In 2008, many economists were surprised by the rising prices of maize, rice, wheat and petroleum, all of which tripled in real terms. Prices came down, but ever since, it’s been a rocky road.
Blame part of it on an increase in demand and natural disasters. Floods in Australia, drought in Argentina, fires in Russia, and frost damage in the U.S. and Europe contributed to the spike in food prices in December 2010, according to the Food and Agriculture Organization (FAO). These events resulted in export bans and short-term speculation, causing riots and political instability in more than 30 countries worldwide.
But part of the problem derives from ethanol production. In the U.S., 40% of corn production from food and feed is used for ethanol fuel production, putting stress on corn supplies in a year when stocks are at the lowest level in decades. People living in the 52 high-risk countries -- 750 million of them already malnourished -- rely on 83 billion tons of imported food a year, much of it corn, soybeans and wheat exported by the United States.
The problem is particularly acute in developing nations. “Economically, prices have a small impact on the food prices in the U.S., though this cannot be said for the developing countries,” said Sheila Karpf, legislative and policy analyst at the Environmental Working Group (EWG).
More than $3 of every $4 in tax credits the U.S. federal government provides for renewable energy goes to corn ethanol.
“The U.S. stubbornly continues to subsidize corn ethanol, even as the ripple effects of burning our food for fuel are felt by citizens worldwide,” she added.
“Corn prices are higher than they’d be if we didn’t have the biofuel industry. People who primarily subsist on corn make $2 a day or less and spend 60% of their budget on food and are seriously hurt by higher prices,” said Walter P. Falcon, deputy director of the Food Security and the Environment Program and Farnsworth professor of International Agricultural Policy at Stanford University.
Exports for Biofuels
A typical biofuel plant consumes about 50,000 barrels of corn daily or 20 million bushels annually, representing 5% of the U.S. oil consumption for one day. In other words, the U.S. is using almost 20% of its corn for biofuel, producing about 22.40 billion liters of ethanol.
Over the last two years, the amount of corn fed to U.S. livestock fell by 3 million metric tons, while corn shipments to ethanol producers grew by 33 million tons.
“The U.S. is a large exporter of corn and much of what we normally exported is now used for ethanol production,” said Falcon. There has also been “a serious decline in investments in agricultural research and technology” over the past two decades, he added.
“The U.S. misestimated corn stocks. When the ratio of stock to use goes below 20%, the market doesn’t have enough flexibility, and we are now substantially below that ratio,” Falcon said.
Biofuels makers often stress that they use a mere 3% of the global grain supply. Still, the additional demand causes more profound ripples in the price of staples. A rise in prices can be further magnified by perceptions and fears.
“People -- for example, Asian consumers -- buy a second bag of rice, fearing that prices are rising,” noted Falcon.
An option to tackle the problem of hunger could be addressed by introducing GMOs, but, as Karpf stressed, “biotechnology is not bad, but [it should not be pursued] at the expense of [harming] the environment to increase yields.”
She pointed out that the environment is suffering from fertilizers, soil erosion, natural weather disasters and other problems. Sustainable farming seems a more appropriate way, she suggests. Nonetheless, sustainable farming -- at the volumes of food required to feed the growing global population -- is challenging.
The silver lining could be found in history and the rhythms of commodity pricing. Once perceptions fade, prices return to something akin to stability. Prices are higher, but the acceleration and the panic they can cause subside.
“I don’t see a decline in the real prices. I see leveling off, but not a rise,” Falcon said.