's population is growing and demanding more and varied foodstuffs. Economic growth in countries such as China results in changing eating patterns. Traditional diets based on grain staples are expanding to include luxury items like beef and pork. High oil prices contribute to the high cost of food through increased transportation costs as well as higher fertilizer prices.

All of those are obvious, traceable, irrefutable components of supply and demand. But there are slightly more invisible animal spirits at work as well. Commodity speculators play some part in nudging prices up or down depending on which way the news blows.

And then there is the ethanol and biofuel effect. A lot of people seem to be blaming biofuels for the high food prices.

In India, for instance, the finance minister attacked biofuels in a speech last month, singling out the U.S. use of corn for fuel. "Outrageous" and "lopsided priorities" were the not-quite-Chavezian words used to describe the idea that developed countries were using food for fuel while developing countries and the poor everywhere are dealing with growing food prices.

In Haiti, biofuels are being blamed for the fall of a government. Eighty percent of the population of Haiti lives on less than $2 a day. Any price increase in food can cause hunger and hardship, but with the price of rice almost doubling since December, huge numbers of people were unable to feed themselves or their children.

Violence broke out April 2, first in one town, then in spreading across the country. At least five people were killed. Politically, Prime Minister Jacques-Edouard Alexis took the brunt of political dissatisfaction and was fired this past Saturday, while President Rene Preval unveiled a 16% cut in the price of rice. Tensions are still running high in the country as the poor wait for the price cut to trickle into their local shops. Guess what the scapegoat was: biofuels.

The World Bank believes that biofuels are at least partially to blame for the world's high food prices, and many others agree. Here's an excerpt from the World Bank's April 1 policy note entitled Rising food prices: Policy options and World Bank response:

Increased bio-fuel production has contributed to the rise in food prices. Concerns over oil prices, energy security and climate change have prompted governments to take a more proactive stance towards encouraging production and use of bio-fuels. This has led to increased demand for bio-fuel raw materials, such as wheat, soy, maize and palm oil, and increased competition for cropland. Almost all of the increase in global maize production from 2004 to 2007 (the period when grain prices rose sharply) went for bio-fuels production in the U.S., while existing stocks were depleted by an increase in global consumption for other uses.

But the big question remains: How much of an effect are we actually talking about?

Figuring out how much of an impact ethanol and biofuel production has had on rising food prices is hard, if not impossible. If you just went by the headlines, you'd think that the solution to end world hunger is to stop making ethanol. And given that 240 kilograms of corn will either make enough ethanol to fill an SUV's gas tank (100 liters) or feed a person for one year, it's a convincing argument.

It is estimated that anywhere from 20 to 30% of the U.S. corn crop ends up as ethanol. But how that impacts food prices is a matter of debate. The International Food Policy Research Institute in Washington suggests that biofuels accounts for a quarter to a third of the increase in global commodity prices. Looking at it from a statistical perspective, the DTN Ethanol Center reports on a study by the Center for Agricultural and Rural Development at Iowa State University. In the article, they state:

Further, there is a close correlation between energy prices and retail food prices, according to the report, with estimates that a 10 percent increase in energy prices can contribute about 5 percent to an increase in retail food prices.

And this interesting fact:

When it comes to the change in corn price, a 2007 CARD study estimated that for every 30 percent increase in the price of corn, retail food prices increased by only about 1 percent.

Who's right? Granted, these are corn people being reported on by an ethanol industry group, but given how difficult it can be to get statistics at all, at least we have some kind of numbers. That's better than the crystal ball of the Food and Agriculture Organization of the United Nations, which argues that if biofuel mandates continue in the EU and U.S., food costs will go up 10 to 15%.

But truly, these are just guesses: highly educated, but guesses nonetheless. No one can truly calculate the effect of biofuels, especially when other variable such as one well-placed drought or huge harvest can cause food prices to spike or drop.

What we do know is that in 2007, 93.6 thousand acres of corn were planted in the U.S., some of those acres at the expense of soybeans and wheat acreage. Those acres ended up producing over 13 billion bushels of corn. Some portion of the harvest went into the 154 thousand barrels of ethanol produced in 2007. This year, the picture is slightly different, with soybean and wheat acreage going up in the prospective plantings report due to higher commodity prices. Ethanol production is projected to continue to increase from 418,000 bbl/d during the summer of 2007 to 550,000 bbl/d this summer. With fewer acres of corn planted in the spring, ethanol will likely be consuming a larger percentage of the crop.

