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Are Rising Food Prices a Result of the Ethanol Subsidy?

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Economies across the globe are struggling, and rising food prices are not going to make life any easier.  The Acton Institute raised concern for rising food prices, especially corn, in 2007, when Ray Nothstine wrote a commentary on, and at the time, record prices for corn, resulting in revolts in Mexico due to rapidly rising prices for tortillas.  The commentary brought to light unintended consequences of ethanol and its subsidy, including rising food prices.

And again, with food prices on the rise, and the subsidy for ethanol up for renewal, the debate has been given new life.

Corn prices are dramatically rising and are currently more than $6 per bushel.  Compare that to a few years ago in 2005, when corn was less than $2 per bushel.  Also, in November of 2010, corn prices reached a two year high.  However, corn is not the only food stock on the rise.  The past year wheat on Chicago Board of Trade was up 74 percent, and both soybean and cotton futures have already jumped.  Although, these rising food prices have had an adverse effect across the world, and according to the World Bank, since June of 2010, the rising food prices have pushed 44 million more people into extreme poverty in developing countries.

The debate over the cause of rising food prices, especially corn has centered around whether current adverse weather conditions are the culprit, or if it can actually be contributed to ethanol subsidies from the United States.

Weather conditions have recently been less than ideal for growing crops in many parts of the world.  Last year drought in Russia and Argentina, along with torrential rains in Australia and Canada caused numerous problems for farmers, and crop production was less than expected.  Furthermore, a cool wet summer in the United States resulted in a delayed harvest.  China’s current wheat crop is being threatened by a drought which may result in even higher food prices especially because China produces more wheat than any other country.  It is estimated approximately 42 percent of China’s winter wheat crop has been hurt by the drought.

While the unfavorable weather conditions have contributed to rising food prices, critics of the ethanol subsidy claim that the subsidy has played a major role in the rising food prices.  The ethanol subsidy, which is up for renewal, places a 54 cent tariff on imported ethanol and a 45 cent tax credit for every gallon of ethanol blended with gasoline.  Current federal law also mandates the use of ethanol.  Oil companies must use a designated amount of ethanol each year, 12.6 billion gallons in 2011, which will rise to 15 billion gallons by 2015.  The ethanol subsidy is paying oil companies to abide by a mandate required by federal law.

The use of corn in ethanol is continuing to rise.  The oil industry uses more ethanol each year because of the federal mandate, and as of November 2010, ethanol production consumed 40 percent of the corn crop produced in the United States.  If the United States decides not to renew the ethanol subsidy it will not only  save 40 percent of its corn crop, but will also save $25-$30 billion over the next five years.

The United States is a major exporter of food, supplying over half the global corn exports and over 40 percent of soybean exports.  However, with more and more corn produced in the United States being used for ethanol, less corn is used for food; thus, by the law of supply and demand, increasing the price of corn.  With the ethanol subsidy creating an increase demand for corn and raising the price, more and more farmers will gravitate to growing corn instead of other crops that are also needed for food supplies around the world.

With food prices on the rise, it is imperative to think long term when deciding if the ethanol subsidy should be renewed.

Not only are the economic arguments to the ethanol subsidy important, but so are the moral arguments.  Tomorrow I will evaluate the morality of rising food prices and the ethanol subsidy.

Louie Glinzak


  • Pyotr Petrovich

    To say that ethanol has no influence on corn prices in the USA would be absurd. The ethanol industry can be blamed for building too many plants too fast. That said, if all ethanol production were ceased, we then would be faced with 40% too much corn. Did I really say surplus corn? Well, we continue to export about the same amount of corn as we have for the past decade. Domestic consumption would only be slightly higher if meat were cheap. Unless the taxpayer would be willing to pay for 40% of our crop to be given to starving millions, then we would be stuck with a massive corn surplus.
    Perhaps this puts a little perspective on the issue.

