A process operator shows a handful of corn at the GreenField Ethanol plant in Chatham, Ontario April 10, 2008.MARK BLINCH/Reuters
An ethanol plant in Iowa, rising inflation around the world, and protests in North Africa and the Middle East. Are these three things related?
It might be a leap to say that American ethanol is directly responsible for the overthrow of Egyptian president Hosni Mubarak. But it's no leap to say that upheaval in countries from Tunisia to Yemen has been at least partly triggered by the return of inflation, which, in turn, is largely due to soaring food prices. That and the American obsession with turning food into fuel-specifically, corn into ethanol-is making a bad situation worse.
The conventional wisdom is that rising energy prices are a good indicator of future inflation. Not so, say economists Luis Catão, of the International Monetary Fund, and Roberto Chang, of Rutgers University. They argue that food prices are a much better inflation yardstick. In a study published in January, the duo noted that "every single inflation upturn over the past four decades has been preceded (with a one- to two-year lag) by an uptick in world food prices."
Guess what? Inflation is now roaring back in many parts of the world. In Britain, prices are rising at twice the Bank of England's target annual rate of 2%. In the 17-country euro zone, inflation is running at about 2.4%. In China, the rate is almost 5%, and prices are climbing fast in Canada and the United States, too. True, oil prices are on the boil, but they're still about a third below their peak of $147 (all currency in U.S. dollars), set in 2008.
Food prices, however, are again near record highs just three years after the global food crisis of 2007-2008 triggered riots in more than a dozen countries. Wheat has roughly doubled over the past year. So has corn, and the futures market suggests that corn will soon break its record of $7.65 a bushel, set in 2008. If Catão and Chang are right, general inflation rates are set to go from worrisome to outright scary.
There's no shortage of explanations for the food price surge. They range from extreme weather hitting the grain belts of Australia and Russia to growing demand for protein-rich diets in the developing world. Turning corn into ethanol should also shoulder much of the blame, yet not many American farmers or Midwest members of Congress will admit that pumping ethanol into gas tanks to keep American SUVs on the road might be creating supermarket sticker shock from Toronto to Tunis.
The U.S. produces more corn than any other country. The total value of its crop in 2009 was about $50 billion, and that was before the recent price surge. It was also more than double the combined value of all the crops produced in Canada. Until a few years ago, corn was used almost entirely for animal feed, booze, processed foods for humans-such as corn flakes and high-fructose corn syrup-and backyard corn roasts. Today, 40% of the U.S. crop is devoted to ethanol, up from 33% in 2008. A decade ago, the figure was just 7%.
In 2010, U.S. farmers produced nearly five billion bushels of corn. That's more than all the corn grown in the European Union, Argentina, Mexico and India combined. Iowa-the epicentre of the corn cornucopia-is overjoyed, because the Obama administration has guaranteed its prosperity for decades by raising the cap on the amount of ethanol that can be mixed with gasoline to 15% from 10%.
That means millions of additional acres of corn will be planted. Since new agricultural land does not appear by magic, one more acre of corn means one less acre of another crop. No points for guessing where this is going. "Land diverted to corn will, in turn, put upward price pressure on other major crops competing for that acreage," said Tom Elam, president of the consulting firm FarmEcon, and Steve Meyer, president of Paragon Economics, in a 2010 report.
There's more. As corn transforms itself from food to fuel source, it should come as no surprise that its value is becoming linked to gasoline. As the price of gas goes up, so does the price of ethanol. Meyer and Elam say the link was forged in 2005, when Congress mowed down the anti-food-for-fuel crowd and established the ethanol mandate for gasoline.
In January, as corn prices were galloping ahead, Peter Brabeck-Letmathe, chairman of Swiss food giant Nestlé, said that turning food into fuel was "absolute madness." Tyson Foods, the largest U.S. meat packer, blamed the ethanol craze for driving up the price of meat, because galloping corn prices are boosting the cost of animal feed. It's also no wonder that rising food prices trigger social unrest. Remember that food typically consumes as much as 50% of household income in poor countries, versus only about 15% in the rich world.
We already know that U.S. ethanol is a boondoggle, because the industry wouldn't exist without import protection and $7 billion a year in subsidies. We know that ethanol's environmental benefits are, at best, dubious. Now, it also appears to be an inflation catalyst, with potentially calamitous consequences in poor countries. Corn-based ethanol isn't just stupid; it's immoral.