I talk occasionally about corn-based ethanol, and the various issues and controversies surrounding this use of agriculture to produce fuel. The questions aren’t simple, and the interplay of economic factors often lead us to counter-intuitive findings.
One such finding – despite the rhetoric of anti-corn ethanol activists, corn-based ethanol doesn’t actually drive up food prices or create hunger. In fact, if we stopped making ethanol from agricultural sources tomorrow, there would be MORE hunger! That’s because one of the most important components in food production and distribution costs is the cost of fuel.
Fuel is used by the farmer driving his tractor and combines. It’s used by the ships and trucks that move produce to market. And most critically, it’s used by the fertilizer industry in the production of modern fertilizers, the foundation stone of today’s incredible crop yields. If fuel prices go up, food-sector productivity goes down – particularly in the developing world, where fuel prices are higher because of a lack of infrastructure, and where trucks are used for inland distribution more than trains or ships.
Ethanol from corn has one important economic effect that is often ignored: it reduces the price of oil. There is insatiable demand for fossil fuels; advanced nations pursuing “green” economies are only slowing the increase in their use of fossil fuels, while the developing world is moving full-speed ahead towards more fossil fuel consumption. That means that any reduction in the supply of oil causes big price shocks as the countries that need oil for their economic survival bid up the price to get what IS available.
It’s hard to know for sure what the impact on oil prices would be if there was an end to ethanol, but a reasonable estimate is a 15% bump. That is an increase that would absolutely devastate food production in the developing world, where fertilizer prices are already high. If developing-world farmers have to pay even more for fertilizers, for many producers the economics of attempting high production just won’t make sense, and they will switch to subsistence farming to meet only local needs. The net result would be an enormous increase in hunger and a greatly increased need for food aid, with all of the deleterious effects that brings.
There are some reasonable arguments in favor of moving away from ethanol – but the food welfare of the developing world is not one of them. On balance, ethanol does those hungry people a service, by making the food they grow for themselves that much more affordable.