And of course, the introduction of ethanol into the fuel supply isn't happening on a whim; it's going to bring down U.S. dependence on foreign oil and will keep prices down. The WSJ reports on how biofuels are keeping oil and gas priced 15% lower than otherwise. And those energy costs have their own tremendous impacts on the actual food industry. So if you imagine a world with no ethanol, who's to say food prices in developing countries might not be higher?

Rising Food Prices, What Should Be Done? IFPRI Policy Brief by Joachim von Braun, April 2008

Food for Fuel? Tom Daschle, C. Ford Runge, and Benjamin Senauer, Foreign Affairs, September/October 2007

How Biofuels Could Starve the Poor, C. Ford Runge and Benjamin Senauer, Foreign Affairs, May/June 2007

As Biofuels Catch On, Next Task Is to Deal with Environmental, Economic Impact WSJ March 24, 2008

Comments

[Tim Plaehn]

Nice, well balanced article. How soon for the anti-corners to arrive?

[Moral Hazards Amok]

So are fuel costs really kept 15% lower as this article claims? Not all! We the taxpayers are being forced to heavily subsidize it.

David Pimentel, a professor of ecology at Cornell University who has been studying grain alcohol for 20 years, and Tad Patzek, an engineering professor at the University of California, Berkeley, co-wrote a recent report that estimates that making ethanol from corn requires 29 percent more fossil energy than the ethanol fuel itself actually contains.

According to their calculations, ethanol contains about 76,000 BTUs per gallon, but producing that ethanol from corn takes about 98,000 BTUs.

Just as bad, corn ethanol subsidies totaled $7.0 billion in 2006 for 4.9 billion gallons of ethanol. That's $1.45 per gallon of ethanol (and $2.21 per gal of gas replaced).
Even with high gas prices in 2006, producing a gallon of ethanol cost 38¢ more than making gasoline with the same energy, so ethanol did need part of that subsidy. But what about the other $1.12. Not needed! So all of that became, $5.4 billion windfall of profits paid to real farmers, corporate farmers, and ethanol makers like multinational ADM.

Where did those subsidies come from:
1. 51¢ per gallon federal blenders credit for $2.5 billion = your tax dollars.
2. $0.9 billion in corn subsidies for ethanol corn = your tax dollars.
3. $3.6 billion extra paid at the pump.

These figures are from 2006. Today’s fleecing of the taxpayers is much worse.

It really is very DUMB idea putting corn and grass into our gas tanks and the market would never buy a drop of it if they weren’t required to do so, or only because it’s so heavily subsidized. It’s a transfer of wealth from ordinary consumers to big Agra, INCREASES our dependence on foreign oil, and oh yea, it causes more pollution than it prevents.

[NUKE]

Yeah! Let's burn some COAL to produce ETHANOL. That's the dream ticket for global warming!
Come on America, let's wake up and look around the world. We have plenty of cheap nuclear energy. And it has zero effect on global warming. I know what you are thinking. What are we gonna do with the nuclear waste? Well, that's the price we have to pay. But, it's much less damaging than fossil fuel.

[Tim Plaehn]

Nuke powered cars?

[All American]

Finally, here is an article that attempts to weigh the pros and cons with recent facts and figures. I am getting so tired of the articles and research funded and sponsored by big oil.

The 51¢ per gallon federal blender’s credit is a reduction in tax that the blender receives not the producer. Its intention was to offset the upstart costs to build the infrastructure used to blend the ethanol. It is much like the income tax credit you would get on your mortgage interest.

Remember, distillers grain, the by produced of ethanol production is fed back to cattle. It has a higher nutritional value than the original corn.

I also find it ironic that these same "starving" and corrupted countries are asking for money and not food. Take Haiti for instance, they have food rotting on their docks. The corrupted government won't allow the food to leave the boats. They want the duties and taxes.

[nickgogert]

Just FYI yoru corn planting info should be measured in millions of acres. the crop allocation was the highest on record in the US. another very salient point is that food prices are global. The US market while important isn't all encompassing. Unfortunately world food stocks have been dwindling for the last few years. I still haven't seen a good global analysis of food and the impact of the extra 30million acres of the 90m in total in the US attributed to (ethanol) last year put into context. The impact is strong, but may only be exacerbating an already stressed situation. Other crops including soybeans, wheat, barley and even hay were impacted by the acreage allocation, but again it was the US.

[biggin]

In South Texas a large number of fields previously used to grow cotton and sorgum are now planted in corn. I assume that is becoming more common throughout Texas and I wonder if it is an issue with these replaced commodities?

[huangjin]

Nuclear power makes electricity which powers electric cars.

[Sir Sid]

All you need to do is exercise common sense. The answer to your question is YES!!! For further explanation, please click on this link: seekingalpha.com/artic...

