World leaders are focused on agricultural supply data, insurance schemes and speculation as they try to quell volatility in global food markets. They should also turn their attention to perhaps the leading cause of price instability: U.S. ethanol policy. Five years ago, few if any food or energy experts predicted that 40 percent of the U.S. corn crop in 2011 would be devoted to ethanol production. Nor did they imagine: that corn prices would reach all-time highs at $8 per bushel ($275 per metric ton); that July futures prices for corn in Chicago would exceed those for wheat; that the United States would be exporting ethanol to Brazil; or that an Iowa Senator would co-sponsor a bill to reduce corn-based subsidies just prior to the Iowa Caucuses for the 2012 primary season.1 What has caused these extraordinary circumstances? And what are the economic, political and food-security implications of a revolution in demand that has caught both economists and political leaders unawares? To answer these questions, we must first unravel the history of modern-day biofuels, the policies governing them and their market implications. The U.S. government has pursued corn-based ethanol policies for more than three decades, but the industry has truly flourished during the past five years as crude oil prices rose above $60 per barrel and new Federal mandates supported renewable fuel use and ethanol as an oxygenate additive in gasoline.2 Policy changes during this period have had three profound effects on food prices and global food security. First, policies that distort corn markets have had far-reaching effects on other agricultural commodity markets through substitutions in production and consumption, as well as on land markets and rural incomes. Second, mandates have played a more significant role than subsidies in generating market instability in globally traded food commodities. Creating a new level of corn demand irrespective of price feedbacks accentuates volatility in grain markets whenever supplies are disrupted. Recent shocks caused by drought and extreme heat in various grain-producing regions underscore the point. Third, price spikes have a disproportionate impact on poor households and low-income economies, as evidenced by food riots in several countries and the persistent hunger that besets an estimated one billion people today.3 The United States, which used to be a major adjustor in helping to stabilize global grain markets, has now become a leading source of price instability. Whether it is good or bad for national security depends in part on whether food riots and the political upheavals they can cause abroad will turn out on balance to be positive or negative developments. Corn Prices in Perspective F or more than a century, the inflation-adjusted price of corn fell by about $6 per metric ton per decade (Figure 1). About every thirty years, however, price spikes have plagued corn and other grain markets. The causes have been varied—wars, weather and bad policies—but the bubbles have always burst. Price expectations were then reset, stocks rebuilt and growth in agricultural productivity resumed sufficiently to outpace growth in demand. When nominal corn prices more than doubled between October 2006 and July 2008, and then declined 50 percent by January 2009, many expert observers believed they were merely witnessing a repeat of earlier episodes. But after another spike followed in the summer of 2010 they wondered whether frequent price spikes for grains were now the new norm. Severe droughts and high temperatures in Australia, Argentina, China, India and Russia added supply shocks and raised concerns about the possible connection of climate change to the frequency of extreme weather events. Despite these shocks, global corn supplies grew in each of the five crop years between 2005–06 and 2010–11, going from 700 million metric tons (mmt) to 821 mmt during this period.4 It is rather the demand side that has taken on a new and perplexing character, with corn-based ethanol as its centerpiece. The recent food-price story concerns all grains, since they are connected by substitutions in production and consumption and by prices.5 Each of the cereals has particular characteristics that are important to the story, but corn is a lynchpin in the world food system. It provides about a third of both global cereal production and global cereal trade. Moreover, corn connects to the other key commodities by virtue of its versatility. It is used in processed foods and directly as a staple in key parts of the world, especially Central America and East Africa. Corn is also a primary feed for livestock: The UN Food and Agriculture Organization (FAO) estimates that about 60 percent of global supply is used for this purpose. In addition, when corn prices are high relative to wheat, up to a quarter of global wheat production is fed to animals, thereby linking the two markets. Corn is also related to sugar, since about half of the 20 mmt of sweeteners consumed by Americans come from corn-based fructose—much of it in the 68 gallons of beer and soda they consume annually per