Why Ethanol Production Will Drive World Food Prices Even Higher in 2008

Lester R. Brown, EPI :: We are witnessing the beginning of one of the great tragedies of history. The United States, in a misguided effort to reduce its oil insecurity by converting grain into fuel for cars, is generating global food insecurity on a scale never seen before.

The world is facing the most severe food price inflation in history as grain and soybean prices climb to all-time highs. Wheat trading on the Chicago Board of Trade on December 17th breached the $10 per bushel level for the first time ever. In mid-January, corn was trading over $5 per bushel, close to its historic high. And on January 11th, soybeans traded at $13.42 per bushel, the highest price ever recorded. All these prices are double those of a year or two ago.

As a result, prices of food products made directly from these commodities such as bread, pasta, and tortillas, and those made indirectly, such as pork, poultry, beef, milk, and eggs, are everywhere on the rise. In Mexico, corn meal prices are up 60 percent. In Pakistan, flour prices have doubled. China is facing rampant food price inflation, some of the worst in decades.

In industrial countries, the higher processing and marketing share of food costs has softened the blow, but even so, prices of food staples are climbing. By late 2007, the U.S. price of a loaf of whole wheat bread was 12 percent higher than a year earlier, milk was up 29 percent, and eggs were up 36 percent. In Italy, pasta prices were up 20 percent.

World grain prices have increased dramatically on three occasions since World War II, each time as a result of weather-reduced harvests. But now it is a matter of demand simply outpacing supply. In seven of the last eight years world grain production has fallen short of consumption. These annual shortfalls have been covered by drawing down grain stocks, but the carryover stocks—the amount in the bin when the new harvest begins—have now dropped to 54 days of world consumption, the lowest on record. [Full Story]

Massive Diversion of U.S. Grain to Fuel Cars is Raising World Food Prices

Lester R. Brown, EPI :: If you think you are spending more each week at the supermarket, you may be right. The escalating share of the U.S. grain harvest going to ethanol distilleries is driving up food prices worldwide.

Corn prices have doubled over the last year, wheat futures are trading at their highest level in 10 years, and rice prices are rising too. In addition, soybean futures have risen by half. A Bloomberg analysis notes that the soaring use of corn as the feedstock for fuel ethanol “is creating unintended consequences throughout the global food chain.”

The countries initially hit by rising food prices are those where corn is the staple food. In Mexico, one of more than 20 countries with a corn-based diet, the price of tortillas is up by 60 percent. Angry Mexicans in crowds of up to 75,000 have taken to the streets in protest, forcing the government to institute price controls on tortillas.

Food prices are also rising in China, India, and the United States, countries that contain 40 percent of the world’s people. While relatively little corn is eaten directly in these countries, vast quantities are consumed indirectly in meat, milk, and eggs in both China and the United States.

Rising grain and soybean prices are driving up meat and egg prices in China. January pork prices were up 20 percent above a year earlier, eggs were up 16 percent, while beef, which is less dependent on grain, was up 6 percent. [Complete Text]

The World After Oil Peaks

Lester R. Brown, EPI :: Peak oil is described as the point where oil production stops rising and begins its inevitable long-term decline. In the face of fast-growing demand, this means rising oil prices. But even if oil production growth simply slows or plateaus, the resulting tightening in supplies will still drive the price of oil upward, albeit less rapidly.

Few countries are planning a reduction in their use of oil. Even though peak oil may be imminent, most countries are counting on much higher oil consumption in the decades ahead, building automobile assembly plants, roads, highways, parking lots, and suburban housing developments as though cheap oil will last forever. New airliners are being delivered with the expectation that air travel and freight will expand indefinitely. Yet in a world of declining oil production, no country can use more oil except at the expense of others.

Some segments of the global economy will be affected more than others simply because some are more oil-intensive. Among these are the automobile, food, and airline industries. Cities and suburbs will also evolve as oil supplies tighten.

Stresses within the U.S. auto industry were already evident before oil prices started climbing in mid-2004. Now General Motors and Ford, both trapped with their heavy reliance on sales of gas-hogging sport utility vehicles, have seen Standard and Poor’s lower their credit ratings, reducing their corporate bonds to junk bond status. Although it is the troubled automobile manufacturers that appear in the headlines as oil prices rise, their affiliated industries will also be affected, including auto parts and tire manufacturers.

The food sector will be affected in two ways. Food will become more costly as higher oil prices drive up production costs. As oil costs rise, diets will be altered as people move down the food chain and as they consume more local, seasonally produced food. Diets will thus become more closely attuned to local products and more seasonal in nature.

At the same time, rising oil prices will also be drawing agricultural resources into the production of fuel crops, either ethanol or biodiesel. Higher oil prices are thus setting up competition between affluent motorists and low-income food consumers for food resources, presenting the world with a complex new ethical issue. [Complete Text]

World Grain Stocks for 2006 Fell to 57 Days of Consumption

Lester R. Brown, EPI :: The world grain harvest for 2006 was projected mid-year to fall short of consumption by 61 million tons, marking the sixth time in the last seven years that production has failed to satisfy demand. As a result of these shortfalls, world carryover stocks at the end of this crop year were projected to drop to 57 days of consumption, the shortest buffer since the 56-day-low in 1972 that triggered a doubling of grain prices.

World carryover stocks of grain, the amount in the bin when the next harvest begins, are the most basic measure of food security. Whenever stocks drop below 60 days of consumption, prices begin to rise. It thus came as no surprise when the U.S. Department of Agriculture (USDA) projected in its June 9 world crop report that this year’s wheat prices will be up by 14 percent and corn prices up by 22 percent over last year’s.

This price projection assumes normal weather during the summer growing season. If the weather this year is unusually good, then the price rises may be less than those projected, but if this year’s harvest is sharply reduced by heat or drought, they could far exceed the projected rises.

With carryover stocks of grain at the lowest level in 34 years, the world may soon be facing high grain and oil prices at the same time (See Figure). For the scores of low-income countries that import both oil and grain, this prospect is a sobering one.

World grain consumption has risen in each of the last 45 years except for three—1974, 1988, and 1995—when tight supplies and sharp price hikes lowered consumption (See Figure). Growth in world grain demand, traditionally driven by population growth and rising incomes, is also now being driven by the fast growing demand for grain-based fuel ethanol for cars.

Roughly 60 percent of the world grain harvest is consumed as food, 36 percent as feed, and 3 percent as fuel. While the use of grain for food and feed grows by roughly 1 percent per year, that used for fuel is growing by over 20 percent per year.

Although the rate of world population growth is projected to slow further, the number of people to be added is expected to remain above 70 million a year until 2020. Each year the world’s farmers must try to feed an additional 70 million people, good weather or bad. This growth is concentrated in the Indian subcontinent and sub-Saharan Africa, which is where most of the world’s hungry people live. [Complete Text]