    Our average corn yield per acre increases about 3% year over year relentlessly. If we do not increase corn ethanol much, relatively soon we will again have substantial corn surplus. While this seems insane when current prices are so high and the crop is tight relative to current demand, this is the nature of commodities: Crops do not meet demand, prices go up. Prices go up, farmers respond by planting more and / or increasing inputs to achieve better yields. Then, with bumper crops again, prices go down. In 2008, the “food for fuel” cry was invented. Ethanol output increased dramatically the next two years, but corn prices dropped. How? Supply was in better balance. In spite of government intent, industrial effort, and everyone’s preference, our species can not regulate weather.

    More than half of the “starving nations” have highly productive land that could feed themselves and the world while producing biofuels. Agricultural mismanagement in underdeveloped nations is not caused by America. Giving them free food removes any incentive for their local farmers to produce more. Our foreign policy needs to increase the incentives for those regions to manage their agricultural productivity much better.

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  • Louie Glinzak

    Pyotr, I appreciate the comments and I would like to clarify a few of the things I mentioned in the blog post. In my post I do not state or advocate to end ethanol. I also do not claim that ethanol subsidies are the sole cause for rising food prices. I point out the recent adverse weather conditions that have occurred across the globe which have negatively affected many different crops and most likely contributed to the rising food prices. The purpose of the blog post was to raise critical points of the rising food prices along with the ethanol subsidy, to encourage the reader to reflect on these points, click on the links used to further foster the reader’s ability to reflect, and then develop their own opinion.

    You are correct that the United States has exported the same amount of corn over the past decade. According to the USDA from 1990-2008 the United States has exported between 18-21 percent of the corn it produced. The increase of corn production has been less than consistent. Over the same time frame as mentioned earlier, according to the USDA, corn production in the United States has increased at different rates of 8 percent, 10 percent, -5 percent, and a 19 percent increase. Some may speculate that the 19 percent increase may be due to an energy bill which mandated the use of ethanol starting the trend, as I mentioned in my blog post, which mandates for an increase use of ethanol each year.

    A concern of the ethanol industry that critics have, is whether the ethanol subsidy, along with the mandated use of ethanol increasing each year, is a government created market. New studies are now showing that the production of ethanol is not energy efficient and result in a loss of profit. Furthermore, the environmental benefits of ethanol are now being called into question after an in-depth study by the University of Minnesota which showed corn ethanol is actual worse for health and the environment. Due to some of these new studies many wonder if the ethanol market can be self-sustaining without the aid of governmental controls.

    Another cause for concern is stockpiles across the world, which are used to ensure a steady flow of food and to prevent shocks are at an all time low. Even in the United States, by far the largest corn producer in the world who keeps a large majority of the corn they produce, the corn stock is almost 10 percent less than the average it has kept over the past 15 years.

    The USDA is also quick to point that the demand for corn is increasing throughout the globe, and with the United States allocating more and more of its corn for ethanol there is speculation if the United States can keep up with the demand without sacrificing other crops that are also essential to produce for both domestic consumption and exporting. For example, Japan is the world’s largest corn importer, and much of this is because it produces almost no coarse grains. Japan is also a very large meat producer, and the United States satisfies almost all of Japan’s demand for corn. Also, both South Korea and China are large importers of corn, and with the rapid increase of population in many Asian countries, there demand for corn will continue to increase. A recent trade agreement with Peru has also spiked a demand for United States corn. While coarse grains, which is the corn used in ethanol production and the corn people do not eat, the dominates the United States corn production, demand for white corn, which is found in many food products, is expected to increase. Such demand increase will affect the United States corn production and the corn market.

    I do not nor am I advocating for giving underdeveloped nations free food. This would be against the principle of subsidiarity. Yes while many underdeveloped nations have arable land, however, arable doesn’t necessary mean the land is currently ready to be farmed. The recent article in the Wall Street Journal explained that it takes years to clear and prepare large tracts of land outside of the United States.

    I apologize if the post was misleading and I hope this clarifies gray areas from my post.

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