Monday, April 07, 2008

Food vs. Fuel, Revisited

Last week's Congressional hearing was focused on high gasoline prices and oil company profits, but the exchange I keep thinking about dealt with growing concerns about competition between fuel and food. Representative Stephanie Herseth Sandlin (D-SD) challenged the oil company executives on the idea that ethanol production was pushing up food prices, citing the high cost of energy inputs as the key culprit. In light of the attention this issue has been receiving, including last week's cover story in Time, I can appreciate her sensitivity and that of her constituents. I've been following this issue for several years, and the only thing that seems abundantly clear is that "food vs. fuel" is far more complicated than the simple notion that US ethanol plants are stealing food from the mouths of hungry people in the developing world.

Viewed in isolation, the numbers on corn production and disposition tend to support Rep. Herseth Sandlin's perspective that high energy prices could be driving this relationship more than ethanol production. Since 2004, US corn output had increased by a sufficient quantity to accommodate both the expansion of ethanol production and a 30% increase corn exports. And while US corn prices have doubled in this period, the impact of that increase in export markets has been partially offset by the falling dollar. In this respect, the dynamics of corn resemble those that have taken oil from $34 per barrel to over $100 in the last four years: supply is up, but demand is up too, and the rapid growth of Asia has been a significant factor for both commodities, and for many others, as well. If US corn prices were the only thing affected, we might well conclude that this was not a strong indictment of ethanol's value. But just as oil is connected to everything else in the energy economy, so is corn, in the agricultural economy.

Two months ago I cited two studies calling into question the net environmental benefits of grain-based ethanol and other food-derived biofuels. As important as their findings are, their methods remind us that agriculture is every bit as global a business as energy. Its connections involve direct flows of individual commodities, and also strong indirect signals about land use and crop choice. While increased US corn output owes something to improved yields, it is also a function of a shift in acreage to corn from other crops, including soybeans. That sends ripples around the world, particularly when Europe's appetite for biodiesel--in line with its growing preference for diesel cars--is soaking up large quantities of canola (rapeseed,) soy, and other edible oils from all over the world. The impact on cooking oil prices for the world's poor may be an even bigger problem than the global rise in grain prices.

It is not in dispute that higher prices for transportation fuels are contributing to food-price inflation, particularly in the US and EU. The farther food travels from source to supermarket, the bigger the impact of rising diesel fuel prices, which also drive up the cost of cultivation and harvesting. Fortunately for US consumers, the price of natural gas, the primary input for fertilizer production, has gone up by a much smaller proportion than crude oil since 2004. But while energy prices might explain a fair amount of the recent rise in food prices that is pinching the budgets of millions of American families, they don't explain dramatic spikes in the price of wheat and rice in North Africa and Asia. The cost of transportation and energy inputs have less influence on those markets than the competition for acreage between food and energy production.

What we have here, I believe, are two very complex linked systems, one for energy and one for food, into which we are introducing powerful new linkages, on top of those that already existed. Change a parameter in one system--diesel prices, for example--and the other system responds in ways that are only partially predictable. Change a fundamental factor in the other system--the demand for biofuels derived from foodstuffs--and the gears in both systems mesh in entirely new ways, spinning towards an equilibrium we can't even guess at, because they are also both deeply enmeshed in the larger global economy, with its newly-revealed financial complexities. The resulting uncertainties are enormous, creating risks that need to be understood and managed.

In light of the significant questions raised by this recent intervention in global food markets, does it really make sense to double our bet that the impact of biofuels is less than the impact of the petroleum fuels they are meant to replace? At the very least, concerns about food vs. fuel competition, while perhaps overly simplistic, ought to alarm us enough to merit a pause in the efforts of government to ramp up food-based biofuel consumption. Temporarily freezing the US Renewable Fuel Standard at 7.5 billion gallons per year, its maximum target prior to the passage of the 2007 Energy Bill, and capping ethanol subsidies at that volume would buy us time in which to evaluate this problem in detail, without depriving farmers of the benefit of their current sales to ethanol producers in the meantime.

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