[Malbec]

perhaps we all should stop drinking spirit to save some grain?

[Jetty]

Good article--As for the comments from the poster using the Pimentel/Patzek studies, they have been proven wrong by every other study out there. There is a positive energy balance with ethanol. Gasoline has a negative 25% energy balance. As for the subsidies--Corn is not subsidized because of ehtanol. The subsidies paid to farmers are paid to idle acres and to make up for pricing that is below a break even point. Ethanol would reduce those subsidies. In 2006 the ethanol industry generated 1.2 billion more in federal revenue than was paid in blenders credits. As for the cost to the consumers at the pump, here in SD we are currently seeing as much as a 20 cent lower cost of 10% blended ethanol.
The bug doctor and the Big Oil guy need to go away!!

[Tim Plaehn]

Current acreage in corn is not record levels. Well over 100 million acres were planted in corn in the U.S. in the 1920's and 1930's including many areas in the south and Texas.

I think it is great that American farmers are good enough to feed the rest of the world, but where do they get the entitlement that we must feed them? In Argentina farmers are currently burning off their fields in protest to government taxation policies. Places like Argentina, Brazil & China could easily produce enough to feed the world if they had incentives like the U.S. It appears that current U.S. policies towards agriculture are what keep the world fed.

[cindyz]

One of the best, most well-researched and well-balanced articles about food prices I have seen yet. Well done!

[iThinkBig]

Here's a question: Rice commoditiy has gone up 500% in the last two years. What does rice and corn have to do with each other on energy production if rice is the principle food staple of the globe? There ya go. The real reason all agriculture products are going through the roof is that they are safehavens for global investors, considering Treasuries are not so safe anymore. This includes oil especially which is used to run our economy.

Ethanol was to substitute 5% of the gasoline blend at the pump and the country is at 3.2% with long contracts on corn looking to me like it will level off over the next several months meaning this goal was fulfilled and demand met. So in most ways, this is a useless global argument to begin with.

I agree with other posters about nuclear energy. Biodiesel can be made out of a ton of agricultural products that will surely have some impact on food supply, but negligable. Best bet for the U.S. economy is declare energy crisis, legislate and subsidize $200 B into alternatives and domestic drilling, create a massive global investment opportunity in America which will deflate the commodities bubble, create millions of jobs and creates long-term opportunity in the trillions of being an exporter of energy and food around the globe. Does Washington have the will considering they own energy stocks and get wonderful inside information/bribes from lobbyists? That is perhaps the best question to ask.

[rickrents]

Let's not forget every dollar spend for gas goes to the people who want to kill us!!! I don't think we are thinking straight on the whole idea of alternative energy.
Mideast terrorists or midwest farmers. Who deserve our support?

[Trader T]

Producing ethanol from corn is bad for the environment, drains resources and diverts food to an expensive additive to gasoline that results in lower gas milage. The government subsidies should end immediately and the plants idled until switch grass or other ethanol methods are devised. There is plenty of crude oil that can be drilled in this country (offshore and Alaska), as well as nuclear power for our energy needs. Converting food into high cost, low value auto fuel is ethically wrong.

[jcrash]

All American...I get a tax DEDUCTION for my mortgage interest not a tax credit. If it were a credit, I would be paying ZERO taxes...I'd love that.

[Gary Dikkers]

Many factors contribute to food inflation.

But the hard truth is that only ONE factor is a result of a policy decision -- corn ethanol. There would be no demand for corn ethanol without the stimulus of subsidies, mandates, protective tariffs and tax credits Corn Belt politicians and Big Ethanol lobbyists have forced on the rest of us.

We can do little about drought or those Indians and Chinese who want to increase their quality of life, but we can alter the misguided policies that have created what is a completely artificial "demand" for ethanol from corn.

[fran]

the literacy /knowledge level of world/USA economic, energy, political factors illustrated herein/above are truly AMAZING.

[dieuwer]

People have been looking at the all the wrong reasons for high prices of commodities and everything else.
The final reason why prices will keep rising is the unabated rise in the supply of human beings. At present there are more than 6 BILLION people on the planet that all need food, water, and energy to live. The world's population, on its current growth trajectory, is expected to reach nearly 9 BILLION by the year 2050! Almost 50% more! MADNESS!!!
Where is all the food coming from? All the water? Energy anyone?
The real and only solution to problems is to curb DRASTICALLY the people supply. I know this sounds immoral,, but a WW-III would do...

