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 Published on Monday, January 28, 2008 by The Christian Science Monitor
As Global Food Costs Rise, Are Biofuels To Blame?
Converting corn and soybeans into fuels is contributing to higher food
prices. The dispute is how much.
http://www.csmonitor.com/2008/0128/p03s03-usec.html

The biofuels industry plans on producing record amounts of ethanol this
year to meet a mandate of the new US energy law - and will need a lot of
corn to do it. At the same time, global food prices are at near-peak
levels. The question is, how big is the connection between those two
developments?0128 07

It’s a topic getting more scrutiny as the world enters 2008 with the
lowest grain stockpiles on record, near-record grain prices, and prospects
for even tighter supplies as global demand rises for food and fuel.

Political instability over higher food prices is a key concern. Last year
saw tortilla demonstrations in Mexico, pasta protests in Italy, and unrest
in Pakistan over bread prices. Soybean prices, meanwhile, prompted
demonstrations in front of Indonesia’s presidential palace. Food
inflation in China is a major problem.

But the connection between the expansion of biofuels and higher global food
prices is not clear cut, with the biofuels industry saying its impact is
relatively small and biofuel critics saying that ethanol plants are driving
up the price of corn and biodiesel producers are taking a bite out of the
soybean crop.

“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,” says Lester Brown, president of the Earth
Policy Institute (EPI), an environmental think tank in Washington. World
population growth will require food for an additional 70 million people
this year, the EPI said in a report last week.

Driven mostly by population growth, world grain consumption rose an average
of 21 million tons per year from 1990 to 2005, the US Department of
Agriculture reported this month. Demand for grain to make ethanol soared by
27 million tons last year, USDA reported.

“Putting [corn-ethanol] land back into food use would have a profound
effect on the price of corn,” says Bruce Babcock, an economist at Iowa
State University’s Food and Agricultural Policy Research Institute. This
year, he estimates, the US will produce about 8 billion gallons of ethanol.
To do that, nearly one-fifth of the 80 million acres now devoted to corn
will go to make ethanol.

That demand is helping to boost feed prices for cattle, as well as for
crops like peas and beans because less land is devoted to growing them, he
says.

In a counterpoint study last month by corn growers and the biofuels
industry, higher corn prices were found to be only a small element in
rising food costs overall - although higher energy costs for fuel to
transport crops and grow them were a larger factor.

“This analysis puts to bed the argument that a growing domestic ethanol
industry is solely responsible for rising consumer food prices,” Bruce
Scherr, CEO of Informa Economics, a food and agriculture research and
consulting firm based in Memphis, Tenn., said in a statement.

The “farm value” of commodity raw materials used in foods accounts for
19 percent of total US food costs, down from 37 percent in the 1973. Higher
costs for labor, packaging, transportation, and energy were a “key
driver” behind higher food costs, the report said.

While higher corn prices cause lower profit margins for livestock and
poultry producers, “the statistical evidence does not support a
conclusion that there is a strict ‘food-versus-fuel’ trade-off”
driving consumer food prices higher, the study said.

Whatever the reason, prices for grains such as corn and soybeans are up.
Despite a record US corn crop in fall 2007, corn prices are near a record
high of about $5 a bushel in mid-January.

Because corn is feedstock, higher corn prices can affect food prices. The
average price of milk rose 29 percent last year, for instance, and eggs 36
percent.

“More people are coming to the conclusion that there is a food-fuel
link,” says Siwa Msangi of the International Food Policy Research
Institute (IFPRI), a Washington food-security research organization. “The
historic pattern of the past, where food prices were in a long-term
decline, could be at an end.”

But the major reason grain prices are spiking, he and others note, is
fast-rising demand for higher-quality food like meat, poultry, and dairy
products by the increasingly affluent people of China and India.

Still, biofuels play a role in higher grain prices, says Dr. Babcock.

His findings are bolstered by a study last month in which Mr. Msangi’s
IFPRI estimated that future biofuel expansion could increase international
corn prices between 26 and 72 percent by 2020, depending on how aggressive
the expansion turns out to be.

Under two scenarios IFPRI examined, “the increase in crop prices
resulting from expanded biofuel production was accompanied by a net
decrease in the availability of … food” for the world’s poor, the
study found.

As prices rise, of course, producers worldwide have incentive to grow more
corn - or other crops, such as wheat, that might be in demand instead of
corn.

But that’s not happening yet. In an apparent effort to moderate food
prices and quell social unrest - which in turn curbs growers’ incentive
to produce more - Russia this month is expected to place a 40 percent
export tax on wheat. Argentina, too, has limited its wheat exports.

“The price of corn, soybeans, and livestock feed is not going to go
down,” Babcock says. America’s new energy bill “pretty much
guarantees that feed costs and land rent are going to stay high.”

© 2008 The Christian Science Monitor