Ethanol Praised as Food Stocks Fall, Prices Rise

By David L. Brown

The world is slipping into an era of shortages — shortages of clean water, shortages of energy, shortages of food in many areas. This is largely a result of human population growth and the resulting depletion of resources. Malthus predicted these limits more than two centuries ago, and with more than six and a half billion humans on the planet it appears that we are exceeding the numbers that the Earth can support.

As shortages become a general condition, it is not surprising that conflicts arise between those who have and those who want or need the various commodities that are becoming more scarce. One of the saddest developments, in my opinion, is the spill-over between energy and food supplies that has resulted in the ethanol boom in the U.S. This is something that Malthus could never have foreseen, and a subject that we have written much about.

And the mad rush to insanity continues. In its November-December issue, the magazine AgriMarketing, published by the National Agricultural Marketing Association, has named its “Product of the Year”. The winner was not a new combine, genetically modified plant, or feed supplement for cattle (although these were among the runners-up). No, the winner was … ethanol!

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The magazine devoted a number of pages to extolling this “product,” fuel alcohol made primarily from corn. According to an editorial by publisher Lynn Henderson, ethanol “has truly ushered in a new renaissance age for crop producers.”

Well, pish and bother. As the magazine itself points out (although buried in a pile of positive praise for ethanol that reminds me of something that might be encountered at the back end of a large feedlot), there are some problems. Prices for corn have risen to the point that most ethanol producers are barely breaking even, so that “construction of some ethanol plants have been halted and some that were on the drawing boards are not being built.”

Nay-sayers are portrayed like the Grinch that stole Christmas. “In addition, the product has been at the center of a food versus fuel debate, principally instigated and publicized by food and oil companies, industry insiders report,” the magazine says.

Well, the “bad press” about ethanol (as AgriMarketing calls it) is not just hype but based on real world facts, as anyone who has shopped for groceries recently will be aware. I note that T-bone steaks are going for ten bucks or more and milk is approaching five dollars a gallon. That is because the cost of corn, soybeans and other animal feeds has nearly doubled because of the demand for corn as feedstock for ethanol production.

The December 8 issue of The Economist takes on this problem with an article titled “Cheap no more.” The article bears the subhead “Rising incomes in Asia and ethanol subsidies in America have put an end to a long era of falling food prices.”

So, just to make the situation clear, as richer and more numerous people in Asia and elsewhere are striving to improve their diets (or in the case of the poor, simply to survive), entrepreneurs in America are diverting food crops to produce fake gasoline for the sole purpose of generating financial profits. The Economist reports:

In early September the world price of wheat rose to over $400 a tonne, the highest ever recorded. In May it had been around $200. Though in real terms its price is far below the heights it scaled in 1974, it is still twice the average of the past 25 years. Earlier this year the price of maize (corn) exceeded $175 a tonne, again a world record. It has fallen from its peak, as has that of wheat, but at $150 a tonne is still 50% above the average for 2006.

As the price of one crop shoots up, farmers plant it to take advantage, switching land from other uses. So a rise in wheat prices has knock-on effects on other crops. Rice prices have hit records this year, although their rise has been slower. The Economist‘s food-price index is now at its highest since it began in 1845, having risen by one-third in the past year.

Food stocks are teetering on the brink of insolvency, and that means big trouble ahead for a world where already perhaps a billion people are living on the verge of famine. In America, millions of acres formerly devoted to wheat, rice, soybeans and cotton are being diverted to corn to feed the hunger of ethanol plants that have sprouted up like weeds across the nation. Government subsidies have helped to fuel the growth of ethanol production and the resulting spike in grain prices

Defenders of the ethanol industry point the finger to other factors such as increasing world demand as the true reason for rising food costs. And they are correct to a degree, but the demand for food is in a different class from demand for corn to produce ethanol. Yes, there are other factors, but according to The Economist:

Ethanol is the dominant reason for this year’s increase in grain prices. It accounts for the rise in the price of maize because the federal government has in practice waded into the market to mop up about one-third of America’s corn harvest. A big expansion of the ethanol programme in 2005 explains why maize prices started rising in the first place.

