Newly released data by FAO show that food prices continued to rise, up 3.4% from the last month of 2010. This is yet another record high. Here is a plot based on the FAO data (click to enlarge):
An article in today's New York Times attributes much of the rise in price to uncertainty over coming harvests. It also notes the four main factors that contribute to increased price: weather, higher demand (from larger population size and greater demand for meat and dairy), smaller yields, and the diversion of food crops to biofuels.
An opinion piece in the IHT this morning raises the important point that stepped up biofuel production may tax already strained world fresh water supplies. Peter Brabeck-Letmathe, chairman and former chief executive of Nestlé, suggests that if world biofuel production targets are met, water withdrawals for agriculture can increase by as much as one-third. Brabeck-Letmathe writes,
Seventy percent of all water withdrawal is already used in agriculture, and while all such activity requires water, growing enough soy or corn to create biofuels is especially water-intensive. For example, to produce just one gallon of diesel fuel up to 9,000 gallons of water are required. Up to 4,000 gallons are needed to produce enough corn for the same amount of ethanol. By way of contrast, producing enough food to meet the caloric needs of one person for one day in, for example, Tunisia or Egypt requires about 666 gallons of water, and twice as much in California (caloric needs and intakes vary widely from region to region due to dietary customs).
This is bad news considering that it is projected that by 2035, one third of the world (over three billion people) will be facing severe water stress. Even without the increased water pressure of extensive biofuel production, water usage will need to increase substantially in order to feed the world by the middle of the century.
These are the sort of issues that we need to take seriously before plunging headlong into a world where we grow the fuel that drives American (and, increasingly, Chinese) SUVs.
Despite the flooding in Iowa earlier this summer, the US is set to harvest its second largest corn crop ever. Good news for the price of food for hungry people? Not really, the USDA expects that 34% of the total corn crop will be used to make ethanol for biofuel. They project a price of $5-6 per bushel for the coming year, up from $4.25 for 2007/08. I can't help but think that making fuel for SUVs out of food when there are still many poor, hungry people in the world is a bad idea. But what do I know?
A recent story in The Guardian reports on an unpublished World Bank study that suggests the conversion of food crops to biofuels, and the resulting economic pressures entailed in this process, is responsible for most of the steep price increases in food this year. The World Bank report has not been published, though it was completed in April, and speculation is that the delay is meant to avoid embarrassing the Bush administration, who maintains that biofuels have had only a minor impact on food prices. For example, the report contradicts statements by US Agriculture Secretary Ed Schafer and Energy Secretary Samuel Bodman made in a letter sent to the Senate Energy Committee last month. The World Bank report attributes fully 75% of the increase in food prices to biofuels in contrast to the official US estimates of just 3%.
Biofuel development distorts food markets in three ways, one of them obvious, the other two less so: (1) it diverts grain production for food to the production of biofuels, (2) it creates incentives for farmers to set aside more land for biofuel crop development, and (3) it induces speculation on the commodities market, driving up grain prices.
The results of this report (at least as reported in The Guardian) resonate well with my own intuitions about biofuels. It seems like a very bad idea to me to make fuel for SUVs out of food. It's all too easy for people in the developing world, where the leading dietary problem is obesity, to forget that a substantial portion of the world (somewhere in the vicinity of 800 million) is still regularly hungry. I remain open to the idea of generating biofuels from organic waste, but the consequences of growing grain and other basic foodstuffs for biofuels on commodity prices, and therefore the price that people pay for food, should be obvious to anyone who has taken an introductory economics class. Price increases with demand and decreases with supply, remember? Given that world population is still growing and that some formerly poor parts of the world are rapidly developing (and therefore increasing their demand for grain both directly and indirectly through increased demand for meat), there is no way that demand for grain as food is going to decrease. This can only mean that increasing crop production for biofuel is bound to decrease supply for food in the absence of large expansions of crop land. Generating demand for biofuels through legislation requiring a certain proportion of biofuel use (as is the case in the EU) or marketing ethanol-burning SUVs as somehow environmentally friendly is similarly going to increase demand for biofuels. This means that prices for grains (and substitutable commodities) are bound to increase. Or am I missing something here?