Battling Ethanol-Propelled Food Prices

April 19, 2008 — -- Food prices worldwide have risen dramatically in the past few years, due in part to a similarly dramatic rise in the amount of corn used for ethanol production in the United States. Now, in an effort to make food less expensive, experts are calling for limits on ethanol production, subsidies for corn, and more incentives for biofuels made from nonfood sources.

According to statistics released Wednesday by the U.S. Department of Labor, food prices for the first three months of the year rose at a rate that translates to an annual increase of 5.3 percent (adjusted for seasonal variations). That's slightly higher than last year's increase, and much higher than the increases in previous years. From 2001 to 2006, the price of food increased each year by an average of only 2.5 percent. According to the World Bank, the situation worldwide is more dire: food prices have nearly doubled over the past three years. That's erased a decade of economic gains for the poor in some countries.

Part of this increase is due to corn being diverted from use as animal feed and food to use as a feedstock for ethanol production. Many other factors are also important--such as growing demand for food imports in India and China and a drought in Australia that hurt grain harvests. But the use of corn for biofuels has been singled out because it is one factor over which governments have some control. Some analysts, such as C. Ford Runge, a professor of applied economics and law at the University of Minnesota, say that the use of corn for fuel rather than food could account for about one-third of the rise in prices worldwide. The other two-thirds is split between the effects of weather and increases in demand, he says. (Runge presents his argument in "How Biofuels Could Starve the Poor," in Foreign Affairs.) A look at the grain markets gives a good idea of the role that ethanol demand plays in food prices, says Patrick Westhoff, codirector of the Food and Agricultural Policy Research Institute at the University of Missouri. In the past two years, global consumption of grains has risen by about 80 million tons, he says. About half of that increase, or 40 million tons, comes from corn used to make ethanol.

To reverse the effects of corn going to fuel rather than to food, some experts are calling for an end to the biofuel mandates signed into law late last year. The mandates require an increase in biofuel production in the United States, including 15 billion gallons of corn ethanol production by 2015--considerably more than the 6.5 billion gallons produced last year. Repealing the mandates would certainly have some effect on food prices, Westhoff says. According to an analysis done by his organization, the mandates will decrease U.S. corn exports by more than 13 percent from 2011 to 2016. That decrease will tighten corn supplies worldwide, driving up not only corn prices, but also the prices of other staples, such as wheat, that could serve as a replacement for corn. Removing the mandates could improve export numbers, Westhoff says. (Notably, higher demand for corn for use in ethanol production has actually increased corn exports in the short term. High corn prices have led farmers to plant more corn, and last year, not all of the increased supply went to ethanol. Much of the excess went overseas.)

But the effect of repealing the mandates on food prices depends strongly on the cost of energy. If oil prices stay around $100 a barrel, ethanol will remain an attractive alternative even without the mandates, Westhoff says. As a result, ethanol production could reach levels as high as those set by the mandates anyway, putting just as much strain on the corn supply. High energy costs increase food prices in other ways, too, says Simla Tokgöz, an economic analyst at the Center for Agricultural and Rural Development at Iowa State University. Growing crops takes energy, and countries that have to import food are now paying a high price for shipping because of fuel costs. Bringing down food prices requires addressing these problems as well.

One thing that could help is reducing or eliminating subsidies that give corn ethanol an economic advantage over ethanol from other sources, such as sugar cane, Runge says. Ethanol can be made from sugar more efficiently than it can from corn, so diversion of sugar to fuel production wouldn't have as much of an effect on food markets.

Scaling up technology for making ethanol from nonfood sources, such as grass and wood chips, could also help. Federal grants are already starting to make that happen, and certain provisions in the U.S. biofuels mandates call for the use of cellulosic ethanol. But so far, technologies for producing cellulosic ethanol have not been commercially deployed. The jump in food prices "increases the urgency to get them developed," says Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University.

Here again, reducing subsidies could help. Runge says that corn ethanol is squeezing out cellulosic ethanol. With corn prices at record highs, farmers have no incentive to plant the best cellulosic crops. Reducing or eliminating corn subsidies could help level the playing field. "You've got to induce farmers to grow the plants you're going to use for [cellulosic] feedstocks, rather than corn," Runge says.

But even if alternative approaches to increasing energy supply catch on, he says, ultimately, people need to use less. "I think the most important thing we could do in the United States would be to develop incentives and regulation encouraging aggressive conservation," Runge says.