Late last week, I was quoted in an article in National Defense disagreeing with a study from the New England Complex Systems Institute (NECSI) about the correlation between food prices and ethanol production. As usual, a short quote in an article cannot say all that goes into my thinking on this.
I wanted to put up a blog post to expand on my thoughts, and to counter some of the arguments that the study puts out. First, I have cited some of the work that the NECSI has done before – they are absolutely correct to link spikes in food prices as a prime underlying cause of unrest around the world. I have cited them in our paper on climate change and the Arab Spring.
But – I think their conclusions in this paper are not complete. They say that ethanol is responsible for a gradual rise in world food prices, with financial speculation responsible for food price spikes. This paper has received added attention because it was partially funded by U.S. military agencies, including the Office of Naval Research, the Air Force Office of Scientific Research and the Army Research Office. There are more factors responsible, and it is more complex than their model assumes.
Warning – this gets a bit long-winded.
First, on price spikes. A combination of weather, energy prices, and bad government policies are more responsible for price spikes than purely speculators, as their paper assumes. Consider the 2010 heatwave, drought, and fires in Russia and Ukraine. Not only did this destroy 1/3 of their wheat crop, it also caused the Russian government to ban all wheat exports. This had the effect of feeding the speculators, who drove up prices.
The same could be said of the 2007-08 food spike: India banned all exports of rice, causing other countries to respond by either banning their own, or engaging in panic buying. You even had the weird phenomenon of the Philippines at one point having more orders for rice than there were in the world. So – weather and/or bad government policy acts as a trigger, which then sets off the speculators. The upshot of this is that good government policy can counteract the speculators – like Japan’s selling of its vast rice stores in the Spring of ’08 that quickly took the bottom out from the global rice prices. Once Japan moved, then the speculative money all went to the down-side on rice and wheat.
I think that volatile oil prices are much more important to world prices than the report makes out. The report casually dismiss this in Figure 3(f) by noting that the price of wheat came down before the price of oil. I would counter that by saying that without the Japanese government’s reaction in ’08, mentioned above, the price would have only come down when the price of oil broke (only a couple of months later). Now, whether the global price of oil is caused by excessive speculation is another matter entirely. So – speculation may be the vector in which the spikes play out, but weather, energy prices, or bad policy are most responsible for the speculators’ moves.
Second – regarding the contribution of ethanol to a gradual rise in food prices – I am not convinced that its that simple either. Fossil fuel prices are a huge input into farming, whether you’re talking about diesel for the tractor, or natural gas for the fertilizer. As we’ve seen the price of fuel go up around the world over the last decade, we have also seen the price of food rise commensurately. As America has ramped-up its use of ethanol, we have also ramped up the amount of corn that we produce.
Also, the report betrays some its bias when it says that 40% of the corn crop goes to ethanol. While it is true that 40% of the corn crop goes to ethanol plants, a large percentage of that corn is re-used as animal feed – called distillers grains. A more correct ratio would be that 17.5% of the corn crop is devoted to ethanol.
Finally, as a point of policy, even if ethanol was driving up prices (gradually – not spiking them- price spikes are very very bad), that may not be a bad thing. I actually think that a model in which the entire world relies on US food exports in order to keep their food prices low is a flawed model. The lessons from the Green Revolution in SE Asia, India, and Latin America are that agricultural efficiency gains at a local and regional level are important for both food security and economic development. Simply relying on cheap American imports of food undercuts local farmers, taking away a prime source of capital accumulation that can be used for other economic development. I would also say that this ‘cheap food’ model has encouraged over-consumption here in the US – contributing to our obesity epidemic.
A low price, ‘cheap food’ model also doesn’t help American farmers – low prices take away incentives for planting more crops – or even to engage in farming at all. If our ethanol policy has helped increase the returns for farming, so much the better. Moreover, making policy is also about priorities: it is a very good thing that a prime goal of America’s ethanol policy is to reduce our dependence on oil – and we have been successful in getting about 10% of our gasoline supply now comes from corn ethanol.
The American farmer is clearly capable of producing vast surpluses above what we can eat. Instead of shoving the extra down our throats or dumping it on foreign markets, we should use these surpluses as a way to reduce our country’s crippling dependence on oil.