[Foodplanning] Commentary: Biofuels Growth May Cause Increase In Food Costs

[Ashwani Vasishth]

http://www.earthpolicy.org/Updates/2008/Update69.htm

January 24, 2008 - 1
Copyright © 2008 Earth Policy Institute

Why Ethanol Production Will Drive World Food Prices Even Higher in 2008

Lester R. Brown

We are witnessing the beginning of one of the 
great tragedies of history. The United States, in 
a misguided effort to reduce its oil insecurity 
by converting grain into fuel for cars, is 
generating global food insecurity on a scale 
never seen before.

The world is facing the most severe food price 
inflation in history as grain and soybean prices 
climb to all-time highs. Wheat trading on the 
Chicago Board of Trade on December 17th breached 
the $10 per bushel level for the first time ever. 
In mid-January, corn was trading over $5 per 
bushel, close to its historic high. And on 
January 11th, soybeans traded at $13.42 per 
bushel, the highest price ever recorded. All 
these prices are double those of a year or two 
ago.

As a result, prices of food products made 
directly from these commodities such as bread, 
pasta, and tortillas, and those made indirectly, 
such as pork, poultry, beef, milk, and eggs, are 
everywhere on the rise. In Mexico, corn meal 
prices are up 60 percent. In Pakistan, flour 
prices have doubled. China is facing rampant food 
price inflation, some of the worst in decades.

In industrial countries, the higher processing 
and marketing share of food costs has softened 
the blow, but even so, prices of food staples are 
climbing. By late 2007, the U.S. price of a loaf 
of whole wheat bread was 12 percent higher than a 
year earlier, milk was up 29 percent, and eggs 
were up 36 percent. In Italy, pasta prices were 
up 20 percent.

World grain prices have increased dramatically on 
three occasions since World War II, each time as 
a result of weather-reduced harvests. But now it 
is a matter of demand simply outpacing supply. In 
seven of the last eight years world grain 
production has fallen short of consumption. These 
annual shortfalls have been covered by drawing 
down grain stocks, but the carryover stocks-the 
amount in the bin when the new harvest 
begins-have now dropped to 54 days of world 
consumption, the lowest on record. (See data.)

From 1990 to 2005, world grain consumption, 
driven largely by population growth and rising 
consumption of grain-based animal products, 
climbed by an average of 21 million tons per 
year. Then came the explosion in demand for grain 
used in U.S. ethanol distilleries, which jumped 
from 54 million tons in 2006 to 81 million tons 
in 2007. This 27 million ton jump more than 
doubled the annual growth in world demand for 
grain. If 80 percent of the 62 distilleries now 
under construction are completed by late 2008, 
grain used to produce fuel for cars will climb to 
114 million tons, or 28 percent of the projected 
2008 U.S. grain harvest.

Historically the food and energy economies have 
been largely separate, but now with the 
construction of so many fuel ethanol 
distilleries, they are merging. If the food value 
of grain is less than its fuel value, the market 
will move the grain into the energy economy. Thus 
as the price of oil rises, the price of grain 
follows it upward.

A University of Illinois economics team 
calculates that with oil at $50 a barrel, it is 
profitable-with the ethanol subsidy of 51¢ a 
gallon (equal to $1.43 per bushel of corn)-to 
convert corn into ethanol as long as the price is 
below $4 a bushel. But with oil at $100 a barrel, 
distillers can pay more than $7 a bushel for corn 
and still break even. If oil climbs to $140, 
distillers can pay $10 a bushel for corn-double 
the early 2008 price of $5 per bushel.

The World Bank reports that for each 1 percent 
rise in food prices, caloric intake among the 
poor drops 0.5 percent. Millions of those living 
on the lower rungs of the global economic ladder, 
people who are barely hanging on, will lose their 
grip and begin to fall off.

Projections by Professors C. Ford Runge and 
Benjamin Senauer of the University of Minnesota 
four years ago showed the number of hungry and 
malnourished people decreasing from over 800 
million to 625 million by 2025. But in early 2007 
their update of these projections, taking into 
account the biofuel effect on world food prices, 
showed the number of hungry people climbing to 
1.2 billion by 2025. That climb is already under 
way.

Since the budgets of international food aid 
agencies are set well in advance, a rise in food 
prices shrinks food assistance. The U.N. World 
Food Programme (WFP), which is now supplying 
emergency food aid to 37 countries, is cutting 
shipments as prices soar. The WFP reports that 
18,000 children are dying each day from hunger 
and related illnesses.

As grain prices climb, a politics of food 
scarcity is emerging as exporting countries 
restrict exports to limit the rise in domestic 
food prices. At the end of January, Russia-one of 
the top five wheat exporters-will impose a 
40-percent export tax on wheat, effectively 
banning exports. Argentina, another leading wheat 
exporter, closed export registrations for wheat 
indefinitely in early December until it could 
assess the condition of the new crop. And Viet 
Nam, the number two rice exporter after Thailand, 
has banned rice exports for several months and 
will likely not lift this ban until the new crop 
comes to market.

Rising food prices are translating into social 
unrest. It began in early 2007 with tortilla 
demonstrations in Mexico. Then came pasta 
protests in Italy. More recently, rising bread 
prices in Pakistan have become a source of 
unrest. In Jakarta, 10,000 Indonesians gathered 
in front of the presidential palace on January 
14th this year to protest the doubling of soybean 
prices that has raised the price of tempeh, the 
national soy-based protein staple. When a 
supermarket in Chongqing, China, where cooking 
oil prices have soared, offered this oil at a 
reduced price, the resulting stampede when doors 
opened killed three people and injured 31.

As economic stresses translate into political 
stresses, the number of failing states, such as 
Afghanistan, Somalia, Sudan, the Democratic 
Republic of the Congo, and Haiti, which was 
already increasing before the rise in food prices 
began, could increase even faster.

There is much to be concerned about on the food 
front. We enter this new crop year with the 
lowest grain stocks on record, the highest grain 
prices ever, the prospect of a smaller U.S. grain 
harvest as several million acres of land that 
shifted from soybeans to corn last year go back 
to soybeans, the need to feed an additional 70 
million people, and U.S. distillers wanting 33 
million more tons of grain to supply the new 
ethanol distilleries coming online this year. 
Corn futures prices for December 2008 delivery 
are higher than those for March, suggesting that 
market analysts see even tighter supplies after 
the next harvest. 

Whereas previous dramatic rises in world grain 
prices were weather-induced, this one is 
policy-induced and can be dealt with by policy 
adjustments. The crop fuels program that 
currently satisfies scarcely 3 percent of U.S. 
gasoline needs is simply not worth the human 
suffering and political chaos it is causing. If 
the entire U.S. grain harvest were converted into 
ethanol, it would satisfy scarcely 18 percent of 
our automotive fuel needs.

The irony is that U.S. taxpayers, by subsidizing 
the conversion of grain into ethanol, are in 
effect financing a rise in their own food prices. 
It is time to end the subsidy for converting food 
into fuel and to do it quickly before the 
deteriorating world food situation spirals out of 
control.

Copyright © 2008 Earth Policy Institute

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