Ethanol and High Food Prices

It is not often that a stroke of a pen can quickly undo the ravages of nature, but federal regulators now have an opportunity to do just that. Americans’ food budgets will be hit hard by the ongoing Midwestern drought, the worst since 1956. Food bills will rise and many farmers will go bust.

An act of God, right? Well, the drought itself may be, but a human remedy for some of the fallout is at hand — if only the federal authorities would act. By suspending renewable-fuel standards that were unwise from the start, the Environmental Protection Agency could divert vast amounts of corn from inefficient ethanol production back into the food chain, where market forces and common sense dictate it should go.

From an excellent New York Times op-ed by Colin Carter, from the Department of Agricultural and Resource Economics at the UC Davis, and Henry Miller, a senior fellow at Stanford’s Hoover Institution.

Here is a telling series of numbers from the same op-ed:

More than one-third of our corn crop is used to feed livestock. Another 13 percent is exported, much of it to feed livestock as well. Another 40 percent is used to produce ethanol. The remainder goes toward food and beverage production.

Many people are fond of blaming commodity speculators for high food prices, but from what I know, there is little to no evidence that commodity speculation caused a substantial increase in food prices either this year, or in the past two food crises.

Likewise, I have not seen any credible evidence that increased demand for food in China and India has led to higher prices. The best evidence I have seen was based on simulation models, but I tend to be skeptical of those.

Sure, based on the numbers above, you can say that eating meat is an important cause of high food prices. But a substantial decrease in meat consumption would require cultural change, both here and abroad. Good luck with that, especially when increased protein consumption leads to improved health outcomes in poorer countries.

Rather, many food policy experts agree that renewable-fuel standards have caused a substantial increase in food prices. So I agree with Carter and Miller, especially since gas prices are not particularly high these days.

I’m all for cleaner air and fewer fossil fuels, but society faces tradeoff, and this is a perfect example of an important tradeoff.

The solution to the environmental issues caused by fossil fuels goes through $10 per gallon of gasoline. Only that will stimulate the demand for public transportation infrastructures in major American metropolitan areas (and no, unlike many people in this country, I don’t think driving a car is a human right). But with our election-minded politicians, only a catastrophe will make that possible.

A great read on the topic of food prices, and what causes them to increase, is Patrick Westhoff’s The Economics of Food, the hardcover version of which sells for $16.