Is the United States starving the world to save its citizens from high energy costs? Is processing corn into ethanol lowering global food supplies and leaving people hungry elsewhere?
There have been numerous attempts to link worldwide food inflation with U.S. attempts to lower oil imports through increasing production of ethanol. Most of these discussions are simple supply-and-demand models: by siphoning corn into ethanol production, the amount available to feed the world’s hungry people is reduced. This pushes up demand for other grains as alternative food sources, raising prices across the board and leaving poorer nations to do without.
The theory became widespread as grain prices on the Chicago Board of Trade spiraled during the first half of the year and wasn’t helped by droughts in Australia and South Africa. When Russia slapped a 40% export tariff on their wheat crop, when Argentina refused to share their wheat and Vietnam their rice, when food inflation protests exploded in Mexico, Italy, Pakistan, China and Indonesia, many fingers pointed to ethanol as the prime culprit.
There’s just one problem with the theory: it’s not supported by the facts.
Ethanol’s Place in the Food Chain
Ethanol is mainly produced from animal feed corn, as in “Iowa corn-fed beef.” Because this crop isn’t intended for human consumption in any country, directly linking ethanol to global food supplies is nonsense.
Ethanol production does not use the entire corn kernel, only the starchy part; the remainder is used for animal feed as originally intended. Industry advocates claim these by-products, termed distiller’s dried grains with solubles (DDGS), offer greater nutritional availability because of the processing, as breaking the kernel’s tough outer shell makes the grain’s innards more accessible to the animal’s digestive tract. (Feed corn is often cracked prior to feeding for this very reason, even if no ethanol is produced.)
Because removing all of that starch from the corn leaves a higher protein feed that’s loaded with vitamins, DDGS is in growing demand as a feedstock. It’s now being exported to the Eurozone, Canada and Mexico, while an Australian feedmill has requested a sample shipment for trial in the local dairies.
Ethanol in context
However, the real problem with the food-or-fuel theory is that it looks at food prices outside of the context of the global economy.
As is the case for many other commodities, several factors came together in 2008 to drive up prices. These include the usual suspects of financial market turmoil due to the subprime mortgage fiasco, a commodities price bubble caused by investors looking for safer places to park their funds than global equities markets and an historically weak U.S. dollar. Because most commodities are priced in dollars, when its value falls on the world market, prices must rise in an inverse ratio to compensate. Metals prices also shot through the roof, but ethanol production had nothing to do with that, either.
The unfortunate fact is that energy costs are more directly related to the price of processed foods than are the costs of raw materials. Value is added by processing, packaging, storing, shipping and refrigerating foods, all of which require energy, which also skyrocketed in price this year. No matter how high the cost of a bushel of corn rises, it remains less than 5% of the cost of a box of corn flakes. Even shipping unprocessed grains to hungry people overseas has become more expensive, with ocean freight charges just beginning to recede from record levels, too.
The U.S. heartland remains the breadbasket for the world. The 2008 corn crop is currently estimated at 12.288 billion bushels from 87 million acres, the second largest on record despite the spring flooding in the Midwest and close behind 2007’s record-breaking crop of 13.1 billion bushels. Around 20% of that will be exported, accounting for almost 70% of all world corn exports—without export tariffs.
Meanwhile, the growing ethanol industry contributed $47.6 billion to the U.S. economy in 2007, influencing or creating 238,541 jobs in various industrial sectors including 46,000 manufacturing jobs—jobs that must remain near the corn-producing states and therefore cannot be outsourced to India or China—and generating $4.6 billion in tax revenue for the federal government and another $3.6 billion for various local and state governments. The 6.5 billion gallons of ethanol produced meant that 228.2 million barrels of oil were not imported.
Perhaps the U.S. really can have its cake and let the world eat, too.