The Market Strikes Back

I've decided the farm bill process has truly jumped down the proverbial rabbit hole, so we're moving on to other topics for now. And so I'll weigh in on the food vs. fuel debate, dangerous as that may be, because it is one of the most important debates occuring today. And it is a debate that desperately needs to be broadened to include the entire way in which we structure our agricultural support, production and distribution systems. Any and all comments are welcome- these musing are just my thoughts to date, and could change at any moment. Right off the bat I'll say recent increases in the price of food justify emergency spending on domestic and international food aid. I'll also point out that our most recent newsletter has an essay on the specific direction biofuels production should take.

For the US, everything I have seen indicates that while biofuels mandates are increasing the price of commodities domestically, the RFS only accounts for 10-25% of that increase (depending on which study you look at). Increased energy prices account for the vast majority of commodity price increases. And as we all know, the price of commodities is not a big influence on the price of food, and we don’t spend that much of our income on food anyway (around 10%).

The weak link between commodity prices and food prices is particularly true with regards to highly processed food, which the US consumes a great deal of. To make cause and effect trends even harder to discern, approximately $300 billion has been pumped into commodity markets in the past year or so by speculators (hedge funds, etc.) looking to park their cash somewhere safe since the subprime mortgage fiasco. This is causing some serious problems in the futures markets and certainly driving up commodity prices to an unknown extent.

Increased commodity prices are more directly correlated with food price increases when looking at less processed foods. That’s why we’re seeing substantial increases in the price of dairy products, eggs, etc. And we will see much higher prices on meat once excess capacity is eliminated (though that could take some time). The impact on low-income Americans of these price increases is hard to gauge, particularly because they tend to eat more highly processed foods. However, for USDA programs that require purchases of those types of foods (food stamps, school lunches), the impact could be quite severe.

Overseas, low-income diets often consist of a very high percentage of basic grains, etc. That means the impact of high commodity prices is much more severe.

However, the staple receiving the most media coverage (think food riots) is rice- and very little of that is traded on the world market (only about 8% of global production). Rice prices are much more local/regional. A severe drought in Australia combined with a shift towards grape production has had a big impact on Asian rice prices.

Also, when it comes to biofuels, it is important to remember that the US imports little in the way of ethanol due to the 54 cents/gallon ethanol tariff (though $100/barrel oil may overcome that). So it is hard to argue that the US is driving the negative environmental impacts of biofuels globally. The EU imports a large percentage of its biofuels and is currently wrestling with various standards to ensure that their biofuels consumption does not have negative environmental/social/economic affects, but that’s a tall order.

The bottom line on biofuels mandates and incentives is hard to discern. It is entirely possible that most of the biofuels used today will eventually be regarded as little better and perhaps worse than gasoline. However, advanced biofuels hold enormous promise. Right now, it would be politically difficult (if not impossible) to remove incentives for corn-based ethanol and keep incentives for cellulosic/advanced biofuels. And even if that could be done, it is possible, maybe even likely, that the result would be another farm crisis in the Midwest and finish off family farming once and for all. That puts farm and rural organizations such as ours in a difficult position. The ultimate solution is strong public policy that supports biofuels that are environmentally, economically, and socially sustainable- and public policy that supports family farms, ranches, and rural communities as a whole. But it will be a tough fight to get there.

My view is that biofuels mandates have taken up the slack in commodity markets. Probably more important than the actual cost of corn is the fact is the acreage competition that high priced corn inspires. I think that is what was really behind the run-up in wheat prices a few months ago, and certainly is still influencing prices for all commodities. And quite simply, there is money to be made in commodity markets now (Conagra just sold their grain trading operation to a hedge fund for $2 billion), and when there’s money to be made the little guy is going to have problems- be it farmers in the Midwest or the urban poor in Kenya.

The world has gone a long time enjoying grain market surpluses, and now they don’t exist, primarily due to biofuels and drought. It’s a new reality that has to be dealt with, and biofuels are being cast as the bad guy. But I think doing away with biofuels would ultimately do little to ameliorate the situation. Moreover, we’re seeing more and more calls for the next “green revolution”.

What, so we can drive the price of corn back down to $2 and rice to $7 /hundredweight? These days, few countries can produce enough food to supply their populations, and that means food production and distribution is now controlled by markets and the WTO. Ultimately, the advocates of globalized food production have succeeded in achieving many of their goals and now we’re paying the price. Biofuels may have illuminated the problems, but they certainly didn’t cause them.

I'll leave with these closing thoughts/questions: We all want farmers everywhere to make money and everyone to be food secure. But in the short term- right now- is it better for commodity prices to crash so food is more affordable to the global poor? Should we risk another farm crisis in the Midwest on the chance we help starving people in the developing world? Is it even possible to address these problems by only talking about biofuels? I think not. I'd like to hear what you have to say.