capita. Finally, corn is used increasingly as a fuel, particularly in the U.S. ethanol industry. In short, corn’s potential for producing food, feed, fructose and fuel gives it a special status. As one veteran commodity trader put it, “Mess up the corn market and you pretty much mess up everything.” New Dynamics of Demand T hree forces have interacted to make both the U.S. and global corn markets more complex: rising meat consumption in middle-income countries, the expanding ethanol industry in the United States, and changes in macroeconomic, trade and agricultural policies. This complexity raises the following core question: Did the first decade of the 21st century mark a fundamental turning point in long-run trends in corn prices, with the future likely to show constant or perhaps even rising real prices? Or has the world witnessed instead just another variant of a corn price spike, which will peak in a year or two and then decline in the years ahead? No definitive answer is possible at this time, though the determining variables are becoming clearer: meat consumption; exchange rates, speculation and other market transactional factors; and ethanol policies. Meat. Americans eat about 130 pounds of red meat and about 105 pounds of poultry annually. Most of this meat comes from grain-fed animals. The U.S. Department of Agriculture estimates that about 40 percent of total American corn production is used for feed in the United States, with a similar proportion going to industrial purposes. U.S. meat consumption is high by world standards, but it is not a major cause of recent price increases in corn. Since 1995, total meat consumption per capita has stabilized. Beef consumption per capita is actually declining; it is now about 25 percent less than it was 25 years ago. Through sometimes-painful adjustments, the U.S. livestock industry has been among the major sectors that help burst previous corn-price bubbles. High feed prices have caused farmers to cull breeding stock, thereby reducing both animal numbers and corn demand over several years. Recently, however, the cutback in livestock herds did not generate a decline in corn prices. Instead, the growing demand for corn-based ethanol has largely canceled out this adjustment mechanism. Quite a different story is unfolding in Asia, with potentially large consequences for future feed use and prices. The economies of China, India and Indonesia (which rank first, second and fourth in terms of population) have been growing at rapid rates (10 percent, 8 percent and 6 percent, respectively). Demand for meat in these middle-income countries is surging and will potentially have significant spillover effects in the international grain markets. Interestingly, the scenarios in these three countries differ substantially, partly because of their varying religions. Indian and Indonesian meat consumption is rising rapidly, but from very small starting points. Per capita consumption of meat in those countries is still only about six and ten pounds per year, respectively. In neither country has there been a spillover into feed imports. Indeed, Indonesia is now even a small exporter of corn. China’s consumption profile, by contrast, has seen the dietary role of pork escalate rapidly since 1980. Current total meat consumption there is now on the order of 120 pounds per capita. Remarkably, although China imported 52 mmt of soybeans in 2010–11 (nearly 60 percent of the global soybean trade), it has been able to supply its energy-feeds for livestock from domestic sources. (China’s arable land is only 0.27 acres per capita, roughly one sixth that of the United States.) But in an important turn of events, China imported more than 1.5 mmt of corn in 2010–11 and is expected to import larger quantities in 2011–12. These quantities are far less than Japan’s (16 mmt) or Korea’s (eight mmt), but China’s entry into the import market was nevertheless a force in driving up global corn prices over the past year. Much has been written about meat and its role in driving up commodity prices. Our view is that the increased consumption of livestock products has played a relatively minor role in the recent volatility of corn prices. The larger question focuses on meat’s future role, and China will be the key actor here. The continuing lack of clarity about Chinese intentions with respect to imported feed grains will affect both the volatility and levels of world corn prices. Moreover, China has undertaken new forays into land acquisitions in South America and Africa, apparently to ensure supplies of agricultural raw materials. If that aim proceeds, it may add future instability to both product and factor markets in several key countries. Exchange Rates and Speculation. Because most international commodity prices are denominated in U.S. dollars, the levels and variability of corn and ethanol prices have also been affected significantly by activities in foreign exchange and financial markets. Between 2000 and 2010, the value of the U.S. dollar varied by more than 30 percent, as indicated by the nominal effective exchange rate, and the rapid depreciation