Monday, January 28, 2008

[PBN] Ethanol and food prices in 2008


Earth Policy Institute Plan B Update January 24, 2008
By Lester R. Brown

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.(See data at

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 assistance. 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

Lester R. Brown is President of the Earth Policy Institute and author of
Plan B 3.0: Mobilizing to Save Civilization.
For a more detailed discussion of this issue, see Chapter 2 in Plan B
3.0, available for free downloading at
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