Thursday, June 19, 2008

How Will Demand for Ethanol Affect Food Prices?

Lester Brown of the Earth Policy Institute writes, “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.” This taken alone could be seen as one man’s opinion about the process of using staple foodstuffs to create fuel. However at a time when the economy already seems to be in crisis, the process of taking food traditionally meant for our dinner table to put in our gas tanks, put’s people at odds with themselves.

Corn, soybeans and wheat have all reached or breached all time highs for price per bushel. As a result the food items made from these products have seen significant increases in cost. The drastic increase in prices in America has been less evident than in countries which are less developed. For instance, in Pakistan flour prices have doubled. In industrialized nations our mechanization tends to soften the blow but even that is changing. In recent months America has begun to see its share of food inflation. The cost of milk has gone up about 30% while bread costs are up over 15%. In Italy pasta prices are up 22%.

Add to this the weather woes that have befallen the Midwest where a large part of the American corn, wheat and soybean crops are grown. Currently a great many of those crops are underwater and it remains to be seen if any can be salvaged. According to Agribusiness experts some 3 million acres of corn was destroyed by the flooding. Because of the damage to the corn crops from which a great deal of the livestock feed is made, the cost of beef and pork will also see a rise in costs.

The demand on corn for ethanol production was already creating a scarcity effect. Add to that the recent related crop catastrophes and it is easy to see how Mr. Brown’s words take on some credence.

Historically food has never been in the same economic ball park with fuel. It’s sort of like if they started making bullets out of butter. It would change the whole scheme of things. Now because of the either or scenario. Whether grains are usurped by the energy economy has to do with the perceived value. If the energy industry is willing to pay more to turn grains into ethanol then the world will suffer as the grain stores go to the highest bidder. The energy industry has the deep pockets so they can pay well above what the market will bear. That does not appear to bode well for food economies. According to the Earth Policy institute, projections show the number of hungry people increasing to 1.2 billion by 2025.

Lest you think the rising food prices are just about hunger, understand that a hungry person is prone to instability. Take a nation of hungry people and you have problems. Already countries are imposing sky high tariffs and in some cases banning exports out right. In some places social unrest comes as a result of the frustration at the rising costs. In 2007 Mexico saw the tortilla riots, where some 75000 people protested the rising cost of tortillas. It seems laughable but beneath the surface it is about the price of corn and the trade off that is being made. People across the world depend on products made of corn. As ethanol demand increases, corn prices rise and food makers can not compete. In addition to Mexico, Italy saw pasta protests and in Jakarta, some 10,000 Indonesians protested the doubling of soybean prices that has raised the price of tempeh. Tempeh is the national staple of Indonesia. In Chongqing, China, a store offered a sale on cooking oil. Currently in China cooking oil prices are at an all time high. So many people showed up for the sale that there was a stampede. Three people were killed and 31 injured.

America has not seen anything like this however; we have another problem to ponder. According to Mr. Brown, “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.”

As it turns out, by continuing to subsidize the conversion of grain into ethanol, we are in effect causing a rise in our own food prices. It may be time to look at an alternative to the alternative before things really get out of hand.–2008_world_food_price_crisis