Massive Diversion of U.S. Grain to Fuel Cars is Raising World Food Prices, Risking Political Instability
Briefing before U.S. Senate Committee on Environment and Public Works,
Senator Barbara Boxer (D-CA), Chair, June 13, 2007
Lester R. Brown
The escalating share of the U.S. grain harvest going to ethanol distilleries is driving up food prices worldwide. Investment in fuel ethanol distilleries has soared since gasoline prices jumped at the end of 2005. Once completed, distilleries now under construction could double U.S. ethanol output, turning nearly 30 percent of next year's U.S. grain harvest into fuel for automobiles. This unprecedented diversion of the world's leading grain crop to the production of fuel will affect food prices everywhere, risking political instability.
The U.S. corn crop, accounting for 40 percent of the global harvest and supplying nearly 70 percent of the world's corn imports, looms large in the world food economy. Annual U.S. corn exports of some 55 million tons account for nearly one fourth of world grain exports. The corn harvest of Iowa alone exceeds the entire grain harvest of Canada. Substantially reducing this export flow would send shock waves throughout the world economy.
In six of the last seven years, total world grain production has fallen short of use. As a result, world carryover stocks of grain have been drawn down to 57 days of consumption, the lowest level in 34 years. (See data.) The last time they were this low wheat and rice prices doubled.
Already corn prices have doubled over the last year, wheat futures are trading at their highest level in 10 years, and rice prices are rising. Soybean prices are up by half. If the United States were to suffer intense heat and severe drought this summer in the Corn Belt, rising grain prices could quickly take the world into uncharted territory.
The countries initially hit by rising food prices are those where corn is the staple food. In Mexico, one of more than 20 countries with a corn-based diet, the price of tortillas is up by 60 percent. Angry Mexicans in crowds of up to 75,000 have taken to the streets in protest, forcing the government to institute price controls on tortillas.
Food prices are also rising in China, India, and the United States, countries that contain 40 percent of the world's people. While relatively little corn is eaten directly in these countries, vast quantities are consumed indirectly. The milk, eggs, cheese, chicken, ham, ground beef, ice cream, and yogurt in the typical refrigerator are all produced with corn. In effect, the refrigerator is filled with corn. And the price of every one of these items in the refrigerator is affected by the price of corn.
Rising grain and soybean prices are driving up meat and egg prices in China. January pork prices were up 20 percent above a year earlier, eggs were up 16 percent, while beef, which is less dependent on grain, was up 6 percent. For China, which suffered the most massive famine in human history in 1959-61, these food price rises could be approaching a politically dangerous level.
In India, the overall food price index in January 2007 was 10 percent higher than a year earlier. The price of wheat, the staple food in northern India, has jumped 11 percent, moving above the world market price.
In the United States, the U.S. Department of Agriculture projects that the wholesale price of chicken in 2007 will be 10 percent higher on average than in 2006, the price of a dozen eggs will be up a whopping 21 percent, and milk will be 14 percent higher. And this is only the beginning.
In the past, food price rises have usually been weather related and always temporary. This situation is different. As more and more fuel ethanol distilleries are built, world grain prices are starting to move up toward their oil-equivalent value in what appears to be the beginning of a long-term rise.
The food and energy economies, historically separate, are now merging. In this new economy, if the fuel value of grain exceeds its food value, the market will move it into the energy economy. As the price of oil climbs so will the price of food. If oil jumps from $60 to $80 a barrel, you can bet that your supermarket bills will also go up. If oil climbs to $100, how much will you pay for a dozen eggs?
From an agricultural vantage point, the automotive demand for fuel is insatiable. The grain it takes to fill a 25-gallon tank with ethanol just once will feed one person for a whole year. Converting the entire U.S. grain harvest to ethanol would satisfy only 16 percent of U.S. auto fuel needs.
Since the United States is the leading exporter of grain, shipping more than Canada, Australia, and Argentina combined, what happens to the U.S. grain crop affects the entire world. With the massive diversion of grain to produce fuel for cars, exports will drop. What was for decades the world's breadbasket is fast becoming the U.S. fuel tank.
The number of hungry people in the world has been declining for several decades, but in the late 1990s the trend reversed and the number began to rise. The United Nations currently lists 34 countries as needing emergency food assistance. Many of these are considered failing states, including Chad, Iraq, Liberia, Haiti, and Zimbabwe. Since food aid programs typically have fixed budgets, if the price of grain doubles, food aid will be reduced by half.
Urban food protests in response to rising food prices in low and middle income countries, such as Mexico, could lead to political instability that would add to the growing list of failing states. At some point, spreading political instability could disrupt global economic progress.
Against this backdrop, Washington is consumed with "ethanol euphoria." President Bush in his State of the Union address set a production goal for 2017 of 35 billion gallons of alternative fuels, including grain-based and cellulosic ethanol, and fuel from coal. Given the current difficulties in producing cellulosic ethanol at a competitive cost and given the mounting public opposition to coal fuels, which are far more carbon-intensive than gasoline, most of the fuel to meet this goal might well have to come from grain. This could take most of the U.S. grain harvest, leaving little grain to meet U.S. needs, much less those of the hundred or so countries that import grain.
The stage is now set for direct competition for grain between the 800 million people who own automobiles, and the world's 2 billion poorest people. The risk is that millions of those on the lower rungs of the global economic ladder will start falling off as rising food prices drop their consumption below the survival level.
Soaring food prices could lead to urban food riots in scores of lower-income countries that rely on grain imports, such as Indonesia, Egypt, Algeria, Nigeria, and Mexico. The resulting political instability could in turn disrupt the global economy, directly affecting all countries.
There are alternatives to this grim scenario. A rise in auto fuel efficiency standards of 20 percent, phased in over the next decade would save as much oil as converting the entire U.S. grain harvest into ethanol.
One option that is gaining momentum is a shift to plug-in hybrids. Adding a second storage battery to a gas-electric hybrid car along with a plug-in capacity so that the batteries can be recharged at night allows most short-distance driving-daily commuting and grocery shopping, for example-to be done with electricity. If this shift were accompanied by investment in hundreds of wind farms that could feed cheap electricity into the grid, then cars could run largely on electricity for the equivalent cost of less than $1 per gallon gasoline.
Ethanol euphoria is not an acceptable substitute for a carefully thought through policy. Do we really want to subsidize a rise in food prices? For Washington, it is time to decide whether to continue with the current policy of subsidizing more and more grain-based fuel distilleries or to encourage a shift to more fuel-efficient cars and a new automotive fuel economy centered on plug-in hybrid cars and wind energy. The choice is between a future of rising world food prices, spreading hunger, and growing political instability, or one of stable food prices, sharply reduced dependence on oil, and much lower carbon emissions.
As the leading grain producer, grain exporter, and ethanol producer, the United States is in the driver's seat. We need to make sure that in trying to solve one problem-our dependence on imported oil-we do not create a far more serious one: chaos in the world food economy.
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Lester R. Brown is President of the Earth Policy Institute and author of Plan B 2.0: Rescuing a
Planet Under Stress and a Civilization in Trouble.
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