Blame It on Biofuels

High food prices always hit the poor hardest, and these days there is plenty of bad news. Corn prices are nearly $4 a bushel, almost double their 2005 level. In Mexico, for instance, that translates into a 50 percent rise in the price of corn tortillas, which has elicited protests from tens of thousands of workers. Many blame the burgeoning U.S. biofuel industry, centered around corn-based ethanol, for the crunch. Fidel Castro says diverting corn into fuel is a "tragic" turn of events for the world's poor, while Venezuela's Hugo Chávez calls it "craziness."

They aren't the only ones pointing the finger at biofuels for high prices—food makers like Kellogg's are also. While biofuels are a convenient scapegoat, global food economics are a complex phenomenon. A surge in global food demand, high oil prices, uncooperative weather, currency fluctuations and biofuels all play a part in explaining the new, stratospheric world of food economics.

About a third of the recent corn-price rise is "just a currency issue," says Peter Timmer, an agricultural economist at the Center for Global Development. The dollar has plummeted against most of the world's currencies, and since most internationally traded foods are priced in dollars, the price hikes lose some of their bite abroad. "If you look at food-price inflation from a euro-currency perspective," he says, "it doesn't look as bad as it does in dollars."

Bad weather has also played its part. Drought in Australia ravaged its wheat crop last year, and exports fell by more than 20 percent. Recent flooding in China has destroyed 5.5 million hectares of wheat and rapeseed, and an abnormally dry growing season across northern Europe threatens grain yields. Longer term, Timmer sees two worries: that these are early signs of a climate change, and that there is no new Green Revolution underway to create tougher crops. "Agricultural scientists are quite concerned about the lack of a pipeline of new technology," he says.

Rising oil prices hurt, too. Food expert Michael Pollan has said that the most "worrisome" aspect of food production is how much energy it consumes. Each step from reaping to packaging uses additional energy—and with oil at close to $80 a barrel, that adds up. Most food packaging is plastic, which is made from oil, and common plastics like polypropylene cost up to 70 percent more today than they did in 2003, says Andrew Falcon, the CEO of C&M Fine Pack, which sells containers to U.S. restaurants. Retailers like Wal-Mart tried to absorb these costs by squeezing greater efficiency out of their suppliers, says Falcon, but eventually had to pass on the price increases. Taken together, these factors, from weather to bio-fuels to oil, contribute about 30 percent to the recent price hikes.

But perhaps the most significant factor is rising wealth, particularly in the developing world. Since 2002, the combined GDP of the 24 largest emerging markets has doubled, according to Bank of America, and per capita income has risen by nearly 14 percent a year. As families get richer, they can more regularly indulge in meat and dairy products. In China, beef consumption has gone up by 26 percent since 2000, and pork, which was already popular, rose by 19 percent. Even in India, where much of the population is vegetarian, chicken consumption has almost doubled since 2000. "This is an economic-development success story," says Lawrence Goodman, head of emerging-market strategy at Bank of America. But it's also a story of placing greater demands on our grain crops, since seven kilograms of feed go into every kilogram of beef.

The rise of per capita income in emerging markets is itself responsible for as much as one third of the current food-price inflation, say experts. With wealth rising, the globe warming and no technological fix in sight, higher food prices are unlikely to be a short-term phenomenon (as they would be if the ethanol craze were the primary cause). The good news may be that more poor people will get rich enough to buy corn anyway.