New England Complex Systems Institute
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September 5, 2012 - The severe drought in the American Midwest, combined with misguided biofuel policy, threatens to trigger a global catastrophe. This summer, the worst U.S. drought since 1956 has severely impacted corn and soybean crops . Corn prices have risen 65% since June, while wheat prices have risen 50% from their low this spring .
On August 30, the World Bank announced that global food prices had risen 10% from June to July, breaking the previous record set in February 2011. The cause, according to the bank, was droughts in both the U.S. and Eastern Europe. It promised to pledge billions of dollars in financial assistance to the world's poorest countries to dampen the effect of price shocks . What it did not mention is the U.S. government policy that could be changed to help: mandates for ethanol production.
U.S. energy legislation requires that 4.9 billion bushels of corn --46% of a projected harvest of 10.8 billion bushels --be used to produce ethanol for fuel. This mandate diverts corn from food and feed production, driving up prices faster and further than they might have otherwise. 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 at least 3/4 of the ethanol energy yield .
Rising corn prices also inflate the prices of substitutes such as wheat and other grains. According to the World Bank, the price of sorghum, a sub-Saharan staple, has recently soared 220% in South Sudan and 180% in Sudan.
The conversion of corn to ethanol has grown rapidly from almost nothing to its current level in only the past seven years, promoted by government subsidies and an increasing mandate. Even before the drought it led to more than a doubling of basic food prices .
While the drought-triggered higher costs of grains will be felt by Americans (the U.S. Department of Agriculture projects a 3-4% rise in food prices next year ), the situation is direr for the developing world, particularly in Africa and parts of South America. The United States remains the largest grain exporter in the world , and when U.S. supply goes down, everyone's prices go up. Those living in the "bottom billion"  on less than a dollar per day already spend most of this income on staples  such as corn and rice to survive. When prices soar, they starve. The United Nations estimates 925 million people suffered from chronic hunger at the end of 2010 , a period of relatively low prices. That number will surely rise.
In times of food crises, starving people take to the streets. Hunger leads to desperation, and desperation to violence. NECSI has shown that surges in unrest coincided with food price peaks in 2007-01 and 2010-11 . Violence, social unrest, political upheaval, and human suffering are inevitable if we do not take steps to control prices.
This power is within the U.S. government's grasp. The Environmental Protection Agency possesses the ability to curtail or even suspend the mandate for conversion of corn to ethanol , which it so far has declined to use.
Last month, 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.
"It is abundantly clear that substantial evidence exists now within the existing reports of USDA regarding expected crop yields and within private sector forecasts of crop yields that current and futures pricing of corn will result in severe economic harm in the poultry and livestock sectors," Georgia governor Nathan Deal wrote in his letter to Jackson, which was released to the public .
"Georgia is experiencing severe economic harm during this crisis, and important economic sectors in the state are in serious economic jeopardy. This harm is precisely of the type, character and extent that Congress envisioned when it granted EPA authority to waive Renewable Fuel Standard applicable volumes," the letter continued.
The language highlighting damage to Georgia's economy is not coincidental. In response to the letters, the EPA has published an official request for comment on previous letters from other states, noting in its request that the waiver may only be granted "if implementation of those requirements would severely harm the economy or environment of a State, a region, or the United States" . Such thinking misses the bigger picture.
The EPA will collect public comments through September as lobbyists on both sides of the issue make their cases--the National Cattlemen's Beef Association and the National Chicken Council have agitated for a full, one-year suspension, while the National Corn Growers Association has also acknowledged that at least a partial waiver is necessary --but may not issue a ruling until mid-November, after the presidential elections.
The calls for a waiver have lead to a growing consensus that a waiver will happen, likely delayed till after the election by political concerns . This expectation is likely to moderate futures market speculative activity, limiting the rise in food prices. The level that has already been reached is sufficient to increase hunger and even cause some social unrest. Still, the extent of the speculative bubble may be blunted by the concern of speculators about the transfer of large amounts of corn from ethanol production to food production and its impact on futures prices.
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 .
