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Real culprit is policy failures

Tuesday, March 3, 2015

When I opened the Sunday New York Times, the first thing I read was Elisabeth Rosenthal’s article on growing biofuel demand and hunger pangs in Guatemala. My interest was heightened, because I know those pangs of hunger are real—my nephew is a Peace Corps volunteer in Guatemala working to help relieve those pangs. 

There is no doubt that higher grain prices are hurting the world’ poor, many of whom are subsistence farmers. However, as is discussed in the Foundation’s series of papers, What's Driving Food Prices, writtenby a team of Purdue University economists, rising grain prices are the result of a complex brew of forces that includes but is not limited to biofuels.  The other forces include supply shocks, macroeconomic factors, trade policies, and rising demand for food in the developing world. 

Even if biofuels were the only cause of hunger pangs, the reality is that we can’t turn the clock back.  There is a growing consensus among agricultural economists that even if we dropped the U.S. ethanol mandate, also known as the renewable fuel standard (RFS), economic incentives would continue to support ethanol production in the foreseeable future.  Once you have invested billions in biorefineries and distribution systems, they will keep operating as long as they bring in a return above variable costs.  Even though the ethanol subsidy, or blender credit, in the United States is already gone and corn prices remain high, there is still a strong economic incentive to blend ethanol, even if the mandate were to be waived.  Those issues are discussed in the paper, Potential Impacts of Waiving Ethanol Blending Rules. 

The corn story is over, but sugar is heating up. The current RFS in the United States calls for a maximum of 15 billion gallons of corn ethanol. We are basically at that level now.  The remaining part of the RFS, which totals 36 billion gallons ethanol equivalent, is reserved for advanced biofuels. When the RFS was enacted in 2007 everyone expected most of the renewable fuel to come from cellulosic ethanol, based on the belief that economically viable cellulosic was just around the corner. It is still around the corner. By a quirk of the law, sugar-based ethanol counts as advanced biofuel even though it is chemically identical to corn ethanol. This reflects the supposed environmental superiority of sugar-based ethanol.  I say supposed since the case for its environmental friendliness is primarily based on a narrow carbon life cycle analysis and its greenhouse gas consequences, not on a full assessment of its environmental consequences.

U.S. sugar policy supports prices at such a high level, primarily through a restrictive import policy—a tariff rate quota—which makes U.S-produced sugar uneconomic as a feedstock.  Even if our sugar policy changed there is limited land suitable for growing cane in the United States, and sugar beets are not likely to be an economically viable feedstock for biofuels. Even if sugar beets were, their production would come at the expense of wheat, corn and soybean acres, meaning higher prices for basic grains. What this all means is that pressure on Central and South America to produce sugar-based ethanol will continue if the advanced biofuel requirement remains in force. 

Just like corn markets, sugar markets are complex. In her article, Rosenthal overlooks a major European Union policy change which has had a big effect on sugar markets, and Guatemala’s farmers. Over the last several years, the EU has been phasing out their sugar price supports, which were even higher than those in the United States. This was supposed to boost global sugar prices and benefit sugar producing developing countries, which it has.  Unfortunately, as Rosenthal eloquently points out, higher prices for the products of developing countries don’t necessarily translate into higher incomes and better nutrition for the impoverished, including subsistence farmers. 

This brings us back to the main question arising from Rosenthal’s article: Are biofuels the culprit? Clearly higher grain prices in recent years have increased hunger pangs for the poor in Guatemala and across the developing world, who depend heavily on staple grains for nourishment. Those higher prices are the result of complex economic forces beyond biofuels, and the reality is that changes in biofuel policy won’t relieve those hunger pangs any time soon. 

The real culprit here is not biofuels, corn or sugar markets, but the failure of a much broader set of policies—social as well as macroeconomic—to address the consequences of the uneven distribution of wealth, resources, and income in Guatemala and much of the developing world. While Rosenthal touches on these most fundamental causes of hunger pangs, it somehow remains easier to point a finger at biofuels, than to tackle the complex and politically-loaded issues of inequality. Market-specific policies, like biofuel mandates, often have unintended consequences, but changing those policies will not solve the problem of hunger pangs.


Neilson Conklin Neilson Conklin (neil@farmfoundation.org)
President, Farm Foundation, NFP www.farmfoundation.org

View more posts by Neilson Conklin

The views and opinions expressed in AgChllenge2050 blog posts are solely the opinions of the authors, and not those of Farm Foundation, NFP.