Oil not subsidies behind corn prices hikes

By Sarah Hills

- Last updated on GMT

Related tags: Food prices, Biofuel

Biofuel subsidies should not be singled out for blame when it comes to rising corn prices, as the underlying driver is the high cost of oil, according to a new study commissioned by the Farm Foundation.

At the same time economic growth and rising human aspirations”​ are putting increasing pressure on global resources, which is affecting all food commodities, Neilson Conklin, president of the Farm Foundation, said.

The study called What’s Driving Food Prices, stated that “prices of virtually all food commodities have increased substantially over the past year”​ and many are at or near records.

It said that the reasons behind this are complex and involve economic growth, international trade, currency markets, oil prices, government policies and bad weather.

Biofuels have also contributed and the growth in the use of corn for ethanol in the US has been largely responsible for the global increase in demand for the crop over the past four years.

The subsequent price rises for corn have been blamed by some on US subsidies and mandates for biofuels. But the report said that quantitatively, most of the corn price increase is driven by high crude oil prices.

It showed that during the four years corn has gone from about $2 to $6 a bushel while oil has gone from $40 to $120, and concluded that about $3 of the corn price increase is due to the higher oil price and $1 to the ethanol subsidy.

The authors, Wallace Tyner, Philip Abbot and Christopher Hurt, of the Purdue University in the US, who are economists, described a price circle where “higher crude leads to higher gasoline, which leads to higher ethanol, which leads to more ethanol production, which increases corn demand, which increases corn price”.

As with corn, the factors driving current food price increases in general are complex, according to Conklin.

He said: “As is true of many issues in the food system, the full story behind rapid increases in food prices is not a simple one.

“Today’s food price levels are the result of complex interactions among multiple factors - including crude oil prices, exchange rates, growing demand for food and slowing growth in agricultural productivity - as well as the agricultural, energy and trade policy choices made by nations of the world.

“But one simple fact stands out: economic growth and rising human aspirations are putting ever greater pressure on the global resource base.

“The difficult challenge for public and private leaders is to identify policy choices that help the world deal with the very real problems created by today’s rising food prices without jeopardizing aspirations for the future.”

Responding to the study, the National Corn Growers Association President Ron Litterer, said: “Reports such as this are mounting evidence that many fears about ethanol are ungrounded, and that biofuels are an important part of the solution when it comes to energy independence and sustainability.”

Ethanol concerns

There is debate over whether biofuels are a major factor in rising food prices in general as land previously used for food crops is diverted to biofuel crop production at a time when food security is at risk.

Statistics from the Department of Agriculture (USDA) indicate the country' ethanol capacity in 2006 was 4.4 billion gallons with growth projections of 7 billion gallons for 2010.

The US is also spearheading research into second generation biofuels, which would draw on waste cellulose material instead of diverting grain supplies from food.

A statistical analysis by Informa Economics at the end of last year found that there is little connection between corn ethanol production and food price inflation as factors aside from corn are more influential.

They include energy-intensive activities such as processing, packaging and transporting, as well as the cost of labor.

In May the United States Department of Agriculture (USDA), said that commodity food prices are not going down anytime soon but should plateau as preventative measures are implemented and markets stabilize.

The department's chief economist, Joseph Glauber attributed the recent dramatic spike in food prices to factors including economic growth in the US and abroad, weather conditions, energy prices, export restrictions, as well as new markets for alternative fuels.

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