Food and Fuel

Are subsidies for corn based ethanol causing a food shortage?  There is some debate over this question.  From the Financial Times:

Biofuels still have strong political support in many countries. Angela Merkel, Germany’s chancellor, said last week: “Those rising global food prices have nothing to do [with] biofuels.”

But Rob Bailey of Oxfam said: “We want the government to stop adding fuel to the fire by subsidising the diversion of land to biofuels production.”

Agriculture diplomats are concerned that governments are focusing on biofuels as the main reason for rising food prices. They argue that the use of agricultural land and crops for fuel is only part of a mix of problems including higher demand in Asia, climate change, declining growth in farming productivity and water scarcity.

All around the world high food prices are stimulating unrest:

According to the UN Food and Agricultural Organisation, the price of wheat is more than 80 percent higher than a year ago and corn (maize) prices are up by a quarter. Prices for vegetable oils are increasing at similar rates. The organization also reported that the food price index, based on export prices for 60 internationally-traded foodstuffs, climbed 37 percent last year, on top of a 14 percent increase in 2006, and the trend has accelerated this winter.

The effects of this are already visible. Earlier this year protests erupted in Pakistan over wheat shortages and in Indonesia over soybean shortages. Egypt has banned rice exports to keep food at home and China has put price controls on cooking oil, grain, meat, milk and eggs. Food riots have occurred over the last few months in Guinea, Mauritania, Mexico, Uzbekistan, Senegal and Yemen.

Stephen Bainbridge clearly blames government policy:

The massive increase in the amount of corn being diverted into ethanol production is almost entirely a product government policy rather than market forces. In turn, government policy has been driven by interest group politics. Corn farmers, large agricultural businesses, and a subset of the environmental movement have combined into an unholy alliance that few politicians are willing to buck.

For a good discussion of this issue see this Foreign Affairs debate between Tom Daschle and two University of Minnesota economists. Daschle argues:

Having lived through three decades of debates about ethanol, I can attest that the critics of biofuels have often warned of a coming food crunch as a result of the competition for inputs needed to produce both food and fuel....Over the next several decades, the doomsayers were proved wrong: productivity gains for corn averaged nearly three percent per year, and the annual U.S. corn crop increased from approximately seven billion bushels in 1980 to nearly 12 billion bushels in 2006.

The economists reply:

First, we, too, know that meat-producing animals eat more than half of the U.S. corn crop. But people do eat chicken, eggs, pork, steak; drink milk; and consume foods containing cornmeal, corn oil, and corn sweeteners. U.S. consumers spend over 20 percent of their food budgets on meat, eggs, and dairy. And the share of the corn crop used to produce ethanol will rise from less than ten percent in 2004 to an expected 20-25 percent of the crop next year. As more acres are devoted to corn, fewer acres are available for other types of dairy feed, such as alfalfa, or for table vegetables, such as green beans. As a result, milk and vegetable prices are rising. And as acres are bid away from soybeans and turned over to corn, the price of soybean-based feed is also increasing, adding to the pressure on meat prices.

Obviously, read the whole thing to get the entire argument. 

This much seems clear, current policy towards ethanol is misguided.  The economists have it right: the policy is driving up food costs.  Meanwhile, the policy does little to decrease fuel prices.  First, as Bainbridge notes, we exclude much cheaper Brazilian bio-fuels made with sugar cane.  This is done solely as a sop to American farmers.  It is also well documented that the high energy use of producing and transporting corn based ethanol makes its effect on overall energy price questionable.  A smarter energy policy increases oil production by drilling offshore and in Alaska while encouraging efficiency by heavily subsidizing hybrid automobiles.