How Ethanol Fuels the Food Crisis

In the year since the publication of our article, "How Biofuels Could Starve the Poor" (May/June 2007), the average price of corn has increased by some 60 percent, soybeans by 76 percent, wheat by 54 percent, and rice by 104 percent. What at first seemed alarmist has turned out to be an underestimate of the effects of biofuels on both commodity prices and the natural environment. These price increases are substantial threats to the welfare of consumers, especially in poor developing countries facing food deficits. They are especially burdensome to the rural landless and the urban poor, who produce no food at all. Josette Sheeran, the Executive Director of the World Food Program, calls this a global "tsunami of hunger." Robert Zoellick, President of the World Bank, estimates that there are 100 million newly poor and hungry people as a result of rising food prices.

Although controversy remains over how much of the food price increase since 2006 can be attributed to biofuels, their effects cannot be overlooked. In 2008, 30 percent of the U.S. corn crop will be used for ethanol. Although economic growth in developing countries (especially India and China) and poor crop conditions in certain parts of the food-exporting world (such as Australia) are part of the explanation for rising commodity prices worldwide, neither offers constructive opportunities for policy redirection. By contrast, the panoply of subsidies, tariffs and mandates protecting the biofuels sector, especially in the United States and the European Union, is ripe for reform.

Last year, we predicted that upward pressure on petroleum prices would persist, allowing ethanol producers to pay higher and higher prices for corn. At the time, oil prices were approximately $70 per barrel and rising while corn prices were roughly $3.75 per bushel and rising. But few observers, ourselves included, imagined that within a year oil prices would reach $130 per barrel and corn futures would exceed $6 per bushel. Meanwhile, despite a near doubling of U.S. corn ethanol production (from 3.4 billion gallons in 2004 to 6.5 billion gallons in 2007), infrastructure and distribution problems created local gluts of ethanol while the ethanol price increased only moderately. As a result, profit margins in the ethanol industry plummeted from an average of $3.40 per gallon in June 2006--when corn was still relatively cheap--to 60 cents per gallon by May 2008. Many ethanol investors pulled back, some expansion plans were cancelled, and much of the bullishness over biofuels faded.

Moreover, the supposedly "green" virtues of biofuels are not quite what they seemed. In fact, biofuels pose major risks to the environment. In October 2007, the Nobel Prize winning chemist Paul Crutzen, who pioneered the atmospheric science of ozone depletion, co-authored an article demonstrating that the heavy application of nitrogen fertilizer on corn (for ethanol) and on European rapeseed (for vegetable-oil biodiesel) would produce such high levels of atmospheric nitrous oxide--which is 296 times more damaging as a greenhouse gas than carbon dioxide--that it would have a net negative effect on greenhouse gas emissions.

In early 2008, two articles in showed that forests or grasslands converted for the production of biofuels will immediately incur a "carbon debt," due to the release of carbon dioxide from biomass and soil. This long "payback" for biofuels is disappointing in light of the urgency of global warming. The second study demonstrated that biofuel production often displaces crops, moving them to new areas where further land-use conversions are required. In the Corn Belt of the Midwest, biofuels helped to convert nearly 20 million acres from soybean production to corn production in 2007, pushing soybean prices higher while encouraging extensive applications of nitrogen and phosphorus fertilizers that run off into lakes and streams, enter the Mississippi River, and eventually reach the Gulf of Mexico where they have created an oxygen-starved "dead zone." The authors found that such land-use changes nearly double greenhouse emissions over 30 years, and increase greenhouse gases for 167 years.

The current biofuels craze is neither clean nor green. Instead, it has disrupted food and commodities markets and inflicted heavy penalties on poor consumers. These developments have occurred despite record global grain harvests in 2007. Our analysis (and virtually everyone else's), assumes that normal trends in grain yields will continue or improve. But U.S. corn yields, despite dramatic increases over the last half-century, have also shown significant departures from trend, including decreases of roughly 30 percent in some years due to adverse weather. Planting delays this spring in the Corn Belt due to wetter, cooler conditions are beginning to raise concerns about this year's crop. And, as reported recently in the , many economists "believe that food inflation will rise faster than the USDA estimate and likely continue into 2009."

The policy response to these pressures, in both rich and poor countries, has not been encouraging. Rather than reducing the mandates, subsidies, and tariffs that buttress the ethanol industry, the U.S. government has larded new agricultural legislation in Congress with further subsidies and shifted blame to other countries (or to economists). The one token reduction came in the recent farm bill, which trimmed the ethanol subsidy from 51 to 45 cents per gallon--hardly a significant change.

Political protests and riots related to rising food prices have occurred in a number of developing countries including Egypt, Guinea, Haiti, Indonesia, Mauritania, Mexico, Morocco, the Philippines, Senegal, and Yemen. In response, several governments have increased food subsidies, imposed price controls, restricted exports, and cut duties on food imports. Russia has imposed a 40 percent tariff on wheat exports, essentially halting them. Argentina, normally a major wheat exporter, has slowed exports. Vietnam, usually the second largest rice exporter after Thailand, has banned rice exports at least until the new crop comes to market. These trade restrictions reduce the supply available on the world market and drive global prices of these grains even higher, aggravating global price instability.

Nearly a decade ago, we published an article in ("A Removable Feast," May/June 2000) calling attention to global food insecurity and warning that distractions from the role of trade and investment in poor developing countries could erase the positive impact that increased agricultural productivity has had when it comes to reducing global hunger. Biofuels have become just such a distraction, threatening both food security and the natural environment. It is now time for governments to respond, not with more trade distortions and subsidies, but by ending the failed policies that have created an artificial industry that is emptying the stomachs and purses of the world's poor.