Although U.S. and European Union (EU) farm subsidies have long been criticized for their effect on global farm prices, many analysts say the biggest culprits today are the biofuel policies of the two economic powers. Laws that require a certain percentage of transportation fuel to be biofuel — made from corn, sugarcane or other plants — are having perhaps a greater impact on world crop prices than other types of subsidies.
Corn-based ethanol, the main biofuel used in the United States, will consume 40 percent of the U.S. corn crop this year, up from 6 percent in 2001. “The markets are considerably distorted by U.S. biofuels policy,” says William Kerr, a professor of bioresource policy, business and economics the University of Saskatchewan in Saskatoon, Canada. “Virtually all the corn that used to go to export is now being bought up for biofuels,” driving up world corn prices.
In Europe, biodiesel made from soybeans, rapeseed and other crops is the preferred biofuel. The U.S. Department of Agriculture estimates that 10.5 million metric tons of these and other feedstocks will be used for biodiesel production in 2012.
Farmer Brent Carmichael, loads seed corn into a planter in Rochelle, Ill. Corn-based ethanol, the primary biofuel used in the United States, will consume 40 percent of the U.S. corn crop this year, helping to drive up world food prices, say critics of ethanol subsidies. The United States plans to be using 36 billion gallons of biofuels by 2022, mostly for transportation. The European Union aims to make 10 percent of its transportation fuels renewable by 2020. (Getty Images/Scott Olson)
Government mandates are driving the surge in biofuels. In the United States, the 2007 Energy Security and Independence Act required that 36 billion gallons of biofuels be used by 2022, most of it for transportation. In 2009, the European Union set a goal of using 10 percent renewable energy for its transportation needs by 2020. Without the regulatory requirements, say many analysts, biofuels production and use would be lower.
Experts differ on how much biofuels use is raising crop and food prices, although even the ethanol industry acknowledges it is having at least some impact. Gawain Kripke, director of policy and research for Oxfam America, a nongovernmental anti-poverty organization, says some of the farm products now going into biofuels would otherwise be sold in the food chain.
But the price-distorting effect of biofuels goes beyond using a traditional food crop for fuel, he contends. “Agricultural land is fungible. If you're not using the land to produce one thing, you can use it to produce another thing,” says Kripke. “We're pretty sure that biofuels production is having a significant impact on food prices.” In other words, with more land being diverted to corn production because of the high price of corn, less acreage is available to grow wheat and other grains, which drives their prices up as well. So biofuel policies affect the grain markets overall, not just the corn market.
Robert Carlson, a North Dakota farmer and president of the World Farmers Organization, a federation of 40 farm groups from around the world, says biofuel production has gone up because political leaders have recognized the importance of reducing dependence on imported oil. “The estimate is we'd pay about 40 cents more per gallon at the pump if we didn't have ethanol, so the question is: How much more dependent do we want to be on petroleum?” Carlson asks.
High food prices, which have struck particularly hard in Africa and other poor regions, have led to increased criticism of U.S. and EU biofuels policy. To tackle volatile food prices, “policymakers need to curtail biofuels subsidies and mandates [and] discourage the use of food crops in biofuels production,” said Maximo Torero, coauthor of the “2011 Global Hunger Index” for the International Food Policy Research Institute, in Washington, D.C.
Congress allowed a 30-year-old tax credit for ethanol production to expire in early 2012, leading to speculation that the political commitment to biofuels is waning. But others think high oil prices, along with the power of the farm lobby and the investment in ethanol and biodiesel plants, make a major shift unlikely.
“It would be pretty hard for either Europe or the United States to abandon their biofuels policy,” says Kerr.
— Reed Karaim