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Record Food Prices Linked to Biofuels

Reports from the WTO and USDA show that corn supplies are influenced by biofuel subsidies and mandates.
June 17, 2011

The biofuels industry is being blamed for record food prices and high price volatility. Earlier this month a report from the World Trade Organization and other international agencies recommended that governments cut support for biofuels to ease that volatility. On the heels of that report, the U.S. Department of Agriculture issued its corn forecast; it suggested that corn supplies will be very tight this year because bad weather has limited planting and because the share of corn going to ethanol is increasing. After the report, corn prices shot to record highs, reaching $8 a bushel. Then on Friday, the Organization for Economic Cooperation and Development released a report predicting that food prices will remain high for the next decade.

Alternative fuel: A sign advertises ethanol for sale at a gas station in Chicago.

Many experts say the unprecedented prices are at least partially driven by government subsidies and mandates that have led to fourfold increases in production of ethanol biofuel and tenfold increases in production of biodiesel between 2000 and 2009 worldwide. In the United States, multiple bills and amendments have been introduced to scale back subsidies as a way of trimming the federal budget, and on Thursday the Senate voted to end tax credits for ethanol that amounted to nearly $6 billion. (The program won’t be killed unless the House passes its own law ending it.)

The WTO report cited many reasons for the high prices and volatility, including changes in demand for food, bad weather, low stock, and the recent high cost of oil. Oil prices directly affect the production costs of food by raising the price of tractor fuel and fertilizers. If oil is expensive enough, it can also increase demand for biofuels, which drives up the price of crops such as corn and sugarcane.

The WTO report also cited government biofuel mandates as a significant problem. Not only do these requirements drive up demand for crops such as corn, increasing prices, but they limit the ability of markets to respond to price changes, increasing volatility. “We’ve lost a lot of our ability for our agricultural system to be buffered from price shocks from weather and other things that affect production,” says Jason Hill, a professor of bioproducts and biosystems engineering at the University of Minnesota.

Worldwide, 8 percent of corn produced is used for biofuels. In the United States, according to the new USDA report, 35 percent of corn in the growing season ending in 2010 went to the production of biofuels; this growing season it is predicted to be 37 percent; it is expected to be 38 percent in 2012.

Representatives for the ethanol industry say that the share of corn used for ethanol is typically overstated. After processing in an ethanol plant, one-third of the corn used, by weight, can still be used as feed, decreasing the amount of feed that ethanol displaces, according to the Biotechnology Industry Organization. The Renewable Fuels Association argues that other factors, such as the price of oil, have a far greater impact than ethanol production on the price of food.

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