Cite as:

K.Z. Bertrand, G. Lindsay, Y. Bar-Yam, Food briefing Aug 24, 2012, NECSI Report 2012-08-02 (8/24/2012).

August 25, 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 [1]. Corn prices have risen 65% since June, while wheat prices have risen 50% from their low this spring [2].

One result is that many hog farmers and cattle ranchers have begun slaughtering their herds early to avoid the skyrocketing costs of grain feed [3,4]. This, in turn, has depressed meat prices, leading President Obama to announce Monday that the Department of Agriculture intends to buy more than $150 million of pork, lamb, chicken and catfish to put a floor under prices [5]. In his weekly radio address, the President--who toured drought-stricken Iowa last week--described this as "an all-hands-on-deck response" [6], but he did not mention the government policy that could be changed to help: ethanol production.

U.S. energy legislation requires that 4.9 billion bushels of corn [7]--46% of a projected harvest of 10.8 billion bushels [1]--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 [8], 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 [9]

Rising corn prices also indirectly inflate the prices of substitutes, primarily wheat but also rice. There are warning signs this may be happening now: The Wall Street Journal reported Monday that rice prices are expected to rise 10% over the next three months because of tightening supplies [10].

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 [11].

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 [12]), 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 [13], and when U.S. supply goes down, everyone's prices go up. Those living in the "bottom billion" [14] on less than a dollar per day already spend most of this income on staples [15] 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 [16], 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 [17]. 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 conversion of corn to ethanol [18], which it so far has declined to use.

On Tuesday, the governors of Georgia and New Mexico joined those of four other states--Maryland, Delaware, North Carolina, Arkansas--in formally petitioning EPA administrator Lisa Jackson to exercise her waiver authority to implement a full, one-year suspension of the ethanol mandate [19]. The day before, the EPA 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" [20]. Such thinking misses the bigger picture.

The EPA will collect public comments for 30 days 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 [21]--but may not issue a ruling until mid-November, after the presidential elections.

Past research by NECSI has also found clear links between the precipitous rise in food prices over the past decade and commodity speculation [11]. 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.

Earlier this month, 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 [22]. 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 [22].

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 [23]. 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 [24], 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 August 24, 2012 from version of August 15, 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. A. Bjerga, Ranchers send cows to slaughter as drought sears pasture. Bloomberg (8/10/12). http://www.bloomberg.com/news/2012-08-10/ranchers-send-cows-to-slaughter-as-u-s-drought-sears-pasture.html

4. T. Waters, US slaughter of sows soars to 8-month high amid drought. Reuters Africa (8/9/12). http://af.reuters.com/article/commoditiesNews/idAFL2E8J9J9020120809?pageNumber=1&virtualBrandChannel=0

5. C. Doering, U.S. to buy $170M in meat, fish to help farms hit by drought. USA Today (8/13/12). http://www.usatoday.com/money/economy/story/2012-08-13/drought-obama/57039784/1

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. 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/

8. 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
and:
US Energy Information Administration, Energy overview: Total energy flow, 2010 (2010). http://www.eia.gov/totalenergy/data/annual/diagram1.cfm)

9. US Department of Energy, Ethanol myths and facts (8/23/2011). http://www1.eere.energy.gov/biomass/ethanol_myths_facts.html

10. S. Mohindru, Surging rice prices compound Asia food inflation. Wall Street Journal (8/13/12). http://online.wsj.com/article/SB10000872396390444184704577586850444119264.html

11. 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://www.ers.usda.gov/data-products/food-price-outlook.aspx

13. 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

14. P. Collier, The bottom billion: Why the poorest countries are failing and what can be done about it (New York: Oxford University Press, 2007).

15. A. V. Banerjee, E. Duflo, The economic lives of the poor. Journal of Economic Perspectives 21, 141ΓÇô167 (2007). http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2638067/

16. 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/

17. 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

18. Clean Air Act, Section 211(o)(7). http://www.law.cornell.edu/uscode/text/42/7545

19. P. Rucker, Update 2-Georgia, New Mexico join call for end to US ethanol rule. Reuters (8/21/12). http://www.epa.gov/otaq/fuels/renewablefuels/documents/2012-rfs-waiver-request-comment.pdf

21. Amber waves and an ethanol waiver: using food for fuel during a drought is unconscionable. Chicago Tribune editorial (8/20/12). 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

Food prices (blue) and food price model (red) including projected increases in coming months. The social unrest threshold, corrected for inflation (purple dashed line) is a level of food prices that is likely to cause food riots of impoverished populations and social disruption. Parameters as in July update, modified to include larger recent reported FAO food price index increase of 6%.