[stockmaven]

It is a pity to see basic food supply like corn being used as "fuel" and to boot it costs us a lot more $$$. Between increased cost of gas and the tax subsidy of over $.50 a gallon, not to mention the crisis at the grocery store that it is contributing to, the policy is a disaster.
Yes prices are rising, wheat has a fungus and costs are soaring but do we need dumb policies to add to our burden here.
Either make ethanol out of garbage or give it up. Corn is too needed in our lives.

[User 77995]

Nuclear? No. The cost and risk is too high for private financing and uranium has to be mined.

[Gary Dikkers]

rickrents said: <i>"Let's not forget every dollar spend for gas goes to the people who want to kill us!!!"</i>

Don't be so hyperbolic. Most of our gasoline comes from Canada and Mexico. I don't know where your paranoia comes from, but I don't think there are any Mexicans or Canadians out to kill me.

Dollars that go to Mexico or Canada stay in North America.

dieuwer said: <i>"People have been looking at the all the wrong reasons for high prices of commodities and everything else. The final reason why prices will keep rising is the unabated rise in the supply of human beings."</i>...

You are absolutely correct -- we are fast outstripping the load carrying capacity of the planet. If the earth had only two billion people, there would be no energy shortage, no global warming, no peak oil, and no peak water.

[Ames Tiedeman]

It is simply 1 piece of this rotten pie.

[cindyz]

Regarding oil imports - Canada is our largest exporter, Saudi Arabia is second and Mexico is third. Added together, Canada and Mexico amount to about 3,131,000 barrels per day (according to latest EIA figures for this year). Adding together only Saudi Arabia, Venezuela and Iraq

[cindyz]

the total is 3,236,000 barrels per day. And there are other countries that are unfriendly to the US on the list. So, you are wrong, Gary.

[Gary Dikkers]

Cindy,

You are correct, I should have said "much" of our oil comes from Canada and Mexico, not "most" of it. But my point remains valid ~ Rickrents said "...every dollar spend for gas goes to the people who want to kill us." That is clearly not the case, unless he has a problem with the Canadians and Mexicans (fellow North Americans, by the way) who do provide much of our oil.

In case you are interested, for 2007 the Top 10 exporters of "finished" gasoline to the U.S. in millions of barrels were:

1. United Kingdom 25.147 million barrels (total for the year)
2. U.S. Virgin Islands 23.590
3. France 11.209
4. Canada 10.605
5. Netherlands 10.518
6. Norway 8.406
7. Germany 8.351
8. Russia 7.387
9. Italy 7.239
10. OPEC Countries 5.516

That is finished gasoline, not oil, and you should note there are not many on that list who want to kill us as rickrents so recklessly suggests.

Have you ever realized the Big Ethanol talking point rickrents is trying to make about dollars spent for oil going to terrorists, could also apply to the dollars spent on synthetic nitrogen fertilizer made from natural gas?

More than 60% of the synthetic nitrogen our corn farmers use is imported after being made from foreign natural gas. He could just as easily have said, "Let's not forget, almost every dollar spent on imported nitrogen fertilizer goes to the people who want to kill us!!!

[pinkclouds17]

Actually, there are several reasons as to why
nuclear energy is not, and will never be the best alternative for fuel.
Here are just a few contentions:

1. Nuclear energy provides too great of a residual risk - nuclear facilities and plants, not to mention disposal sites, aren't currently equipped with efficient technology to prevent a widescale attack or a man-made accident.
2. Nuclear proliferation...must i say more?
3. Nuclear energy mainly consists of uranium and thorium. Estimates state that the U.S only has enough uranium to last us 40-50 years---at the point where it's not a renewable resource, we'll only end up spending BILLIONS to end up in another perpetual cycle of high fuel prices.
4. The only reason why nuclear energy is the cheapest form of energy right NOW, is because we barely use it.....when we become dependent, billions will be spent into building new facilities and the Law of Supply & Demand will kick in = Demand increases, $ increases
5. Nuclear energy IS NOT CLEAN. According to Greenpeace, the U.N., and the SDC, nuclear energy releases CO2 and radioactive waste...so yes, it does harm the environment
Alternative Plan--we continue investing in RENEWABLE resources such as solar, wind, geothermal, hyro and wave power. Indeed, all of these have their faults...as seen with biofuel, but they are 100 times more efficient and environmentally friendly than "Going Nuclear"

I rest my case.

On Apr 23 12:49 AM NUKE wrote:

> Yeah! Let's burn some COAL to produce ETHANOL. That's the dream ticket
> for global warming!
> Come on America, let's wake up and look around the world. We have
> plenty of cheap nuclear energy. And it has zero effect on global
> warming. I know what you are thinking. What are we gonna do with
> the nuclear waste? Well, that's the price we have to pay. But, it's
> much less damaging than fossil fuel.