Food for Fuel
06 Sep, 2012
The worst drought in half a century has led to falling corn and wheat production in the U.S. and Russia, causing seismic waves in an intricate supply chain ranging from livestock feed to biofuel. Without an end to declining production levels, supply shocks and their inflationary effects on corn-related products—including some 2500 supermarket goods—have brought the ethanol mandate into question.
The Renewable Fuel Standard (2005) and Renewable Fuel Act (2007) set a precedent for the amount of “clean” fuel required for blending with traditional gasoline. For most purposes, the required percentage blend was 10%, typically using corn-based ethanol. 40% of corn produced in the United States is used to produce fuel, with a further 12% being exported and 10% for food products, this leaves approximately 34% and a small surplus for use as feed. As a result of the drought, corn prices have surged over 60% from June leading to supply shocks that are exacerbated by the existence of the ethanol mandate.
The drought and rising cost of corn has sparked a heated food vs. fuel debate with many calling for a waiver or suspension of the ethanol mandate by the U.S. Environmental Protection Agency. Arguments in favour of the waiver generally consist of an appeal to rising global food prices as a result of higher corn prices and a general denunciation of subsidization and government intervention in the free market. As far as global food prices are concerned, the UN Food and Agriculture Organization’s index of global food prices rose 6% in July, the biggest increase since November 2009. The index, which measures the export prices of food, is just 10% below its February 2011 record. The potential effects led the UN Director-General of the Food and Agriculture organization to suggest that “Much of the reduced crop will be claimed by biofuel production in line with U.S. federal mandates, leaving even less for food and feed markets.”
The mandating of corn-based ethanol in gasoline drives up the cost of food, as corn is used in feed for livestock and other food products. Researchers at Texas A&M University have concluded that American consumers pay approximately $40 billion in higher food prices a year as a result of the mandate. As far as the environmental benefits go, ethanol can reduce emissions by approximately 20%; however, much of this is negated with the amount of energy and emissions required to grow the corn. All of these effects were rather easy to ignore until now, due to the drought, forcing the US government to intervene further by purchasing $178 billion worth of meat, as beef and pork producers slaughtered more animals in an attempt to avoid the higher cost of corn-based feed.
Perhaps most importantly, higher corn prices bode ill for world food prices due to their vast interdependency. As students, budgeting is exceedingly important and these rising food prices are likely to be felt by us too, so it may be wise to pay special attention to price changes and to use cost saving strategies. While North Americans devote approximately 15% of their income to food, the developing world spends roughly 40% of their income on food, and an incremental price increase for some could be a fatal barrier to many.
In Douglas Coupland’s Player One, five individuals watch the world crumble when the world supply of oil depletes. Understandably, anarchy ensues as vigilantes fight to secure the last drops of oil. Corn, sorely underrated as an essential product, just might be on the same level as oil in terms of its importance in the global market. It might even be worse; hunger is a stronger drive than putting gas in the tank.