Has Ethanol Led to Food Riots? No, Says A&M Report
Yes, food prices worldwide are rising and basic foods are in short supply. But it's hard to put all the blame for riots in Haiti and shortages in India on corn ethanol in the U.S.
With Haiti torn by riots over the price of rice and beans and food shortages in India, Egypt and the Philippines (where the Wall Street Journal reported that rice shortages have become "acute"), the common cauase of the world-wide food crisis has been assumed to be biofuels.
India's finance minister, Palaniappan Chidambaram said, "When millions of people are going hungry, it's a crime against humanity that food should be diverted to biofuels." An official from Turkey said the use of food for fuel was "appalling," according to the Wall Street Journal.
In this morning's New York Times, reporter Andrew Martin reports that "reaction is building against policies in the United States and Europe to promote ethanol and similar fuels, with political leaders from poor countries contending that these fuels are driving up food prices and starving poor people. Biofuels are fast becoming a new flash point in global diplomacy, putting pressure on Western politicians to reconsider their policies, even as they argue that biofuels are only one factor in the seemingly inexorable rise in food prices."
Exactly how much of the undeniable rise in food prices is caused by the use of food crops for biofuel? A little, but not nearly as much as the "crime against humanity" outcry would imply. And, according to a recent report from Texas A&M University, the use of corn to make biofuels has had very little impact on food prices at all.
Prices are going higher, but there are a number of causes that vary crop by crop. Worldwide wheat prices are up, it's true. But the cause is largely the weather, according to the Texas A&M report and the New York Times. U.S. farmers planted fewer acres of wheat and rain damaged the harvest across the Southern Plains. Also, "a record drought in Australia sharply cut supplies from that major world supplier of wheat," according to Texas A&M. "Tighter supplies in other major producing regions of the world have been the major cause of record prices."
(The Texas A&M report is titled "The Effects of Ethanol on Texas Food and Feed" and was produced by the Agricultural and Food Policy Center. It can be downloaded here.)
Finding the exact cause of higher prices is hard work. New financial markets are leading to greater swings in prices for commodities, for example. C. Ford Runge, a University of Minnesota economist, told the Times that it is "extremely difficult to disentangle" the effect of biofuels on food prices. But reducing biofuels mandates was one way that governments could help reduce the upward pressure on prices on food, Runge said.
Others disagree, saying the rise in food prices is the result of a failure in many countries to support agricultural development over the past generation while demand for food has soared. Besides, notes August Schumacher, a consultant to the Kellogg Foundation, much of the world food crisis concerns wheat and rice, two crops that aren't used to produce biofuels.
Corn is the feedstock of choice for U.S. ethanol plants and corn prices have risen recently. The U.S. Congress last year mandated higher levels of blending ethanol into regular oil-based fuel, up to 13.2 billion gallons by 2012. And corn prices have risen with this increased demand.
But the A&M report concludes that "corn prices have had little to do with rising food costs." What's driving food prices higher, the report concludes, is higher energy costs, greater labor costs and higher demand.
For example, bread, egg and milk prices have all jumped sharply higher recently, but A&M finds that these high prices "are largely unrelated to ethanol or corn prices, but correspond to fundamental supply/demand relationships in the world." In other words, prices are going higher for these products because more people around the world want to — and can afford to — buy them.
Moreover, reducing the federal ethanol blending mandate would not significantly reduce corn prices, according to the A&M economists who prepared the report. As long as oil remains expensive, there will be demand for ethanol.
What the A&M report hammers home is that farm prices for food have relatively little effect on the store prices for food. Simply, the cost of food leaving the farm gate has been a decreasing portion of the store price of food for more than three decades.
In 1970, the farm share of the retail value of bread amounted was 16 percent. (That is, 16 percent of the cost of a loaf of bread on the shelf went to pay the farmer.) By 2002, it was 5 percent. The farm share of the retail cost of all food in 1970 was 32 percent. By 2002, it had dropped to 19 percent.
Sen. Charles E. Grassley, the Iowa Republican, said it was a "big joke" to blame ethanol for the world food crisis while ignoring the Australian drought and the higher demand for food from China. Grassley said these problems had little to do with the price of corn, a product many food ministers from countries critical of ethanol would have little use for.
"You make ethanol out of corn," Grassley told the Times. "I bet if I set a bushel of corn in front of any of those delegates, not one of them would eat it."