Biofuels and the Food Crisis

From Tim Searchinger in The Washington Post:

Each year, the world demands more grain, and this year the world's farms will not produce it. World food prices have surged above the food crisis levels of 2008. Millions more people will be malnourished, and hundreds of millions who are already hungry will eat less or give up other necessities. Food riots have started again.

Nearly all assessments of the 2008 food crisis assigned biofuels a meaningful role, but much of academia and the media ultimately agreed that the scale of the crisis resulted from a "perfect storm" of causes. Yet this "perfect storm" has re-formed not three years later. We should recognize the ways in which biofuels are driving it.

Demand for biofuels is almost doubling the challenge of producing more food. Since 2004, for every additional ton of grain needed to feed a growing world population, rising government requirements for ethanol from grain have demanded a matching ton. Brazil's reliance on sugar ethanol and Europe's on biodiesel have comparably increased growth rates in the demand for sugar and driven up demand for vegetable oil.

Agricultural production is keeping up in general with the growing demand for food - but it keeps up with the added demand for biofuels only if growing weather is good. A good growing year in 2008 helped end that year's crisis, but average-to-poor weather since then has stressed inventories and confidence. Higher fuel costs for farmers and a weaker dollar contribute to higher prices, but prices soar only when large consumers, fearing that production will continue to fall short, bid up prices to secure their supplies.

Much of today's discussion focuses only on the challenge of meeting rising food demand because of factors such as rising meat consumption in China and long-term underinvestment in agricultural research. Droughts in Russia and floods in Australia over the past year may be early harbingers of climate change. But if it is hard to meet rising food demands, it must be harder to meet demands for both food and biofuels.

So why has attention shifted away from biofuels? The answer probably lies in the confusing explanations of 2008, when the problem and its "cause" were defined in different ways.

For example, some studies evaluated the effect of biofuels on retail food prices in the United States rather than on wholesale crop prices worldwide. Not surprisingly, they found little impact. The price of corn in your corn flakes and other retail products is so small that even a tripling of crop prices has little effect at U.S. grocery stores. But the world's poor do not eat processed, packaged corn flakes; they spend more than half of their incomes on staples such as corn meal.

Several reports tried to segregate the precise role of biofuels from weather and other factors. That's not possible because the causes multiply each other. Just as a political tremor in the Middle East makes oil prices jump in tight markets, so drought in Russia sends wheat futures soaring once biofuels have stressed grain markets. In 2008 and again recently, some governments have responded by banning grain exports to keep domestic prices down. This has the effect of forcing prices higher for everyone else. You can blame national self-interest and the inevitable vagaries of weather, but the key is to avoid tight markets in the first place.

A broad misunderstanding has also arisen from economic models predicting price increases from biofuels that are still far lower than those of the past decade. In fact, these models do not estimate biofuel effects on prices today but those in a future market "equilibrium," which will exist only after farmers have ample time to increase production to match demand. Today, the market is out of equilibrium. Biofuels have grown rapidly, from consuming 2 percent of world grain and virtually no vegetable oil in 2004 to more than 6.5 percent of grain and 8 percent of vegetable oil last year. Governments worldwide seek to triple production of biofuels by 2020, and that implies more moderately high prices after good growing years and soaring prices after bad ones.

The good news is that relief is possible. The same economic studies imply that food prices should come down if we can just limit biofuel growth. Corn ethanol is nearing Congress's requirement for 15 billion gallons a year, and lawmakers need to hold it there. Similarly, Europe must rethink its mandates. For "advanced biofuels" required by Congress, the Obama administration needs to focus on fuel sources that do not compete with food, such as garbage and crop residues, and not grasses grown on good cropland. Otherwise, the sequel to the food crisis is likely to turn into a series.

The writer is a research scholar at Princeton University and a fellow of the German Marshall Fund of the United States.