Samuelson: Food vs. Fuel

If people can't eat, they can't do much else. One of the great achievements of the past century has been the enormous expansion of food production, which has virtually eliminated starvation in advanced countries and has made huge gains against it in poor countries. Since 1961 world population has increased 112 percent; meanwhile, global production is up 164 percent for grains and almost 700 percent for meats. We owe this mainly to better seed varieties, more fertilizer, more mechanization and better farm practices. Food in most developed countries is so plentiful and inexpensive that obesity—partly caused by overeating—is a major social problem.

But the world food system may now be undergoing a radical break with this past. "The end of cheap food" is how the Economist magazine recently described it. During the past year prices of basic grains (wheat, corn) and oil seeds (soybeans) have soared. Corn, which had been selling at about $2 a bushel, is now more than $3; wheat, which had been averaging $3 to $4 a bushel, has recently hovered around $9. Because feed grains are a major cost in meat, dairy and poultry production, retail prices have also risen. In the United States dairy prices are up 13 percent in 2007; egg prices have risen 42 percent in the past year. Other countries are also experiencing increases.

Higher grocery prices obviously make it harder to achieve economic growth and low inflation simultaneously. But if higher food prices encouraged better eating habits, they might actually have some benefits in richer societies. The truly grave consequences involve poor countries, where higher prices threaten more hunger and malnutrition.

To be sure, some farmers in these countries benefit from higher prices. But many poor countries—including most in sub-Saharan Africa—are net grain importers, says the International Food Policy Research Institute, a Washington-based think tank. In some of these countries the poorest of the poor spend 70 percent or more of their budgets on food. About a third of the population of sub-Saharan Africa is undernourished, according to the Food and Agriculture Organization of the United Nations. That proportion has barely changed since the early 1990s. High food prices make gains harder.

What's disturbing is that the present run-up doesn't seem to be temporary. Of course, farming is always hostage to Mother Nature, and drought in Australia has cut the wheat harvest and contributed to higher worldwide prices. But the larger causes lie elsewhere. One is growing prosperity in China, India, other Asian countries and Latin America. As people become richer, they improve their diets by eating more protein in the form of meat and dairy products. The demand for animal feed grains rises. This has been going on for years and, until recently, was met by the steady gains in agricultural output from improved technology and management.

It's the extra demand for grains to make biofuels, spurred heavily in the United States by government tax subsidies and fuel mandates, that has pushed prices dramatically higher. The Economist rightly calls these U.S. government subsidies "reckless." Since 2000 the share of the U.S. corn crop devoted to ethanol production has increased from about 6 percent to about 25 percent—and is still headed up.

Farmers benefit from higher prices. Up to a point, investors in ethanol refineries also gain from the mandated use of their output (though high corn prices have eroded or eliminated their profits). But who else wins is unclear. Although global biofuel production has tripled since 2000, it still accounts for less than 3 percent of worldwide transportation fuel, reports the U.S. Agriculture Department. Even if all U.S. corn were diverted into ethanol, it would replace only about 12 percent of U.S. transportation fuel (and less of total oil use), according to one study.

Biofuels became politically fashionable because they combined benefits for farmers with popular causes: increasing energy "security," curbing global warming. Unfortunately, the marriage is contrived. Not only are fuel savings meager, so are the environmental benefits. Substituting corn-based ethanol for gasoline results in little reduction in greenhouse gases. Indeed, the demand for biofuels encourages deforestation in developing countries; the New York Times recently reported the clearing of Indonesian forests to increase palm oil production for biofuel. Forests absorb carbon dioxide, a greenhouse gas.

This is not a case of unintended consequences. A new generation of "cellulosic" fuels (made from grasses, crop residue or wood chips) might deliver benefits, but the adverse effects of corn-based ethanol were widely anticipated. Government subsidies reflect the careless and cynical manipulation of worthy public goals for selfish ends. That the new farm bill may expand the ethanol mandates confirms an old lesson: having embraced a giveaway, politicians cannot stop it, no matter how dubious it is.