Food vs. Fuel: Filling the Wrong Tank?

Wondering how to put a brake on spiraling prices at the pump and along the supply chain? As the debate about the economic and environmental effect of biofuels continues, today’s guest, economist Thomas E. Elam, Ph.D., president, FarmEcon LLC, and Adjunct Fellow of the Center for Global Food Issues, a project of the Hudson Institute, provides an analysis of the situation. Elam recently published a study on the effects of Federal ethanol subsidies on feed and food costs sponsored by the National Turkey Federation, the National Chicken Council and the American Meat Institute.

-Lynn A. Kuntz

Leaders of the G8 are meeting in Japan this week where they will address the food crisis currently impacting developed and developing nations. They are facing pressure to call a moratorium on plant-derived fuels. Biofuels have forced global food prices up 75% according to a confidential World Bank report published in the Guardian on July 4^th. Rising food prices have recently pushed another 100 million people over the poverty line.

Most economic problems take years to resolve, but Congress and the administration can do something almost immediately to save consumers more than $20 billion this year and help keep food prices from climbing calamitously next year.

How? By reducing the 2008 ethanol mandate now and eventually eliminating the subsidies for turning food crops into biofuels.

Currently, the federal renewable fuel standard (RFS) requires rising levels of food-based ethanol and biodiesel as part of our motor fuels mix.  There are 9 billion gallons mandated this year, rising to 15 billion by 2015. In addition, federal law currently pays a fixed minimum of 51 cents a gallon for all ethanol and a dollar a gallon for biodiesel to petroleum blenders in the form of tax rebates.

Congress and the administration conceived the RFS and provided generous subsidies for ethanol and biodiesel use at a time when the country was awash in excess grain, and oil and gasoline prices were about a third of today’s levels. The hope was that these supports would encourage an alternative domestic source for transportation fuels that diversified our supplies in an environmentally friendly way.

The dream has turned into a nightmare.

As a replacement for gasoline and diesel, biofuels are a near-total failure. In 2007, ethanol production had the energy equivalent of 3% of U.S. oil imports. But at what expense? This year’s RFS mandate will require about 3.2 billion bushels of corn—which amounts to nearly a quarter of last year’s record corn crop. Using all of our corn and soy crops for biofuels would displace only 17% of our imports.

As far as being environmentally friendly, the increased use of biofuels globally is forcing more land into crop production, which actually increases overall greenhouse-gas emissions compared to equivalent uses of oil. And corn’s requirements for water deplete that resource, while its demand for increased use of fertilizers threatens increased water pollution.

The one thing that the biofuel mandates and subsidies has accomplished is higher prices for the producers of corn and soybeans, along with wheat, rice and other major food crops.  Those higher prices are also higher costs for the entire global food production system.

Higher oil prices, shifting consumer demand and weather problems around the globe have contributed to more than a doubling of major food crop prices since 2005, when biofuel mandates were initiated.  My own studies and those of other researchers, including the World Bank, have found that biofuel mandates and subsidies have played a major role.

My recent study entitled “Biofuel Support Costs to the U.S. Economy: The Key Role of the RFS in a Feedstock Shortage Scenario,” found the mandates and subsidies had increased corn prices by more than $1.40 a bushel in 2007/2008 and would add $2.04 a bushel in 2008/2009. They increased soy bean prices by $4.50 a bushel this last year and would add $5.25 a bushel next year.

This, of course, was before this year’s Midwest floods, which has forced corn and soy bean prices to record levels. The federal biofuel mandates, perversely, takes no account of such disasters floods to allow less biofuel production. Thus, coupled with this year’s floods, they threaten devastating food price increases for consumers here and around the globe unless Congress and the administration act now to reduce the mandates.

Cutting the mandates by half would reduce all of those costs to consumers, saving them billions of dollars that could support other portions of the economy. Such action also would place our biofuels program on a more sustainable and market-driven course.

And the effect would be felt this year, not years down the road.

- Thomas E. Elam, Ph.D.