September 28, 2012 — This summer’s droughts in the American Midwest have pushed corn and wheat prices above their previous highs in 2011 and out of the reach of the world’s poorest, threatening to trigger a new wave of global unrest — perhaps even a second Arab Spring.
After a sharp rise in July — the steepest monthly climb since February 2011, according to the World Bank — prices stabilized in September at around $9.00 per bushel for wheat and $7.50 per bushel for corn. On Friday, the U.S. Department of Agriculture reported that domestic corn supplies totaled 988 million bushels as of Sept. 1, the lowest level in eight years. The news sent corn prices — which had fallen steadily during September — back to their summer values .
Also on Friday, Bloomberg reported U.S. corn supplies are dropping below the previous year’s consumption for just the third time in half a century. This year’s harvest, plus previous supplies, will total 11.872 billion bushels, less than the 12.33 billion consumed or exported last year, according to USDA data and Bloomberg’s poll of 29 agriculture analysts .
U.S. energy legislation requires that nearly half of this year's harvest be used to produce ethanol for fuel. This mandate diverts corn from food and feed production, placing a high floor under prices. Despite claims that ethanol as a "renewable fuel" might help with energy independence, the total amount of energy obtained from ethanol is only 1% of American energy consumption , and the amount of fossil fuel energy needed to grow the corn and convert it to ethanol is about 3/4 of the ethanol energy yield .
In August, the governors of six states — Georgia, New Mexico, Maryland, Delaware, North Carolina, and Arkansas — formally petitioned EPA administrator Lisa Jackson to exercise her waiver authority to implement a full, one-year suspension of the ethanol mandate . Their letters were preceded by calls from 25 U.S. Senators and 156 Congressmen for Jackson to do the same.
A final decision isn’t expected until Nov. 13, after the U.S. presidential elections, but the uncertainty surrounding the waiver appears to have at least temporarily dampened traders’ enthusiasm for grain futures . Even a partial suspension could divert enough bushels to food and feedstock to alleviate the drought’s impact on prices, which continue to hover near all-time highs.
NECSI has shown that surges in unrest coincided with food price peaks in 2007-01 and 2010-11 . During much of August and September, the price of wheat exceeded the high of $8.94 of February 2011, by which time the events of Arab Spring were underway. North Africa and the Middle East are almost exclusively dependent on wheat as their staple grain. Corn prices have also seen spikes to record highs of ($8.44) well above the previous historic highs of 2007-2008 ($7.65, a period which saw 60 food riots in 30 countries) and 2011 (coinciding with the Arab Spring).
Together, these grains drove the FAO Cereal Price Index to an all-time monthly high in August, while the FAO Food Price Index has reached the threshold (210 points) at which food riots have been identified to occur. The world is currently within the range of conditions in which the tiniest spark can lead to riots — the kind including recent anti-American attacks in Libya and riots in Egypt and across the region.
Memories of 2007’s “tortilla riots” in Mexico recently led Mexican president Felipe Calderon to link high prices to unrest (including the Arab Spring) and to note that more than 40% of grain purchases are made by financial institutions for speculative purposes . On Sept. 11, French President Francois Hollande has called for an international strategic grain reserve to increase supply during periods of high prices, but without offering details .
Grain reserves might help both to alleviate the problems of droughts and dampen financial speculation. Dampening speculation is important; past research by NECSI has also found clear links between the precipitous rise in food prices over the past decade and commodity speculation . While ethanol production is responsible for the long run-up in prices, commodity speculation is to blame for the brief, but especially painful price spikes in 2008 and 2011.
In late August, Chris Mahoney, the director of agricultural products at Glencore, the world's largest commodities trader, pronounced soaring food prices would be "good for Glencore," which recorded pre-tax profits of $2.2 billion last year .
"Private companies like Glencore are playing a game that will make them enormous profits," Concepcion Calpe, senior economist of the UN's Food and Agriculture Organization (FAO) told The Independent. "So now is the time to change the rules and regulations about how Glencore and other multinationals such as ADM and Monsanto operate. They know this and have been lobbying heavily around the world to water down and halt any reform" .
