Posts tagged with: food prices

After taking a look yesterday at economic consequences of rising food prices along with the affects ethanol may have on the rising food prices, a moral perspective must also be taken into account.

As I stated in my previous blog post, the World Bank says rising food prices have pushed 44 million more people into extreme poverty in developing countries since June of 2010, and are having an adverse effect on people around the globe.  The increase in demand and expanded use of crops have caused global stockpiles to erode.  Stockpiles are important to help ensure a steady flow of food, especially during traumatic times such as large food shortages.  Even the corn stocks of United States, the world’s largest corn producer, amount to 5 percent of annual use which is far below the 13.6 percent average that they have been kept at over the last 15 years.

We are also called to be stewards of the Earth and this not only means not abusing the one planet we are given, but also ensuring that we leave a planet in good condition for future generations.  However, recent studies have called into question whether ethanol is actually better for the environment.  A study conducted by the University of Minnesota demonstrates that corn ethanol is actually more harmful than gasoline to the environment.  Furthermore, a recent article from Forbes also articulates that ethanol gasoline lets out more harmful toxins than regular gasoline.  There are even suggestions that ethanol uses more energy per gallon to produce it than the energy contained the actual gallon of ethanol.

In 2007, Ray Nothstine’s commentary Big Corn’ and Unitended Consequences pointed out some of the effects of rising food prices and the environmental implications of ethanol production.

Ethanol is expensive to produce, has contributed to a rise in gasoline prices, and has its own pollution problems. It requires a lot of fertilizer, fresh water, and productive farm land. And, because of corrosive properties that make pipeline transportation problematic, it takes a lot of trucks to haul it.

While the policies behind increased ethanol production may have been intended to promote good environmental stewardship, the actual results may show a higher negative environmental impact than other fuel sources.

If ethanol is causing the problems recent studies have indicated, then is the ethanol subsidy and the government mandate to continue the increase use of ethanol sound policy?  Continued funding for the ethanol subsidy and a mandate to increase the use of ethanol, when it may not be accomplishing its originally intended goals, might be cause to reevaluate ethanol’s future.  With food prices on the rise, and the demand for wider uses for crops across the globe also rising, the United States continues to fund the current ethanol policy, which may become counter intuitive to its original goals. The United States currently dedicates 40 percent of the amount of corn it produces each year to ethanol, and so you wonder if we are actually working at cross purposes to sound stewardship, and if so, it may be time to look towards a more morally sound solution.

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.

Acton On The AirKishore Jayabalan, Director of the Acton Institute’s Rome office, made an appearance today on Vatican Radio to discuss efforts by the G-20 nations to address the growing problem of rising food prices around the world.  Jayabalan discusses how natural events and bad policy are both contributing to the sharp rise in prices seen of late.  Listen to the full interview using the audio player below:

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The recent dramatic rise of food prices reflects the worst agricultural crisis of the last 30 years, especially for developing countries whose citizens inevitably spend a larger portion of their incomes for basic needs. The list of countries facing social unrest as a result is long and growing: Cameroon, Egypt, Niger, Somalia, Ethiopia, Mauritania, Bangladesh, Burkina Faso, Haiti, Indonesia, Mexico, Argentina, and the Philippines.

Consequences of these price increases are also affecting the United States, where rice is beginning to be rationed, Europe, where the price of bread in the last six months has grown 17%, and Japan, where butter has disappeared from markets and inflation is appearing for the first time in 10 years.

Many people in the developed world know that the price of oil has risen from $88 to over $114 a barrel in the last six months. But the price of corn, wheat, rice, milk and soybeans have increased even more so; corn and wheat have shot up 70% and rice is up 141% compared to January 2007.

This global crisis is affecting approximately a billion people around the world and the World Bank estimates that it could lead 100 million people into poverty, not to mention starvation.

The causes of this phenomenon are multiple and inter-related. Most economic analysts and agricultural experts have highlighted six main root causes to this emergency:

  • In the United States subsidies given to farmers that grow corn used for the production of biofuel (ethanol). A quarter of the national crop production is now devoted to the bio-fuel industry.

  • In Europe, the Common Agriculture Policy (CAP) which pays farmers to restrict their output and locks out agricultural products from outside the European Union.
  • In Australia, a terrible draught that has lasted 2 years and compromised 60% of the agricultural production.
  • Increasing demand for rice, wheat, meat in China and India
  • Decrease of cultivated land especially in China and India, where agricultural districts are transformed in industrial areas.
  • Increase in the price of fuel which has resulted in an increase in the price of fertilizers.

The market perversions caused by government subsidies for bio-fuel production and the export restrictions mandated by governments in the name of “food security” are particularly damaging and add to what we already know about the law of unintended consequences.

It is interesting and perhaps even surprising to note how the Catholic Church is reacting to this issue, given the Church’s significant role in many developing countries and its presence in many international and humanitarian activities.

Despite heavy lobbying from environmental activists, the Church has given priority to the needs of the human person and his integral development. In practice, this has meant Vatican criticism of bio-fuel subsidies and Vatican support for biotechnology that increases agricultural yields such as the use of genetically modified organisms.

For example, at a recent FAO conference in Brazil, the Holy See’s representative, Msgr. Renato Volante, said “bio-fuel is a serious threat to the natural right of every individual to proper nutrition, causing food riots and an increase in worldwide poverty.” The bishop of San Marino, Luigi Negri, hosted an April 22 event that highlighted the potential of GMOs and new seed specimens that are already being used by 12 million farmers worldwide.And Archbishop Silvano Tomasi the Holy See’s Permanent Observer to the United Nations in Geneva, has blamed poor distribution, rather than the lack of food, for the crisis.

Curiously enough, Catholic non-governmental organizations (NGOs) such as Caritas Internationalis, Sant’Egidio and FOCSIV seem to be behind the curve when compared to the Church hierarchy. The NGOs have generally clamored for more foreign aid but have not addressed core issues as bio-fuels and biotechnology.

Even secular NGOs such as Oxfam and CARE are beating them to the punch and have even called for the elimination of trade-distorting subsidies, export restrictions and price controls.

It is difficult to generalize about such as complex international problem and about a Church of 1 billion people. But it is a shame that Catholic NGOs need to catch up not only with their fellow Catholics as well as their fellow humanitarians.