As global food costs rise, are biofuels to blame?

The biofuels industry plans on producing record amounts of ethanol this year to meet a mandate of the new US energy law – and will need a lot of corn to do it. At the same time, global food prices are at near-peak levels. The question is, how big is the connection between those two developments?

It's a topic getting more scrutiny as the world enters 2008 with the lowest grain stockpiles on record, near-record grain prices, and prospects for even tighter supplies as global demand rises for food and fuel.

Political instability over higher food prices is a key concern. Last year saw tortilla demonstrations in Mexico, pasta protests in Italy, and unrest in Pakistan over bread prices. Soybean prices, meanwhile, prompted demonstrations in front of Indonesia's presidential palace. Food inflation in China is a major problem.

But the connection between the expansion of biofuels and higher global food prices is not clear cut, with the biofuels industry saying its impact is relatively small and biofuel critics saying that ethanol plants are driving up the price of corn and biodiesel producers are taking a bite out of the soybean crop.

"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," says Lester Brown, president of the Earth Policy Institute (EPI), an environmental think tank in Washington. World population growth will require food for an additional 70 million people this year, the EPI said in a report last week.

Driven mostly by population growth, world grain consumption rose an average of 21 million tons per year from 1990 to 2005, the US Department of Agriculture reported this month. Demand for grain to make ethanol soared by 27 million tons last year, USDA reported.

"Putting [corn-ethanol] land back into food use would have a profound effect on the price of corn," says Bruce Babcock, an economist at Iowa State University's Food and Agricultural Policy Research Institute. This year, he estimates, the US will produce about 8 billion gallons of ethanol. To do that, nearly one-fifth of the 80 million acres now devoted to corn will go to make ethanol.

That demand is helping to boost feed prices for cattle, as well as for crops like peas and beans because less land is devoted to growing them, he says.

In a counterpoint study last month by corn growers and the biofuels industry, higher corn prices were found to be only a small element in rising food costs overall – although higher energy costs for fuel to transport crops and grow them were a larger factor.

"This analysis puts to bed the argument that a growing domestic ethanol industry is solely responsible for rising consumer food prices," Bruce Scherr, CEO of Informa Economics, a food and agriculture research and consulting firm based in Memphis, Tenn., said in a statement.

The "farm value" of commodity raw materials used in foods accounts for 19 percent of total US food costs, down from 37 percent in the 1973. Higher costs for labor, packaging, transportation, and energy were a "key driver" behind higher food costs, the report said.

While higher corn prices cause lower profit margins for livestock and poultry producers, "the statistical evidence does not support a conclusion that there is a strict 'food-versus-fuel' trade-off" driving consumer food prices higher, the study said.

Whatever the reason, prices for grains such as corn and soybeans are up. Despite a record US corn crop in fall 2007, corn prices are near a record high of about $5 a bushel in mid-January.

Because corn is feedstock, higher corn prices can affect food prices. The average price of milk rose 29 percent last year, for instance, and eggs 36 percent.

"More people are coming to the conclusion that there is a food-fuel link," says Siwa Msangi of the International Food Policy Research Institute (IFPRI), a Washington food-security research organization. "The historic pattern of the past, where food prices were in a long-term decline, could be at an end."

But the major reason grain prices are spiking, he and others note, is fast-rising demand for higher-quality food like meat, poultry, and dairy products by the increasingly affluent people of China and India.

Still, biofuels play a role in higher grain prices, says Dr. Babcock.

His findings are bolstered by a study last month in which Mr. Msangi's IFPRI estimated that future biofuel expansion could increase international corn prices between 26 and 72 percent by 2020, depending on how aggressive the expansion turns out to be.

Under two scenarios IFPRI examined, "the increase in crop prices resulting from expanded biofuel production was accompanied by a net decrease in the availability of ... food" for the world's poor, the study found.

As prices rise, of course, producers worldwide have incentive to grow more corn – or other crops, such as wheat, that might be in demand instead of corn.

But that's not happening yet. In an apparent effort to moderate food prices and quell social unrest – which in turn curbs growers' incentive to produce more – Russia this month is expected to place a 40 percent export tax on wheat. Argentina, too, has limited its wheat exports.

"The price of corn, soybeans, and livestock feed is not going to go down," Babcock says. America's new energy bill "pretty much guarantees that feed costs and land rent are going to stay high."