Grain$ of truth  

Prompted by a post at Early Warning, SP at TOD ANZ has a look at the impact of US ethanol policy on global food prices - Grain$ of truth.

Early Warning had a post recently decrying the proposed emergency policy of the Spanish Govt. to increase the biofuel content in their petrol. One follow up post then used US data for ethanol production to extrapolate the impact of US production to global food prices. Thus linking the unrest in North Africa and around the gulf states with the increased cost of food due to biofuels (as indicated by corn ethanol). But root causes of the increased cost of food are more complex than that.

Stuarts prime beef seems to be with the corn to ethanol conversion: many authors have argued that the conversion efficiency is poor - but it is probably the final act of a greater tragedy. Outside of the Americas, is corn a primary human staple? Even within the US its prime function seems to be as energy source for feed lot produced beef and a major ingredient in the US staple of fast foods (including supermarket ready meals).

While I agree that biofuels may be problematic, lumping all cereal crops together and then assuming that because 40% of US CORN production is going to ethanol that that is the cause of the rise in food prices seems to overly and dramatically simplify the issue.

Various international agencies have pointed out that the rise in GLOBAL food prices is a complex issue, with different causes in different regions. ...

From this we should remember that generally “commodities such as corn or wheat are a small part of the final retail price of most food products”. Not also the effect attributed to the currency situation in the US – the effect of the deflating dollar. ...

So, its complicated, but it’s not all down to biofuels.

Other sources about the more recent price rises also note that speculation has been a significant factor in the increases.

- Speculation behind global commodity price rise (different version at Speculation behind global commodity price rise)
- Food Price Spiral: Causes and Consequences
- High food prices: Cause and Result

Finally, I just want to point out that many of the countries in the Arab World experiencing turmoil (partially) as a result of these increased prices have one other thing in common. They all have currencies that are either:

1. directly pegged (or nearly so) to the US dollar,
2. are neighbors or close trading partners with countries with fixed dollar exchanges, or
3. have currencies that are not traded.

The following have (had?) a direct peg; Eritrea, Lebanon, Qatar, UAE, Suadi Arabia, Jordan, Bahrain. Egypt had periodic revaluations along with Oman, Kuwait and Tunisia had rigid currency controls. That a large number of countries in the region have a pegged or fixed exchange rate to the $US and the major commodity of the region is traded in $US means that other commodities will be more expensive to import in these countries.

So, if you need to buy grain valued in falling US dollars and your currency is pegged to (or otherwise controlled by) that currency, or your own currency is also falling OR you can’t easily convert your currency to buy US dollars AND speculators are playing the market… What then for local food prices?

On the other hand, if your currency was not affected in this way, and appreciated against the $US, then food from the US would have become cheaper.

Which could explain the US sourced apples and oranges in the supermarkets of the provincial Indonesian city in which I currently reside!

However the cost of rice has increased, not becuase of corn feed cows or biofuels, but for the simple reason that the heavy rain (and flooding) in Indonesia has cut production.