between 2004 and 2008 was especially critical. Monthly real corn prices for the decade were highly correlated with this rate, illustrating once again the pervasive power of macro-level variables on commodity prices. Strong correlations with the dollar were not the only external forces affecting corn and energy prices. U.S. financial markets have been in turmoil during the past decade, and the creation of new derivative instruments and hedge funds has raised important questions about the price impacts of these instruments in commodity markets. A fierce debate rages on over whether speculation in commodity markets has been a major force in generating price instability and price increases. Our assessment generally sides with those who see supply, demand and stocks as primary price determinants, not “excessive” speculation. While fortunes were no doubt made (and lost) with large computer-assisted trading schemes, these schemes mainly affected the short-term (minute, hourly and sometimes daily) price volatility in corn and other commodity markets, not the month-to-month prices that are of primary importance in establishing global prices. That said, two caveats are in order. First, short-term price volatility created a “buzz” in the marketplace, which in turn led to uncertainty and to some hoarding at the household and firm level. This phenomenon was probably stronger for rice than for corn, but it probably affected all food commodities. Second, data on the end-uses of corn, and thus on uncommitted corn stocks still available to the market, tend to lag and are sometimes misleading. The USDA estimates of available corn stocks in June 2010, in retrospect, were far off the mark. As became clear in later months, uncommitted stocks were less than had been predicted, and the corn market reacted in a frenzied manner as it tried to adjust to lower supplies. A similar situation now prevails following the “unexpectedly large” stock estimates by the USDA in June, which were followed by widespread heat and drought conditions. Ethanol. If experts have sometimes overestimated the impact of meat and speculation, they have largely underestimated that of the corn-based ethanol industry. Between 2000 and 2010, U.S. ethanol production grew by a factor of eight. For the first time, more U.S. corn is devoted to ethanol than to livestock. Since the United States plays such an outsized role as a global producer and exporter of corn, the rapid rise of ethanol production during such a short period has produced a fundamental change in the structure of demand for corn. The ethanol industry traces its brief history to an earlier era of high energy prices and long lines at the gas pump. In 1978, President Jimmy Carter was instrumental in convincing Archer Daniels Midland, a major agribusiness firm, to convert one of its alcohol plants to ethanol production as part of his “Synfuels” initiative. It is not surprising that the U.S. ethanol industry started with corn as the input (in contrast to sugar in Brazil). Nor is it surprising that companies producing corn sweeteners dominated the industry in its early history, since the enzyme processes used to produce fructose are similar to those used for ethanol. Moreover, large-volume infrastructure and supply chains already existed for the sweetener industry and for corn more generally. The latter point is particularly important, and is too often forgotten by vocal proponents of other potential feedstocks. While chemists have demonstrated that there are many potential sources for ethanol—from agricultural wastes to trees to algae—sugarcane and corn are the only ones economically viable at a large industrial scale. Without the development of broad-based supply chains, large-scale replication of industrial-scale plants is impossible. This is the main reason why U.S. ethanol to date has been synonymous with corn. The rapid growth of the U.S. ethanol industry was not without internal turmoil. In the rush to operate more plants, some were poorly managed or lacked efficient scale. But over the past decade, average plant size increased, the industry consolidated and new uses (as animal feed) were found for the associated co-product of ethanol: distillers grains. In 2005, for example, 92 ethanol plants were in operation, and 23 more under construction. However, the high corn prices that prevailed in 2008, partly caused by ethanol industry demand, also led to bankruptcies. In the first half of 2009, ten ethanol plants filed for Chapter 11 protection. Today the industry seems largely to have shaken out, with more than 200 plants producing more than 13 billion gallons of ethanol. A lthough the numbers driving events in the ethanol industry are clear, the reasons for those numbers are less obvious. Three structural features appear particularly important. During the early days of the ethanol industry, farm groups and agricultural processors like Archer Daniels Midland played particularly important roles in lobbying for subsidies, blender credits and tariffs. Corn prices remained low most of the time from 1980–2005, and establishing a new end-use for corn