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Corn, Ethanol Production and Food Prices -- It's Not So Simple
The rapid escalation of food prices in the past few years, peaking in June/July of 2008, exacerbated hunger in the United States and around the world and prompted serious reflection on the causes. One contributor and source of controversy is the use of food – especially corn -- as feedstock for biofuel production. While some decry the dichotomy of “food versus fuel” and the impact of biofuel production on local economies and the environment, others argue that biofuels provide valuable opportunities to reduce dependence on fossil fuels and generate income for farmers without significantly raising food prices. A new Bread for the World Institute internal discussion paper explores these issues and finds that the reality is not so easily distilled to a slogan or a sound bite.
Consensus has emerged that global biofuel production accounted for 40 percent of the corn price increase in 2008. The translated into perhaps 10-15 percent of the total recorded increase in food prices in 2008, which was roughly 5 percent. Since, in the U.S., average spending on food is less than 6 percent of total household expenditure, that increase is relatively insignificant. This is not the case in poor countries where food expenditures constitute a much greater share of household income – as much as 80 percent in some cases.
The increased demand for corn as a feedstock for ethanol could continue to raise food prices if demand for corn, whether for animal feed or ethanol, increases at a faster pace than production. Higher petroleum prices, which increase farmers’ production costs, could also affect consumer food prices regardless of the pace of ethanol production, as would further displacement of soy cropland for corn.
Organizations which share Bread for the World’s commitment to poor and hungry people have expressed concern about the impact of biofuel production in developing countries. Some argue that biofuels provide an important opportunity for developing nations to contribute to the global economy and increase their export earnings. However, there are concerns lest this come at the expense of access to food and equitable opportunities for income generation. Domestic subsidies and import tariffs on the part of industrial nations further constrain prospects for biofuels to contribute significantly to development by hindering developing nations’ ability to export competitively.
Several tools other than the blunt instruments of mandates and subsidies now in effect in the US might offer better alternatives for advancing U.S. energy independence, reducing greenhouse gas emissions and stabilizing corn prices to the benefit of farmers and consumers alike. Government regulation of carbon emissions through capping or taxing output would encourage innovation and reduce the use of fossil fuels without contributing to the volatility of commodities markets. Cap-and-trade offers an alternative means of promoting more environmentally sound policies which allow for greater flexibility and ingenuity in developing fuels sources with lower GHG emissions.
Regulation of commodities markets could also safeguard food prices. Although higher prices can benefit farmers, the extreme volatility in evidence in the course of 2008 definitely does not. Rep. Peterson’s Derivatives Markets Transparency and Accountability Act of 2009 (H.R. 977), aims to prevent investment strategies from disrupting prices and impairing markets’ ability to reflect supply and demand forces.
Others suggest price supports and grain reserves as a better way to stabilize reasonable corn prices that would provide security to both farmers and to the poor and hungry. Similar voices also argue in support of sustainable agricultural practices that reduce energy consumption and re-focusing the energy debate on conservation and consumption rates.
In sum, the question of biofuels, namely the use of corn for ethanol, is more complicated than its frequent designation as cure or curse. The challenges that the industry both faces and presents are broadly reflective of shortcomings in both national and international policies, and the impact of corn-based ethanol production on food prices, greenhouse gas emissions and rural development in this country and overseas provides an important perspective on U.S. policies and the ways in which they demonstrate, or fail to demonstrate, consideration for the poor and the hungry of the nation and the world. In light of these nuanced realities, reflexive responses regarding corn-based ethanol should be replaced by principles that consider the full impact of biofuel-related trade and domestic economic policies on the poor.
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