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How U.S. Ethanol Policy Makes World Hunger Worse

If you are a farmer in the U.S., you cannot lose money growing corn for ethanol. Congress has instituted tariffs and import quotas, to limit supply and protect the domestic fuel ethanol market. Laws mandating ethanol in gasoline ensure that the ethanol market has ample demand.

And the very generous crop insurance program in the U.S. means that even with a total crop failure, the farmer still makes money. The program protects against crop damage due to weather, irrigation failure, plant diseases, insects, wildlife, fire, earthquakes, volcanic eruptions, and even “a change in the harvest prices from the projected price.” If the commodity market price for corn falls during the growing season, the farmer is protected.

In some years (e.g. 2012), U.S. farmers take more money from the crop insurance program than they pay into it. The taxpayer foots the bill for the difference to the tune of billions of dollars. That’s not insurance; it’s more like gambling when you are the house. If a crop is so damaged that the farmer would make less money on the crop than the cost to produce it, he plows the whole crop under and takes the insurance.

As a result of the decision by Congress to artificially create a corn-ethanol market, millions of hectares of prime agricultural land are no longer used to grow food. Or, more precisely, the land is used to grow food, and the food is converted into fuel. Meanwhile, around a billion persons in the world are chronically undernourished.

When the U.S. began to sharply increase its conversion of corn (maize) into ethanol instead of food, beginning about 2004 to 2005, and increasing yearly thereafter, the result was that less farmland was used to grow various crops for food. This change in supply drove commodity prices for cereals higher, resulting in higher prices for corn, rice, wheat, and other foods worldwide. In 2006 to 2008, the higher prices created a food crisis at both the retail and the agricultural (or “farmgate”) sources of cereals.

The FAO notes this dramatic increase in food prices, but does not attribute it to ethanol: “Domestic food prices increased substantially in most countries during the 2006-08 world food crisis at both retail and farmgate levels.” (FAO 2011 Hunger Report). My observation is that the two events coincided: a sharp increase in the use of corn for ethanol was quickly followed by a sharp increase in prices for corn first in 2006, continuing into 2007-2008, and then for other staple foods in 2007 to 2008, including wheat, rice, soybeans, barley, palm oil, rapeseed oil (canola), peanuts, sorghum, and sunflower oil (IndexMundi.com). All of these crops are in the top 20 world staple crops, and six of them (maize, wheat, rice, soybeans, barley, palm oil) constitute the six top world staple crops. (Comparison of World Staple Crops). No wonder the hungry of the world were adversely affected!

After 2008, the world agricultural system began to adjust, and to grow more cereals to meet the increased demand and benefit from the higher prices. But the 2012 drought has brought corn and other commodity prices higher again, above their 2006 to 2008 highs. A new wave of increased cereal prices in the developing world, with increased hunger, is likely to follow.

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