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See Inside July 2011

A Quick Fix to the Food Crisis

Curbing biofuels should halt price rises



John Zoiner Getty Images

When food prices rose steeply in 2007 and climaxed in the winter of 2008, politicians and the press decried the impact on the billion or so people who were already going hungry. Excellent growing weather and good harvests provided temporary relief, but prices have once again soared to record heights. This time around people are paying less attention.

The public has a short attention span regarding problems of the world’s have-nots, but experts are partly to blame, too. Economists have made such a fuss about how complicated the food crisis is that they have created the impression that it has no ready solution, making it seem like one of those intractable problems, like poverty and disease, that are so easy to stash in the back of our minds. This view is wrong.

To be sure, reducing hunger in a world headed toward more than nine billion people by 2050 is a truly complicated challenge that calls for a broad range of solutions. But this is a long-term problem separate from the sudden rise in food prices. High oil prices and a weaker dollar have played some part by driving up production costs, but they cannot come close to explaining why wholesale food prices have doubled since 2004. The current price surge reflects a shortfall in supply to meet demand, which forces consumers to bid against one another to secure their supplies. Soaring farm profits and land values support this explanation. What explains this imbalance?

Crop production has not slowed: total world grain production last year was the third highest in history. Indeed, it has grown since 2004 at rates that, on average, exceed the long-term trend since 1980 and roughly match the trends of the past decade. Even with bad weather in Russia and northern Australia last year, global average crop yields were only 1 percent below what the trends would lead us to expect, a modest gap.

The problem is therefore one of rapidly rising demand. Conventional wisdom points to Asia as the source, but that’s not so. China has contributed somewhat to tighter markets in recent years by importing more soybeans and cutting back on grain exports to build up its stocks, which should serve as a warning to policy makers for the future. But consumption in China and India is rising no faster than it has in previous decades. In general, Asia’s higher incomes have not triggered the surge in demand for food.

That starring role belongs to biofuels. Since 2004 biofuels from crops have almost doubled the rate of growth in global demand for grain and sugar and pushed up the yearly growth in demand for vegetable oil by around 40 percent. Even cassava is edging out other crops in Thailand because China uses it to make ethanol. 

Increasing demand for corn, wheat, soybeans, sugar, vegetable oil and cassava competes for limited acres of farmland, at least until farmers have had time to plow up more forest and grassland, which means that tightness in one crop market translates to tightness in others. Overall, global agriculture can keep up with growing demand if the weather is favorable, but even the mildly poor 2010 growing season was enough to force a draw down in stockpiles of grain outside China, which sent total grain stocks to very low levels. Low reserves and rising demand for both food and biofuels create the risk of greater shortfalls in supply and send prices skyward.

Although most experts recognize the important role bio­fuels play, they often underestimate their effects. Many of them misinterpret the economic models, which understate the degree to which biofuels drive up prices. These models are nearly all designed to estimate biofuels’ effects on prices over the long term, after farmers have ample time to plow up and plant more land, and do not speak to prices in the shorter term. Commentators also often lump all sources of crop demand together without recognizing their different moral weights and potential for control. Our primary obligation is to feed the hungry. Biofuels are undermining our ability to do so. Governments can stop the recurring pattern of food crises by backing off their demands for ever more biofuels. 

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