seemed reasonable economically (and even more so politically) to improve rural incomes in the Corn Belt. Finding an outlet for grain surpluses was an urgent task in the early 1980s given the dire state of the rural economy, which was plagued by high debts (relative to assets) and farm bankruptcies. Proponents used classic infant-industry arguments, increasingly bolstered by calls for more energy independence. Farm groups and political leaders were both fond of saying that even if ethanol subsidies were distasteful they would at least promote a product that was of vital domestic importance. The rise in crude oil prices from $60 per barrel in mid-2005 to more than $140 per barrel in mid-2008 clearly added fuel to the pro-ethanol movement. A final rationale was that a shift from fossil fuels to biofuels would help reduce U.S. greenhouse gas emissions and would thus mitigate global warming. (This proposition has been challenged, however, and ethanol production is now subject to regulation by the Environmental Protection Agency.) The ethanol industry received another major boost when, in 2005, MTBE (methyl tertiary butyl ether) was phased out as a gasoline additive because of environmental and health risks. Ethanol played much the same role that MBTE had played as an oxygenate, and it immediately became the preferred MBTE substitute as part of a 90 percent/10 percent (E10) gasoline blend. As gas prices rose at the pump, so did the price of ethanol. The demand for ethanol has thus been tightly linked to the country’s growth in transportation fuel demand.6 At the present time Americans consume about 140 billion gallons of gasoline annually. The E10 blend market thus provides a generally assured market for the existing ethanol production capacity of 14 billion gallons.7 Improved utilization of ethanol’s co-product, distillers grains, constituted a third major force in expanding the industry. Assessments of distillers grains are frequently absent in discussions of ethanol, but these grains are increasingly important to the profitability of the industry even if they have no significant direct effect on the price of corn. When a bushel (56 pounds) of corn enters an ethanol plant, it goes through several processes to produce two separate products: 2.7 gallons of ethanol and about 17.5 pounds of distillers grains on a dry matter basis.8 The corn designated as having been “used” for ethanol manufacture thus returns about 30 percent of its weight to the livestock sector. However, whereas the original corn contains about 9.4 percent protein and 70 percent starch, distillers grains contain about 30 percent protein and 4 percent starch. They thus serve distinctly different needs in livestock rations with respect to energy and protein. There were initial concerns about whether the rapidly expanding tonnage of distillers grains could be marketed without steep price discounts. However, new nutritional research shows that distillers grains performs well in both dairy and beef feeding programs. This research, combined with creative marketing, has helped the distillers grains co-product to become increasingly valuable. For the approximately 40 percent of ethanol plants producing wet distillers grains, the product is typically picked up by trucks on a daily basis and delivered to nearby feedlots and dairies for immediate use. For the 60 percent producing dry distillers grains, destinations can be almost anywhere. Cargill, for example, has arranged for highly efficient 100-unit trains to take dry distillers grains from plants in Iowa, Nebraska and Missouri to major feedlots in Oklahoma. Although prices vary somewhat by region, dry distillers grains currently sell for about $200 per ton and wet distillers grains for about $65 per ton—the spread reflecting differences in water content, energy costs for drying and dry distillers grains’ lack of location and shelf-life constraints. Thus we reach two key conclusions regarding distillers grains: Nearly a third of the corn that enters the industry is returned to the livestock sector, thereby reducing somewhat the competition between the two end-uses; and distillers grains constitute about 15–20 percent of the total revenue from ethanol processing. U.S. Ethanol Policy D espite the support the ethanol industry receives from livestock feed co-products, the MTBE phase-out and industry pressure, it might have faltered without strong policy support. This support, which has a long history, takes three forms: tax breaks at different points along the supply chain, tariff protection and mandates.9 Tax exemptions and credits date back to the 1970s, and import tariffs on ethanol were first established in 1980. In 1978, the Energy Tax Act exempted gasoline with a 10 percent or more blend of ethanol (E10) from excise taxes, and in 1980 the Crude Oil Windfall Tax Act introduced a $0.40 per gallon income tax credit for blenders. The value of the blending subsidy has varied between $0.40 and $0.60 per gallon since that time and is now set at $0.45 per gallon. Meanwhile, the import tariff has fluctuated between $0.50 and $0.60 per gallon and is set at $0.54 per gallon today. There is also a 2.5 percent ad valorem tariff on ethanol, and a variety of other producer, blender and infrastructure tax credits for ethanol and biodiesel. These tax and tariff provisions have been extended by the 2010 Omnibus Tax Bill and will end (unless extended) on December 31, 2011. Together they contribute to the industry’s overall budget cost of around $6 billion annually. The main difference between historical and contemporary ethanol policies is the mandates for renewable fuels and for the use of ethanol as an oxygenate in gasoline. Congress introduced the first phase of the Renewable Fuels Standard (RFS) in the Energy Policy Act of 2005, and then ratcheted it up significantly in the second phase as part of the Energy Independence and Security Act of 2007. The RFS currently requires that the amount of conventional (corn-based) ethanol in American gasoline blends reach a minimum target of 15 billion gallons by 2015, and that advanced biofuels (cellulosic and algal-based) reach a minimum of 21 billion gallons by 2022. The overall target of 36 billion gallons of renewables in transportation fuel is nine times the conventional biofuels (four billion gallons) used as recently as 2006. With climate change in mind, the EPA also requires that biofuels consumed within the RFS be 20 percent lower in greenhouse gas emissions than petroleum-based fuels for conventional biofuels and 50 percent lower for advanced biofuels (calculated through a life-cycle analysis). Corn-based ethanol produced in modern natural-gas fired plants already meets the first criterion. Growth in the U.S. ethanol industry depends, of course, on whether vehicles can consume higher ethanol blends. State and federal decisions to phase out MTBE as an oxygenate in gasoline provided an easy transition to ethanol use in E5 and E10 blends, but a “blending wall” arose near at the end of the phase-out period when ethanol had replaced MTBE. Ethanol blends above E10 can erode catalytic converters, especially in older cars, because ethanol burns hotter than gasoline. To overcome this barrier on ethanol demand, the EPA approved in October 2010 the use of E15 for cars and light trucks manufactured after 2007, and in January 2011 approved an extension for vehicles made since 2001. As a result, the majority of American vehicles could soon be fueled with E15 blends, and U.S. demand for corn-based ethanol could exceed the 15 billion-gallon target. If car manufacturers redesign their fleets to tolerate even higher blends of ethanol in future—say, up to E85—the ethanol industry will have substantially more room for growth. With mandates in place, does corn-based ethanol still need subsidies in the form of tax breaks and tariff protection? U.S. policymakers are currently grappling with this question, either directly or indirectly, with the end of subsidy provisions looming in 2012. It is a debate largely centered on reducing the Federal budget deficit and eliminating tax breaks, particularly for oil companies earning large profit margins from high crude oil prices. The discussion also revolves around ethanol’s indirect bonus to corn farmers at a time when corn prices are at their peak. Most of the debate is not aimed at ameliorating agricultural price volatility. Although the recent meeting of G-20 leaders in June 2011 cited the reduction of global food price volatility as a primary goal, U.S. policymakers helped steer the discussion away from specific measures on conventional biofuels. The pace of proposed legislation in the first half of 2011 has been mind-boggling.10 Moreover, assessing the various proposals is challenging because many of the devils are in the details. The flurry of activity quickened when an early House bill in the spring of 2011 advocated a continuation of existing subsidies. A Senate bill also supportive of the ethanol industry instead delineated targeted reductions in tax credit and tariff rates and tied blending credit rates to oil prices after 2013. The latter bill, introduced by Senator Charles Grassley (R-IA), also provided strong support for cellulosic biofuel production and for investments in infrastructure to promote E20 to E85 fuel blends. Then a new pair of bills in June sought to repeal blender subsidies and tariff protection altogether. Its backers argued that mandates provided sufficient industry incentives on their own. An even more recent bipartisan agreement was released in July by Senators Diane Feinstein (D-CA), John Thune (R-SD) and Amy Klobuchar (D-MN) that advocated abolishing ethanol blenders’ credits and tariffs by the end of the month and using the tax savings to support infrastructure for higher ethanol blends, cellulosic fuels and small producers. A sense of urgency propelled these discussions as the August deadline for an agreement on the debt limit approached. The impetus of the debate shifted as of mid-August to the 12-member bipartisan committee tasked to produce a viable plan for the second round of debt reduction. Since the new committee was formed, widespread arguments advocating the continuation or repeal of ethanol subsidies