Severe drought in the Midwest has resulted in widespread crop failure, causing spikes in food prices. Already, the costs of basic food commodities have shot to new highs: this week, corn traded at $8.14 a bushel, a new record. Food prices are expected to continue increasing as the effects of the drought deplete existing food supplies. While the drought is the primary cause of the recent shocks in the food market, there is also an underlying policy that has artificially bolstered the market prices for years.
Ethanol and its mandated use by the federal government have put significant pressure on already strained market prices. This year alone, 13.2 billion gallons of ethanol are required by law to be blended with gasoline as part of the Renewable Fuel Standards Program. That amount represents about half of the U.S. corn crop to be harvested this year.
Crafted with the best intentions, the program is part of a broader effort to reduce foreign oil consumption and decrease greenhouse gas emissions. To some extent, the two objectives can be considered successful from certain perspectives. Slowly, but surely, consumption of foreign oil has decreased, thanks in large part to the increasing use of ethanol. Also, when ethanol is compared directly to gasoline, it does produce lower greenhouse gas emissions, when greenhouse gases released during ethanol production are not considered.
The mandate, however, has sparked a series of unintended consequences. When a large portion of agricultural land is diverted for the production of fuel rather than food, the costs of food are going to increase. Because of their relatively high incomes, Americans can comfortably absorb the costs, but those living in extreme poverty do not fare as well. In countries such as Pakistan, Kenya, and Cameroon, food expenditures already absorb 40 percent or more of an average citizen’s income. For the 1.3 billion people in the world that live on less than $1.25 a day, even the smallest changes in food prices are devastating: slight increases can spell the difference between satisfaction and starvation. Regretfully, Ethanol can fuel the cycle by pushing people in food-importing countries into even deeper poverty.
It doesn’t help that the world’s hungry are forced to compete with energy companies for food. A mere 25 gallons of ethanol requires 450 pounds of corn, enough to meet the caloric needs of a person for an entire year. By that reckoning, the ethanol mandate siphons off agricultural production that could otherwise feed 528 million. Regardless of food consumption choice, the volatility impacts all food prices; as a major agricultural supplier, the U.S. decision to grow extra corn for ethanol raises other prices because of the tradeoff from growing other crops such as wheat, rice, and soybeans. Economic studies testify to the fact: estimates vary, but conservative ones suggest that the ethanol mandate was responsible for 20 percent of world food price increases between 2005 and 2011.
Mandating the use of ethanol with static quotas adds a particularly troubling dynamic to the mix. Regardless of what happens, the mandate injects a certain degree of fixed demand that cannot be changed in times of supply constraints. In a free market, should the price of corn increase, the demand for corn goes down in response, providing a relief mechanism against rising food costs. The current regime, however, requires the same amount ethanol, failing to take into account changes in the market.
If food prices go up in developing nations, the resulting impact may be political instability. In many countries that are struggling to maintain a fragile system of governance, pressures on the food supply may be the tipping point. Between 2007 and 2009, more than 60 food-related riots occurred, two of which played a large part in toppling the governments of Egypt and Tunisia. The recent drought–coupled with the ethanol mandate–is once again creating the conditions for a perfect storm, one that many analysts believe will dwarf the food crisis of 2008. With corn and soybeans already at record highs, it is only a matter of time before popular discontent erupts once again. As Oxfam’s food policy advisor Ruth Kelly observed:
The toxic combination of a heatwave in the US, which is decimating corn harvests, and the unwavering global demand for biofuels, is again pushing the price of basic food stuffs higher and higher.
Numerous organizations have called for a freeze or complete halt to ethanol mandates. Amongst the most prominent are the World Bank and the Food and Agriculture Organization of the United Nations; both have called on developed countries to reassess the impact their biofuel blending requirements have on international food prices and to make adjustments to minimize the impact. Assuming the scheduled mandates remains in effect, food prices are projected to increase another 10 to 15 percent.
To say the least, attempts to conjure fuel from corn have badly backfired. Ethanol is more expensive than gasoline, reduces gas mileage, and does not reduce carbon emissions in a cost-effective manner. By these standards, the fuel could be considered inefficient, but it continues for other reasons. The usage of ethanol is closely tied with agricultural interests and Congressional initiative to advance their agenda. Ultimately, the shortcomings of ethanol begs the question of why there is a mandate at all: if it is as good as advertised, it would be unnecessary to require that food be put in cars.