Ethanol accounts for some of the rise in the prices of other crops and foods too. Partly this is because maize is fed to animals, which are now more expensive to rear. Partly it is because America’s farmers, eager to take advantage of the biofuels bonanza, went all out to produce maize this year, planting it on land previously devoted to wheat and soyabeans. This year America’s maize harvest will be a jaw-dropping 335m tonnes, beating last year’s by more than a quarter. The increase has been achieved partly at the expense of other food crops.

In the Third World, where many people earn as little as one dollar a day, food is the major item in the family budget and survival is a day-to-day struggle. When you live in a tin shack subsisting on a marginal diet of thin gruel, any significant increase in the price of corn or wheat is absolutely devastating.

Not only can the very poorest ill afford to pay more for food, but they might not be able to get it at all as scarcity spreads and richer nations bid for the available supplies. As long as they can afford it, those with revenues from oil or exports, Saudi Arabia and China for example, will continue to buy whatever quantities they need to feed their people, no matter what the cost. But in places like Zimbabwe and many other poor nations, grocery store shelves are already empty and hungry people are sliding from malnutrition and hunger toward outright famine.

The United States has long subsidized its farmers by making grants to poor nations. The money has in turn been used to buy food from America. Egypt, for example, depends in large part on U.S. grains to feed its 100 million people. That nation does not have the ability to grow the food it needs, and it does not have the natural resources or export products to allow it to buy grain on the world market, even at previous moderate prices.

What happens now that the Americans are subsidizing ethanol producers instead of hungry people in Egypt and other places, depleting stocks and causing the price of grain to soar? The answer is food riots (some of which have already been reported) followed by famine, political instability and civil unrest. Growing waves of unwanted immigrants can be expected to surge toward developed areas as hungry people struggle to survive.

Even the rising economies of India and China are facing possible problems. They, too, count on grain and other food commodities purchased from the world markets. And reserve supplies are becoming dangerously thin. Writes The Economist:

Normally, sky-high food prices reflect scarcity caused by crop failure. Stocks are run down as everyone lives off last year’s stores. This year harvests have been poor in some places, notably Australia, where the drought-hit wheat crop failed for the second year running. And world cereals stocks as a proportion of production are the lowest ever recorded. The run-down has been accentuated by the decision of large countries (America and China) to reduce stocks to save money.

Yet what is most remarkable about the present bout of “agflation” is that record prices are being achieved at a time not of scarcity but of abundance. According to the International Grains Council, a trade body based in London, this year’s total cereals crop will be 1.66 billion tonnes, the largest on record and 89m tonnes more than last year’s harvest, another bumper crop. That the biggest grain harvest the world has ever seen is not enough to forestall scarcity prices tells you that something fundamental is affecting the world’s demand for cereals.

I put that last sentence in bold because it deserves strict attention. Yes, something fundamental is at work here, and it is the historic crash of rising population and economic expectation against the ability of the Earth to produce food, that thing that the much-maligned Malthus predicted so long ago — and with the additional factor of ethanol production.

There are many sound economic and agronomic reasons why the growing ethanol craze is unwise and unsustainable and we have discussed these points elsewhere on this site. But it seems to me that the moral issues of the case far outweigh any economic considerations. In these times and circumstances, it is tragic that farm acres and resources are being diverted to the production of corn for the sole purpose of enriching the investors in ethanol plants. (They may tell you they are doing their patriotic duty to protect America from the evil OPEC oil thieves, but don’t believe that line of barnyard waste for a moment. As always, it’s all about the money.)

All humanity will soon pay the price as Nature teaches us the lesson that land is meant to produce food, not fake gasoline to keep fuel-guzzling American cars, pickup trucks and SUVs zooming around the landscape. In a world that is veering toward widespread famine, to trade that most basic of all human needs, food, for mere profit is a travesty that will soon be revealed as a major crime against humanity. At the bottom line, food is more important than gold.

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