Sunday, April 10, 2011

Bio-Fuels Impact World Food Prices

Over the past few years there have been some said that bio-fuels would unnecessarily cause the price of food to skyrocket as demand for the food (grains, corn, others) would outstrip supplies (law of supply and demand). As part of this law of unintended consequences would most impact the third world as increasing cost of food would create food shortages and starvation.  Well, it seems that these predictions are starting to become true.

The NY Times has a very detailed article on the impact of increased demand on food for fuel production has had on the cost and availability of food for its primary purpose, and that is to feed people.

In places like Africa and Thailand, where there are many, many impoverished people, decreasing supplies for food is causing starvation issues.  China is currently purchasing nearly the entire cassava root crop which is used for as an important ingredient in everything from tapioca pudding and ice cream to paper and animal feed. (Source: NY Times).

The increase use of food crops for bio-fuels is also having third and fourth level effects beyond the increase of cost for corn and bread.  Transportation costs are also rising as is the cost of beef due to the increased cost cattle feed. In the US alone, corn has gone up over 70% due to increased demand, and that is after a record harvest which usually depresses prices.

Beyond the impact on food prices, bio-fuels are proving to be very hard on the environment, but that is another post for another day.

The US has long been know as the breadbasket of the world, supplying many third world countries with cheap (gov’t subsidized) imports from the US. While this might have created artificially low prices for basic foods (corn, grain, soybeans), it did keep hunger somewhat at bay in many places around the world.  Now we are no longer a reliable exporter of food, diverting much of what would be shipped overseas into the bio-fuels program.  This shortage has created a significant jump in the cost of food all over the world.

The rapid increase in grain and oilseed prices due to bio-fuel expansion has been a shock to consumers worldwide, especially during 2008 and early 2009. From 2005 to January 2008, the global price of wheat increased 143 percent, corn by 105 percent, rice by 154 percent, sugar by 118 percent, oilseeds by 197 percent.  In 2006-2007, this rate of increase accelerated, according to the US Department of Agriculture, “due to continued demand for bio-fuels and drought in major producing countries.”  The price increases have since moderated, but many believe only temporarily, given tight stocks-to-use ratios. (Source: e360, Yale)

And price increases to the most damage in countries that depend on import to feed their people who have very limited incomes.

It is in poor countries that these price increases pose direct threat to disposable income and food security.  There, the run-up in food prices has been ominous for the more than one billion of the world’s poor who are chronically food-insecure.  Poor families in countries such as Bangladesh can barely support a household on a subsistence basis, and have little if any suplus production to sell, which means they do not benefit from higher prices for corn or wheat.  And poor slum-dwellers in Lagos, Calcutta, Manila, or Mexico City produce no food at all, and spend as much as 90 percent of their meager incomes just to eat. (Source: e360 Yale)

One thing that many people in developed nations tend to forget or overlook is that people in third world countries spend nearly all of their income on foods.  Here in the US, increasing food cost does have an impact, but we have the ability to cut elsewhere. We can trim our entertainment budget by eating out less or fewer movie nights. But when one spends 90% of their income just to eat, there is little room to absorb the increased cost of food.

The questions that arise (at least for me) is this all part of some grand plan or are the folks that put these policies in place just not far-sighted enough to see the cause and effect. There have been reports published that increased bio-fuel production would increase food prices. The folks that insisted bio-fuel production be increased to meet an artificially implemented goal should have taken heed from folks that predicted these consequences, but agenda driven motives are hard to overcome.

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