U.S. Secretary of Agriculture Tom Vilsack has said he "gets down on [his] knees every day" and prays for rain. "If I had [...] a rain dance I could do, I would do it," Vilsack said . Even if it comes, rain is no longer a solution. A better one would be to suspend the ethanol mandate, which should immediately drive down the prices of staple foods. The corn used for ethanol is the same used for animal feed as well as for many processed foods , and can provide food for many people. We cannot avert the drought, but we can eliminate the mandates, and diminish the food crisis.
Note: Updated on September 5, 2012 from version of August 25, 2012.
Cite as: K.Z. Bertrand, G. Lindsay, Y. Bar-Yam, Food briefing Sept. 5, 2012, NECSI Report 2012-09-05 (9/05/2012).
1. National Agricultural Statistics Service, Crop production. USDA press release (8/10/2012). http://usda01.library.cornell.edu/usda/current/CropProd/CropProd-08-10-2012.pdf
2. Calculated from: Daily commodity futures price chart: Sept. 2012, Corn (Globex). http://futures.tradingcharts.com/chart/ZC/92?anticache=1345047224; Sept. 2012, Wheat (Kansas). http://futures.tradingcharts.com/chart/KE/
3. Severe Droughts Drive Food Prices Higher, Threatening the Poor. World Bank press release (8/30/12). http://www.worldbank.org/en/news/2012/08/30/severe-droughts-drive-food-prices-higher-threatening-poor
4. Natural Pork Producers Council. Lawmakers ask EPA for waiver of corn-ethanol mandate (8/2/2012). http://www.nppc.org/2012/08/lawmakers-ask-epa-for-waiver-of-corn-ethanol-mandate/
5. 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)
6. The White House Office of the Press Secretary, Weekly address: All-hands-on-deck response to the drought (8/11/2012). http://www.whitehouse.gov/the-press-office/2012/08/11/weekly-address-all-hands-deck-response-drought
7. 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
8. USDA Economic Research Service, Consumer Price Index: Changes in food price indexes, 2010 through 2013 (7/25/12). http://www.ers.usda.gov/data-products/food-price-outlook.aspx
9. United States Department of Agriculture, Foreign Agricultural Service, Production Supply Distribution Online (accessed 8/16/2012, 2011 data). http://www.fas.usda.gov/psdonline/psdQuery.aspx
10. P. Collier, The bottom billion: Why the poorest countries are failing and what can be done about it (New York: Oxford University Press, 2007).
11. A. V. Banerjee, E. Duflo, The economic lives of the poor. Journal of Economic Perspectives 21, 141-167 (2007). http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2638067/
12. Food and Agriculture Organization of the United Nations, 925 million in chronic hunger worldwide (9/14/2010). http://www.fao.org/news/story/en/item/45210/icode/
13. 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
14. Clean Air Act, Section 211(o)(7). http://www.law.cornell.edu/uscode/text/42/7545
15. 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
16. Georgia Governor Petitions EPA for RFS Waiver. Farm Futures (8/21/12). http://farmfutures.com/story.aspx/georgia-governor-petitions-epa-rfs-waiver-0-62652
17. G. McCarthy, Request for comment on letters seeking a waiver of the renewable fuel standard. Environmental Protection Agency notice, EPA-HQ-OAR-2012-0632 (8/20/12). http://www.epa.gov/otaq/fuels/renewablefuels/documents/2012-rfs-waiver-request-comment.pdf
18. Amber waves and an ethanol waiver: using food for fuel during a drought is unconscionable. Chicago Tribune editorial (8/20/12). http://articles.chicagotribune.com/2012-08-20/news/ct-edit-ethanol-0820-jm-20120820_1_ethanol-waiver-cellulosic-ethanol-corn-ethanol
19. Private communication, Peter Timmer (9/3/12).
20. 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
21. J. Cusick, We'll make a killing out of food crisis, Glencore trading boss Chris Mahoney boasts. The Independent (8/23/12).http://www.independent.co.uk/news/world/politics/well-make-a-killing-out-of-food-crisis-glencore-trading-boss-chris-mahoney-boasts-8073806.html
22. 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
23. P. Baker, Drought puts food at risk, U.S. warns. New York Times (7/18/12). http://www.nytimes.com/2012/07/19/us/drought-puts-food-at-risk-us-warns.html?_r=1&pagewanted=all
24. National Corn Growers Association, Fast facts: A tale of two corns (1/2012). http://www.ncga.com/uploads/useruploads/tale_of_two_corns_2012.pdf