Ethanol Use Creates a Spike in Global Food Prices

NCPA June 10, 2013

At the turn of the 21st century, biofuels appeared to be a solution to mounting concerns over greenhouse gas emissions, climate change, skyrocketing fuel prices and dependence on foreign energy. When Congress passed the Energy Policy Act (EP Act) in 2005 with a renewable fuel standard (RFS) provision mandating that producers add ethanol to gasoline, it is unlikely that lawmakers thought the act would increase hunger and social unrest in the world's poorest countries. However, unintended consequences frequently accompany even the most well-intentioned policies, says Sherzod Abdukadirov, a research fellow with the Mercatus Center.

• The EP Act simply ramped up the already increasing use of ethanol as a fuel additive with the hope of reducing greenhouse gas emissions.
• The law's proponents expected higher ethanol use to offset rising oil prices by filling at least some of the domestic demand for fuel.
• Further, because most ethanol in the United States comes from domestically produced corn, policy advocates hoped the act would make the country less dependent on imported oil. As an added bonus, the policy would benefit U.S. farmers.

At the time, the policy seemed perfect. As the Environmental Protection Agency (EPA) implemented the policy and further increased its production in 2007, scholars and environmentalists began to question its environmental and energy benefits. Beyond ethanol's questionable viability as a fuel, the negative environmental impacts of corn production undermine ethanol's benefits. Scholars and environmentalists claim that ethanol production leads to air pollution and greenhouse gas emissions, offsetting some of the environmental gains from its use as a fuel.

Perhaps the most unexpected consequence of the policy has been its impact on worldwide food prices.

• The U.S. fuel industry relied heavily on corn ethanol to comply with the RFS requirements. The resulting demand drastically increased the price for corn globally, not just domestically.
• As corn prices skyrocketed, farmers switched to corn production from production of other cereals, which reduced the latter's supply. At the same time, consumers substituted less expensive rice and wheat for corn. This substitution increased demand and prices for wheat and rice, staple foods across many regions in Africa and Asia.
• Overall, the RFS program led to higher prices for staple foods all over the world. By some estimates, up to 70 percent to 75 percent of the increase in food prices was due to biofuels and the related consequences of low grain stocks, large land use shifts, speculative activity and export bans.
• The spike in food prices, coupled with the global economic crisis, halted and even reversed the long-time trend in reducing malnutrition.

Source: Sherzod Abdukadirov, "The Unintended Consequences of Safety Regulation," Mercatus Center, June 3, 2013.