continues to rage. Lobbying activities in support of corn-based ethanol have been intense, too, and will likely remain so through the 2012 elections. These efforts encompass more than the typical closed-door discussions with legislators and their staff. In June, Growth Energy, a public interest group representing the ethanol industry, launched a media campaign in the Metro stop adjacent to the U.S. Capitol building that touted the benefits of ethanol over other energy sources. A variety of ads, including one claiming that “ethanol saved typical U.S. households $800 per year at the pump in 2010”, masked the huge social costs associated with the industry, most notably the costs to taxpayers who are also gas consumers.11 The budget stakes of the ethanol policy debate are probably $6 billion or less—hardly enough to dent the Federal deficit. But the economic ramifications are much broader. The outcome has potentially serious consequences for the rural economy, jobs, land values, U.S. energy use and, above all, future food prices and food security. Future Courses and Consequences W ith the 2012 elections in sight, we believe that the RFS mandates will remain intact but that ethanol subsidies and tariffs will be repealed or substantially reduced over time. An abrupt repeal of these policies would likely play out in one of two quite different ways. In the first scenario, little will change. Large sunk costs have gone into the U.S. corn-ethanol industry, and it is producing an important livestock feed product. As a result, ethanol production (at around 13 billion gallons today) could easily reach the 15 billion gallon RFS target without further subsidies, particularly if oil prices continue to hover around $100 per barrel. In this case, corn prices and land values in the Midwest will probably remain high, and global food prices will probably continue to be both high and volatile. The alternative scenario is that oil companies will start replacing U.S. corn-based ethanol with sugar-based ethanol imports from Brazil in their gasoline blends. The scale at which this replacement might occur depends on corn prices versus sugar (valued at the appropriate exchange rates), and on the relative price of U.S. corn ethanol to Brazilian sugar ethanol in the absence of ethanol tariffs and blending subsidies. If the relative cost of imported ethanol were to drop dramatically, the profitability of (and investments in) corn-based ethanol could be severely affected. This scenario is unlikely in the short run. Brazil is once again investing heavily in its sugar ethanol industry after a lull when large domestic oil reserves came online, but its industry has recently faced high sugar prices and feedstock shortages due to climate shocks. With the Brazilian real being strong against the U.S. dollar, the United States has recently captured some of Brazil’s export markets for ethanol, and even exported some ethanol to Brazil this year. Nonetheless, if U.S. ethanol tariffs are eliminated and American vehicles move toward E20–E85 technology, there could be a sharp increase in demand for Brazilian sugar ethanol over the long run, particularly since it qualifies for advanced biofuels standards for greenhouse gas emissions within the RFS. Ethanol subsidies are not the only target for cuts in the Federal budget discussion. Legislators are also scrutinizing agricultural subsidies. A new Farm Bill will be drafted in early 2012, and corn and other crop subsidies will surely be debated. Farm and commodity supports totaled $23 billion in 2010, and despite high crop prices, corn payments ranked at the top at $3.5 billion, about twice the size of soybean and wheat payments. Serious discussions in Congress about cutting farm subsidies may seem unlikely given the lopsided clout of farm states in the Senate. Our more cynical view, however, is that such discussions are always easier to initiate when crop prices are extremely high. If corn prices were to fall back to $3 per bushel, any talk about cutting subsidies would end. But this outcome seems unlikely in the near-to-medium term. Should corn prices fall (and perhaps even if they do not) one further scenario is possible: an additional hike in the RFS for conventional biofuels. The existing mandate has helped boost corn prices and farm income during the past five years, but the target of 15 billion gallons will soon be reached. This scenario is the one action that would likely send even more U.S. corn toward ethanol as its end use. Otherwise, growth in corn-based ethanol seems likely to plateau in the next year or two. It is becoming increasingly difficult to disentangle the dynamics of agricultural markets from energy markets. As long as mandates remain in place, an historically high level of demand for food crops will persist. This demand is price inelastic and causes market volatility to accentuate supply shocks. It is this new level of corn demand that largely underpins the double-digit appreciation in farmland values throughout the Midwest and Great Plains states in recent years. Debt-to-asset ratios in the U.S. farm sector have improved