Ethanol and the steep rise in food prices

December 24, 2007

A thought provoking vew from outside the U.S.:

by Iman Kurdi/Arab News

As we prepare for our holiday festivities, spare a thought for the world’s hungry. The good news is that more people today can afford to eat meat. Economic growth in countries like India and China has meant that millions of people whose diet was once low on meat and high on grain are now able to eat a richer and more varied diet.

The bad news is that those who are very poor are having to pay substantially more for their food. Prices of main staples — corn, rice, and wheat — have risen by as much as 50 percent over the last year. For those rich enough to buy food from a supermarket, the price rises have not gone unnoticed, but food makes up such a relatively small proportion of household budgets that it causes little more than a grumble. Oh yes, there was an attempt to boycott pasta for a day in Italy but even that was a flop with most consumers shrugging their shoulders at the idea of doing without pasta for a day.

The very poor by contrast do not have such choices. The poorer you are, the higher the proportion of your income accounted for by food. If you are living at subsistence level — as so many in Afghanistan are for instance — these price rises could make the difference between life and death.

So why have food prices risen so steeply over the last year? Why has the price of wheat risen by 52 percent over the course of the last 12 months? Why are we suddenly seeing the price of food go up when over the last decade prices have been steadily falling? Whatever happened to cheap food? Where are the butter mountains and the milk lakes that the EU’s Common Agricultural Policy once produced? In fact, didn’t the EU actually pay some farmers NOT to grow crops? So why all of a sudden is a food shortage being spoken of? Why are reserves of cereals so severely depleted that there are only 8 weeks of corn left and 12 weeks of wheat?

Some of it is down to the usual suspects — draughts, floods, and storms. For instance draught has hit Southern Australia for the second year running thus hitting wheat crops, and leading to suggestions that we are seeing one of the first effects of global warming. However though we have seen some poor harvests this year, overall the opposite is the case. If anything it has been a bumper year for grain crops. The International Grains Council estimates that this year will see the largest global cereals crop on record.

So where’s it all going? An abundance of food is being produced yet there is less food available to eat, why? The answer is simple: Much of this food is no longer being grown for human consumption.

More meat being eaten means more cattle being fed. When you eat a kilo of beef, you are eating the equivalent of eight kilos of grain. As demand for meat rises, so does the demand for feed grains. An obvious consequence is that farmers switch crops. Hence we have seen a steep rise in the production of feed grains.

But changing diets only explain part of the reason. The main culprit is ethanol. To put it bluntly, the steep rise in food prices can largely be pinned on the current American administration’s blinkered desire to promote alternatives to oil. Of course high oil prices encourage the development of alternative fuels. But that is not the problem. While greener fuels are a good thing, subsidies that dramatically distort food production are not. Filling up one SUV tank — just one car’s tank! — with ethanol takes up the equivalent corn that would feed a person for a year.

Of course the greener option would be to use Brazilian ethanol, made not with corn but with sugarcane, but import tariffs price it out of the market and artificially prop up US ethanol production.

And that’s not all. Ethanol subsidies have effectively diverted around a third of American maize production. They have also made it so lucrative for farmers to grow maize that they have quite logically switched crops, taking out land that would otherwise have been used to grow other crops, thus reducing the supply of wheat and soybeans for instance.

The result is the rampant prices of wheat, rice, corn and other cereals we are seeing today, as well as the knock-on effects on milk and other key foods.

And is ethanol that green? Is it really the pollution solution? Or is the impetus for its promotion more to do with energy politics than environmental concerns?

In recent times we have become accustomed to cheap food, too accustomed perhaps. Higher agricultural prices more accurately reflect the real price of food. It is clear that we need to readjust the way we think about food. In the West, food has become disposable. We often buy food with little thought for where it has come from and buy more than we need or consume — as the colossal amount of food that is wasted each day shows. Meanwhile in developing countries, agriculture has been in decline for decades, with countries that once produced food becoming net importers. Industrial farming methods as well as state subsidies and import tariffs have starved poorer countries of the ability to compete.

When you think that three quarters of the world’s poor live in rural areas, it seems evident that higher agricultural prices provide an opportunity for higher incomes for farmers. Reality may prove to be quite different. Rich farmers will doubtless become richer. But will poorer farmers get a chance to catch up?

Somehow I doubt it. Government intervention in richer countries is likely to continue to artificially prop up agriculture in richer countries, whilst government intervention in poorer countries is likely to continue to attempt to control food prices. Meanwhile, the real cost of feeding the world’s poorest people will continue to rise to unprecedented levels.

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