If you think you are spending more each week at the supermarket, you may be right. The escalating share of the U.S. grain harvest going to ethanol distilleries is driving up food prices worldwide.
Corn prices have doubled over the last year, wheat futures are trading at their highest level in 10 years, and rice prices are rising too. In addition, soybean futures have risen by half. A Bloomberg analysis notes that the soaring use of corn as the feedstock for fuel ethanol “is creating unintended consequences throughout the global food chain.”
The countries initially hit by rising food prices are those where corn is the staple food. In Mexico, one of more than 20 countries with a corn-based diet, the price of tortillas is up by 60 percent. Angry Mexicans in crowds of up to 75,000 have taken to the streets in protest, forcing the government to institute price controls on tortillas.
Food prices are also rising in China, India, and the United States, countries that contain 40 percent of the world’s people. While relatively little corn is eaten directly in these countries, vast quantities are consumed indirectly in meat, milk, and eggs in both China and the United States.
Rising grain and soybean prices are driving up meat and egg prices in China. January pork prices were up 20 percent above a year earlier, eggs were up 16 percent, while beef, which is less dependent on grain, was up 6 percent.
In India, the overall food price index in January 2007 was 10 percent higher than a year earlier. The price of wheat, the staple food in northern India, has jumped 11 percent, moving above the world market price.
In the United States, the U.S. Department of Agriculture projects that the wholesale price of chicken in 2007 will be 10 percent higher on average than in 2006, the price of a dozen eggs will be up a whopping 21 percent, and milk will be 14 percent higher. And this is only the beginning.
In the past, food price rises have usually been weather related and always temporary. This situation is different. As more and more fuel ethanol distilleries are built, world grain prices are starting to move up toward their oil-equivalent value in what appears to be the beginning of a long-term rise.
The food and energy economies, historically separate, are now merging. In this new economy, if the fuel value of grain exceeds its food value, the market will move it into the energy economy. As the price of oil climbs so will the price of food.
Some 16 percent of the 2006 U.S. grain harvest was used to produce ethanol. With 80 or so ethanol distilleries now under construction, enough to more than double existing ethanol production capacity, nearly a third of the 2008 grain harvest will be going to ethanol.
Since the United States is the leading exporter of grain, shipping more than Canada, Australia, and Argentina combined, what happens to the U.S. grain crop affects the entire world. With the massive diversion of grain to produce fuel for cars, exports will drop. The world’s breadbasket is fast becoming the U.S. fuel tank.
The number of hungry people in the world has been declining for several decades, but in the late 1990s the trend reversed and the number began to rise. The United Nations currently lists 34 countries as needing emergency food assistance. Many of these are considered failed and failing states, including Chad, Iraq, Liberia, Haiti, and Zimbabwe. Since food aid programs typically have fixed budgets, if the price of grain doubles, food aid will be reduced by half.
Urban food protests in response to rising food prices in low and middle income countries, such as Mexico, could lead to political instability that would add to the growing list of failed and failing states. At some point, spreading political instability could disrupt global economic progress.
Against this backdrop, Washington is consumed with “ethanol euphoria.” President Bush in his State of the Union address set a production goal for 2017 of 35 billion gallons of alternative fuels, including grain-based and cellulosic ethanol, and liquefied coal. Given the current difficulties in producing cellulosic ethanol at a competitive cost and given the mounting public opposition to liquefied coal, which is far more carbon-intensive than gasoline, most of the fuel to meet this goal might well have to come from grain. This could take most of the U.S. grain harvest, leaving little grain to meet U.S. needs, much less those of the hundred or so countries that import grain.
The stage is now set for direct competition for grain between the 800 million people who own automobiles, and the world’s 2 billion poorest people. The risk is that millions of those on the lower rungs of the global economic ladder will start falling off as higher food prices drop their consumption below the survival level.
In February 2007 the World Food Programme Director James T. Morris reported that 18,000 children are now dying every day from hunger and malnutrition. This daily loss of life is six times the number of U.S. combat fatalities in Iraq over the last four years.
There are alternatives to this grim scenario. A rise in auto fuel efficiency standards of 20 percent, phased in over the next decade would save as much oil as converting the entire U.S. grain harvest into ethanol.
One option that is gaining momentum is a shift to plug-in hybrids. Adding a second storage battery to a gas-electric hybrid car along with a plug-in capacity so that the batteries can be recharged at night allows most short-distance driving — daily commuting and grocery shopping, for example — to be done with electricity. If this shift were accompanied by investment in thousands of wind farms that could feed cheap electricity into the grid, then cars could run largely on electricity for the equivalent cost of $1 per gallon gasoline.
Encouragingly, three auto manufacturers — Toyota, Nissan, and GM — have announced plans to bring plug-in hybrid cars to market. Plug-In Partners, which is spearheading a national campaign to shift to plug-in hybrid cars, already has 508 partners, including electrical utilities, corporations, state and city governments, and farm and environmental groups. Among its fast-growing list of partners are the American Public Power Association, Electric Power Research Institute, American Wind Energy Association, American Corn Growers Association, and the cities of Los Angeles, Dallas, Chicago, and Boston. Already a number of Partners have collectively pledged to purchase for their own fleets more than 8,000 plug-in hybrids as soon as they reach the market.
Ethanol euphoria is not an acceptable substitute for a carefully thought through policy. For Washington, it is time to decide whether to continue with the current policy of subsidizing more and more grain-based fuel distilleries or to encourage a shift to more fuel-efficient cars and a new automotive fuel economy centered on plug-in hybrid cars and wind energy. The choice is between a future of rising world food prices, spreading hunger, and growing political instability, or one of stable food prices, sharply reduced dependence on oil, and much lower carbon emissions.
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