Biofuels, Food Price Inflation, World Hunger

Recently the United Nations issued a report on food shortages that threaten the health and welfare of several countries, and the president of the World Bank called for action on sharply rising food prices.  World Bank Chief Calls for Immediate Action on Deepening Global Food Crisis – Riots in Haiti, the Philippines, Egypt, Cameroon, Ivory Coast, Senegal and Ethiopia have accentuated the urgency of the problem. Food Inflation, Riots Spark Worries for World Leaders – Africa is particularly vulnerable to food price increases.  Indonesia and Uzbekistan are also vulnerable to social upheaval because of food price inflation.  We in the United States pay on average only 10% of our annual income on food, so we may easily forget that in poor countries, up to 85% of family income may go to buy food.  Such poor people cannot afford the 83% increase in food prices that has occurred over the past three years, and many must go hungry.

Meanwhile, rich countries like the United States have adopted policies to encourage the use of food stocks as fuel for automobiles.  Ethanol (ethyl alcohol) has been promoted as a biofuel that will help the United States achieve energy independence while reducing our greenhouse gas emissions.  Where does the ethanol come from?  Primarily from corn!  That contributes to food price inflation!

Ethanol is attractive as an automotive fuel because it has a higher octane rating than gasoline.  However, ethanol has less energy than an equal volume of gasoline.  A gallon of E85 (a mixture of 85% ethanol and 15% gasoline) has an energy content of about 80,000 BTU, compared to gasoline’s 124,800 BTU. So about 1.56 gallons of E85 takes you as far as 1 gallon of gasoline.  The EPA requires oxygenated fuels in major metropolitan areas, to alleviate air pollution problems.  That requirement leads refiners to mix 10% ethanol with 90% gasoline to produce automotive fuel for those areas.  This fuel also reduces the miles per gallon performance of your car, but not as much as E85.

The Unites States now has 147 ethanol production plants with a combined capacity of 8.5 billion gallons of fuel a year, with new construction underway to increase that capacity by another 5 billion gallons a year. Of the record 93 million acres of corn planted in the United States in 2007, approximately 20% was used to produce ethanol.  That number was expected to rise to 30% by the 2009 crop year.  Recent information suggests that U.S. farmers intend to plant less corn in 2008.  Furthermore, bad weather (heavy rain, flooding and tornadoes) throughout the U.S. heartland may further diminish the prospects for the 2008 corn harvest.

The use of ethanol in automotive fuel has helped drive up the price of corn.  The price of corn has risen faster than the price of ethanol.  Many U.S. ethanol producers are losing money because their costs have risen faster than the price of ethanol.  Ethanol producers started losing money last year when the price of corn rose to $4 per bushel.  In early April, 2008 the price of corn exceeded $6 per bushel for the first time, further squeezing ethanol producers.

When considering the economic viability of corn-based ethanol as a means to attaining energy independence, one must consider that growing corn is an intensive process that requires pesticides, fertilizer, heavy equipment and transport.   Without the federal tax credit of $0.51/gallon for ethanol mixed with gasoline, there would be no economic incentive at all to use ethanol in automotive fuel.

With worldwide food shortages driving up prices, it would make sense to use the U.S. corn for food and animal feed instead of ethanol production.  However, a reduction in demand for ethanol would bankrupt many ethanol production companies.  Investors in the ethanol industry would lose a lot of money.

There are other biofuels that warrant consideration.  Perhaps that can be the subject of a future post.

I recognize the political clout of the farm lobby and Wall Street.  Nevertheless, the right public policy would be to eliminate the federal tax credit for ethanol mixed with gasoline.  There is no moral justification for the United States to subsidize the use of food stocks for automotive fuel when people are going hungry because of food shortages and food price inflation.

Reference  Crunching the Numbers on Alternative Fuels – Popular Mechanics




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