substantially with rising land values and low interest rates, and net farm income is expected to rise by almost 20 percent this year due to high commodity prices. Given the bullish financial outlook for the U.S. agricultural sector, this is an ideal time to begin dismantling both ethanol and corn (and other major commodity) subsidies. Cutting these subsidies would help reduce the Federal budget deficit without harming the rural economy. The trickier political and economic questions relate to repealing the ethanol tariff and reassessing the mandates. The latter in particular is probably off-limits with the 2012 elections approaching. That is unfortunate, for these policies will continue to cause unrest in food markets far beyond American shores. If the United States, along with the rest of the G-20, is serious about stabilizing global food prices, U.S. domestic biofuels policy in its entirety will need to be re-examined. 1Although no one foresaw this series of events, the essay that came closest is C. Ford Runge and Benjamin Senauer, “How Biofuels Could Starve the Poor”, Foreign Affairs (May/June 2007). 2The European Union, China and other countries have also introduced mandates for renewable fuel use, but the biofuels industry remains dominated by Brazil (a long-term producer and consumer of sugar-based ethanol) and the United States (now a larger ethanol producer than Brazil). 3The 2008 price spike drove the number of food-insecure people up from an estimated 870 million in 2004–06 to more than one billion in 2009—approximately 15 percent of the world’s population. See The State of Food Insecurity in the World, United Nations Food and Agriculture Organization, 2009. This estimate, which still holds today, does not account for price and wage feedbacks from economic growth that would reduce the overall number. See Derek Headey, Was the Global Food Crisis Really a Crisis? (IFPRI Discussion Paper 1087), International Food Policy Research Institute (2011). 4These quantities are from the USDA Economic Research Service, Feed Outlook, June 13, 2011, which is also a major source for other data in this paper. United Nations Food and Agriculture Organization, Food Outlook (June 2011) is another data source used frequently. 5A fuller treatment of food-price volatility can be found in Rosamond Naylor and Walter Falcon, “Food Security in an Era of Economic Volatility”, Population and Development Review (December 2010). 6The blending arrangement has been particularly important for the pricing and profitability of ethanol. Ethanol contains only about two-thirds the energy of gasoline. To be competitive as a direct energy source, its price per gallon would thus also need to be at two-thirds the cost of gasoline. Nevertheless, ethanol is the only short-run substitute for gasoline that is economically viable at a commercial scale. 7Not all gasoline in the United States is blended at a 10 percent rate due to infrastructure and other blending constraints, and although some E85 pumps exist, the volume of use is small. As a result, the total ethanol blending limit today is about 12.5 billion gallons, and most U.S. residual ethanol production is exported. See Philip Abbott, Christopher Hurt and Wallace Tyner, “What’s Driving Food Prices in 2011?”, Farm Foundation Issue Report (July 2011). 8There are two broad types of distillers grains: dried distillers grains (having about 90 percent dry matter) and wet distillers grains (having about 30 percent dry matter). Wet distillers grains have a shelf life of only three to six days before going rancid; dry distillers grains, by contrast, have a long shelf life but take considerable energy to dry. 9For more history of ethanol subsidies, see U.S. Department of Energy, Energy Information Administration, “Renewable Energy Annual 1995” (December 1995). Current subsidy information can be found at the Alternative Fuels and Advanced Vehicle Data Center (www.afdc.energy.gov/afdc/laws). 10The 2011 bills and amendments to date include: The Renewable Fuels Reinvestment Act (HR 4940, Pomeroy D-ND and Shimkus R-IL); The Domestic Energy Promotion Act of 2011 (S 884, Grassley R-IO and Conrad D-ND); The Ethanol Subsidy and Tariff Repeal Act (S 493 amendment 309, Coburn R-OK, Feinstein D-CA), The Ethanol Subsidy Repeal Act (HR 2307, Herger R-CA, Crowley D-NY), and the recent bipartisan agreement (Feinstein D-CA, Thune R-SD, Klobuchar D-MN). 11One ad paid for by the Renewable Fuels Association claimed that “Ethanol Reduced Gas Prices by 89¢ per gallon in 2010.” PolitiFact rated this claim as “mostly false.” PolitiFact.com, July 1, 2011.
This is your free article this month. A quality publication is not cheap to produce.
Subscribe today and support The American Interest—only $2.99/month! Already a subscriber? Log in to make this banner go away.
Subscribe today and support The American Interest—only $2.99/month! Already a subscriber? Log in to make this banner go away.
Appeared in: Volume 7, Number 2The Global Costs of American Ethanol
Published on: September 28, 2011
Published on: September 28, 2011
How U.S. ethanol policy creates global food insecurity.