Ethanol May Drive World Food Prices Higher

Ethanol May Drive World Food Prices Higher

Feb, 2008  - 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. 
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. 
{Lester R. Brown is founder and president of Earth Policy Institute. He is 
the author of numerous books, including "Plan B 2.0: Rescuing a Planet 
Under Stress and a Civilization in Trouble" where he develops a vision for 
an environmentally sustainable economy. His principal research areas 
include food, population, water, climate change, and renewable energy. The 
recipient of scores of awards and honorary degrees, in 1974, he founded 
Worldwatch Institute, of which he was president for its first 26 years.}

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