How Ethanol Fuels the Food Crisis

In the year since the publication of our article, "How Biofuels Could Starve the Poor" (May/June 2007), the average price of corn has increased by some 60 percent, soybeans by 76 percent, wheat by 54 percent, and rice by 104 percent. What at first seemed alarmist has turned out to be an underestimate of the effects of biofuels on both commodity prices and the natural environment. These price increases are substantial threats to the welfare of consumers, especially in poor developing countries facing food deficits. They are especially burdensome to the rural landless and the urban poor, who produce no food at all. Josette Sheeran, the Executive Director of the World Food Program, calls this a global "tsunami of hunger." Robert Zoellick, President of the World Bank, estimates that there are 100 million newly poor and hungry people as a result of rising food prices.

Although controversy remains over how much of the food price increase since 2006 can be attributed to biofuels, their effects cannot be overlooked. In 2008, 30 percent of the U.S. corn crop will be used for ethanol. Although economic growth in developing countries (especially India and China) and poor crop conditions in certain parts of the food-exporting world (such as Australia) are part of the explanation for rising commodity prices worldwide, neither offers constructive opportunities for policy redirection. By contrast, the panoply of subsidies, tariffs and mandates protecting the biofuels sector, especially in the United States and the European Union, is ripe for reform.

Last year, we predicted that upward pressure on petroleum prices would persist, allowing ethanol producers to pay higher and higher prices for corn. At the time, oil prices were approximately $70 per barrel and rising while corn prices were roughly $3.75 per bushel and rising. But few observers, ourselves included, imagined that within a year oil prices would reach $130 per barrel and corn futures would exceed $6 per bushel. Meanwhile, despite a near doubling of U.S. corn ethanol production (from 3.4 billion gallons in 2004 to 6.5 billion gallons in 2007), infrastructure and distribution problems

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