In early August, Germany's second largest bank, Commerzbank, removed agricultural products from a commodity index fund, joining two other German banks in recently restricting investments in agriculture. The bank declined to provide details concerning its decision, but the German lobbying group Foodwatch has ascribed its motives to ethical concerns. "Commerzbank is reacting to the debate about a series of studies which show that investment in this type of commodity fund pushes food prices upwards and so contributes to the hunger crisis in many parts of the world," Foodwatch said in a statement .
Lowering food prices would reduce the desperation among the poor in wheat- and corn-dependent countries. Suspending U.S. ethanol production for a year or even longer is the fastest, surest way to do so. But while the indecision surrounding the EPA’s eventual decision has left the grain futures markets suspended in a period of doubt, they will likely resume their climb if the waiver is not granted. The sooner we can bring prices down, the better.
Note: Updated on September 28, 2012 from version of September 5, 2012.
1. O. Fletcher, B. Tomson, Corn Prices Jump on USDA Report. Wall Street Journal (9/28/2012). http://online.wsj.com/article/SB10000872396390443389604578024180178198160.html.
2. J. Wilson, U.S. corn supply trails use for first time in 16 years following Midwest drought. Washington Post, (9/27/2012). http://www.washingtonpost.com/business/shrinking-us-corn-supply-trails-use-for-first-time-in-16-years/2012/09/27/7624ab54-085b-11e2-9eea-333857f6a7bd_story.html.
3. Calculated from:
US Energy Information Administration, Annual energy review table 10.3: Fuel ethanol overview, 1981-2010 (10/19/11). http://www.eia.gov/totalenergy/data/annual/showtext.cfm?t=ptb1003
US Energy Information Administration, Energy overview: Total energy flow, 2010 (2010). http://www.eia.gov/totalenergy/data/annual/diagram1.cfm.
4. Ethanol Myths and Facts. US Department of Energy, Energy Efficiency and Renewable Energy report (3/31/2008).http://www.usbiomassboard.gov/pdfs/19_EERE_Ethanol_Myths_Facts.pdf.
5. P. Rucker, Update 2-Georgia, New Mexico join call for end to US ethanol rule. Reuters (8/21/12). http://www.reuters.com/article/2012/08/21/usa-ethanol-georgia-idUSL2E8JL4KZ20120821.
6. Private communication, Peter Timmer (9/3/12).
7. M. Lagi, K.Z. Bertrand, Y. Bar-Yam, The food crises and political instability in North Africa and the Middle East. arXiv:1108.2455 (8/10/11).http://arxiv.org/abs/1108.2455.
8. S. Jegarajah, Recalling ‘Tortilla Riots,’ Mexico president warns about food crisis. CNBC (9/11/2012). http://www.cnbc.com/id/48996423.
9. J. Ponthus, France pushes for strategic food stocks to cool prices. Reuters UK (9/11/2012). http://uk.reuters.com/article/2012/09/11/uk-france-grain-hollande-idUKBRE88A17320120911).
10. M. Lagi, Yavni Bar-Yam, K.Z. Bertrand, Yaneer Bar-Yam, The food crises: A quantitative model of food prices including speculators and ethanol conversion. arXiv:1109.4859 (9/21/2011). http://necsi.edu/research/social/foodprices.html.
11. J. Cusack, We'll make a killing out of world food crisis, Glencore trading boss Chris Mahoney boasts. The Independent (8/23/2012). http://www.independent.co.uk/news/world/politics/well-make-a-killing-out-of-food-crisis-glencore-trading-boss-chris-mahoney-boasts-8073806.html.
12. A. Schuetze, Update 3-Commerzbank removes agriculture from fund on food fears. Reuters (8/10/12). http://in.reuters.com/article/2012/08/09/agriculture-commerzbank-idINL6E8J9ADE20120809.
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