We are witnessing the beginning of one of the great tragedies of history. 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.
The world is facing the most severe food price inflation in history as grain and soybean prices climb to all-time highs.
Wheat trading on the Chicago Board of Trade on December 17th breached the $10 per bushel level for the first time ever. In
mid-January, corn was trading over $5 per bushel, close to its historic high. And on January 11th, soybeans traded at
$13.42 per bushel, the highest price ever recorded. All these prices are double those of a year or two ago.
As a result, prices of food products made directly from these commodities such as bread, pasta, and tortillas, and those
made indirectly, such as pork, poultry, beef, milk, and eggs, are everywhere on the rise. In Mexico, corn meal prices are
up 60 percent. In Pakistan, flour prices have doubled. China is facing rampant food price inflation, some of the worst in
decades.
In industrial countries, the higher processing and marketing share of food costs has softened the blow, but even so, prices
of food staples are climbing. By late 2007, the U.S. price of a loaf of whole wheat bread was 12 percent higher than a year
earlier, milk was up 29 percent, and eggs were up 36 percent. In Italy, pasta prices were up 20 percent.
World grain prices have increased dramatically on three occasions since World War II, each time as a result of
weather-reduced harvests. But now it is a matter of demand simply outpacing supply. In seven of the last eight years world
grain production has fallen short of consumption. These annual shortfalls have been covered by drawing down grain stocks,
but the carryover stocks—the amount in the bin when the new harvest begins—have now dropped to 54 days of world
consumption, the lowest on record.
From 1990 to 2005, world grain consumption, driven largely by population growth and rising consumption of grain-based
animal products, climbed by an average of 21 million tons per year. Then came the explosion in demand for grain used in
U.S. ethanol distilleries, which jumped from 54 million tons in 2006 to 81 million tons in 2007. This 27 million ton jump
more than doubled the annual growth in world demand for grain. If 80 percent of the 62 distilleries now under construction
are completed by late 2008, grain used to produce fuel for cars will climb to 114 million tons, or 28 percent of the
projected 2008 U.S. grain harvest.
Historically the food and energy economies have been largely separate, but now with the construction of so many fuel
ethanol distilleries, they are merging. If the food value of grain is less than its fuel value, the market will move the
grain into the energy economy. Thus as the price of oil rises, the price of grain follows it upward.
A University of Illinois economics team calculates that with oil at $50 a barrel, it is profitable—with the ethanol subsidy
of 51¢ a gallon (equal to $1.43 per bushel of corn)—to convert corn into ethanol as long as the price is below $4 a bushel.
But with oil at $100 a barrel, distillers can pay more than $7 a bushel for corn and still break even. If oil climbs to
$140, distillers can pay $10 a bushel for corn—double the early 2008 price of $5 per bushel.
The World Bank reports that for each 1 percent rise in food prices, caloric intake among the poor drops 0.5 percent.
Millions of those living on the lower rungs of the global economic ladder, people who are barely hanging on, will lose
their grip and begin to fall off.
Projections by Professors C. Ford Runge and Benjamin Senauer of the University of Minnesota four years ago showed the
number of hungry and malnourished people decreasing from over 800 million to 625 million by 2025. But in early 2007 their
update of these projections, taking into account the biofuel effect on world food prices, showed the number of hungry
people climbing to 1.2 billion by 2025. That climb is already under way.
Since the budgets of international food aid agencies are set well in advance, a rise in food prices shrinks food a
ssistance. The U.N. World Food Programme (WFP), which is now supplying emergency food aid to 37 countries, is cutting
shipments as prices soar. The WFP reports that 18,000 children are dying each day from hunger and related illnesses.
As grain prices climb, a politics of food scarcity is emerging as exporting countries restrict exports to limit the rise in
domestic food prices. At the end of January, Russia—one of the top five wheat exporters—will impose a 40-percent export tax
on wheat, effectively banning exports. Argentina, another leading wheat exporter, closed export registrations for wheat
indefinitely in early December until it could assess the condition of the new crop. And Viet Nam, the number two rice
exporter after Thailand, has banned rice exports for several months and will likely not lift this ban until the new crop
comes to market.
Rising food prices are translating into social unrest. It began in early 2007 with tortilla demonstrations in Mexico. Then
came pasta protests in Italy. More recently, rising bread prices in Pakistan have become a source of unrest. In Jakarta,
10,000 Indonesians gathered in front of the presidential palace on January 14th this year to protest the doubling of
soybean prices that has raised the price of tempeh, the national soy-based protein staple. When a supermarket in Chongqing,
China, where cooking oil prices have soared, offered this oil at a reduced price, the resulting stampede when doors opened
killed three people and injured 31.
As economic stresses translate into political stresses, the number of failing states, such as Afghanistan, Somalia, Sudan,
the Democratic Republic of the Congo, and Haiti, which was already increasing before the rise in food prices began, could
increase even faster.
There is much to be concerned about on the food front. We enter this new crop year with the lowest grain stocks on record,
the highest grain prices ever, the prospect of a smaller U.S. grain harvest as several million acres of land that shifted
from soybeans to corn last year go back to soybeans, the need to feed an additional 70 million people, and U.S. distillers
wanting 33 million more tons of grain to supply the new ethanol distilleries coming online this year. Corn futures prices
for December 2008 delivery are higher than those for March, suggesting that market analysts see even tighter supplies
after the next harvest.
Whereas previous dramatic rises in world grain prices were weather-induced, this one is policy-induced and can be dealt
with by policy adjustments. The crop fuels program that currently satisfies scarcely 3 percent of U.S. gasoline needs is
simply not worth the human suffering and political chaos it is causing. If the entire U.S. grain harvest were converted
into ethanol, it would satisfy scarcely 18 percent of our automotive fuel needs.
The irony is that U.S. taxpayers, by subsidizing the conversion of grain into ethanol, are in effect financing a rise in
their own food prices. It is time to end the subsidy for converting food into fuel and to do it quickly before the
deteriorating world food situation spirals out of control.