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
