Commodity trading houses around the world are ‘stress testing’ to be sure their finances can withstand oil at $175 a barrel and corn at $10 a bushel. While these price levels are not a forecast but a “worst case scenario,” the commodity traders’ preparations reflect the shortages and volatility in today’s commodity markets.
The economic stress being placed on food consumers around the world is catching the attention of policymakers. Food security of individual households, and of nations, is under close scrutiny.
Reserves of corn, for one thing, have dropped to their lowest levels in more than 15 years, reflecting tighter supplies that will result in higher food prices in 2011. Demand for corn for the production of ethanol is a major reason for these tight supplies. What’s more, the recent rise in oil prices is likely to increase the demand for ethanol, resulting in the diversion of even more corn for ethanol.
‘What problem with ethanol?’
USDA officials and corn-ethanol proponents like to focus on high oil prices and weather events as driving record-high food and grain prices. They don’t like to acknowledge that allocating 40% and more of corn supplies to ethanol production drives up prices and makes markets vulnerable to recurring price spikes and ongoing volatility. This is where food security concerns come into play – and a reason why corn-for-ethanol policies are under scrutiny.
Officials at the United Nations Food and Agriculture Organization are less reluctant to talk about the linkage between rising prices of food and grains and the use of corn for ethanol production.
Olivier Dubois, a bioenergy expert at FAO, told the New York Times that it is difficult to quantify the extent to which the diversion of corn for ethanol has driven up food prices but it does. “We have to move away from the thinking that producing an energy crop doesn’t compete with food,” he was quoted as saying. “It almost inevitably does.”
A more balanced ethanol policy
U.S. corn-for-ethanol policy is flawed – and has been from its inception – and it is time for Congress and the Obama administration to take action to fix the policy.
WATT PoultryUSA columnist Dr. Paul Aho in 2009 proposed a policy that would accommodate the needs for ethanol production while providing more stability in corn prices. The proposal included a variable subsidy for ethanol plants that would increase as the price of ethanol declines and decrease as the price of ethanol increases.
Dubois and others have also suggested that countries revise their policies so that rigid fuel mandates can be suspended when food stocks get low or prices become too high.
‘Food first’ policy in order
Current U.S. renewable fuels policies tilt in favor of fuel production over food production. At the very least, U.S. renewable fuels policies should be more balanced between food and fuel.
An official at the World Bank goes a step further in the assessment of the priority for foods. “The policy really has to be food first,” Hans Timmer, director of the Development Prospects Groups of the World Bank told the New York Times. “The problems occur when you set targets for biofuels irrespective of the prices of other commodities.”
Adopting more flexible corn-for-ethanol policies that neither set rigid fuel mandates nor rigid subsidies would be a first step in restoring stability in prices and markets.