Biofuels and the Price of Food, the Real Story

The Economist, the New York Times and publications across the country, both herald the economic benefits that biofuels are bringing to the farm belt, while bemoaning the rising price of grains, the primary source of livestock feed and food inputs in North America. Even Rogue Ales’ owner James Joyce, has had to raise the price of beer (gasp) to defer his rising cost of grain.

The culprit is ethanol. Derived from corn, current corn prices are escalating just as existing demand for ethanol ramps into its seasonal peak. Most Midwestern states require ethanol blends of 5% in the winter as an alternative to MTBE fuel additives.

In a previous issue of Environconomy, I referenced Fidel Castro’s letter lambasting American support for corn-based ethanol production. Current rising food costs illustrate this poorly thought, politically driven, policy at work. Cellulosic ethanol (wood and woody plant derived ethanol) production holds great promise, a year, three, or five years from now.

But we live in a political world. In this, an election year, it should be no shock to us when politics trump science. Yes, biodiesel is arguably a superior transportation fuel because of its greater net energy output than corn-based ethanol, but only a fraction of U.S. vehicles are capable of running it.

Current policy has some misguided basis in economic thought. Holding some variables constant are a critical part of economics. Most economic theories are based on a set of controlled variables. They begin with statements like, “assuming the supply of x…“ or “given that demand for y…” There’s a joke about economists I’m fond of repeating. “How did the economist get off the deserted island? Well first, you need to assume a boat.”

What I’m trying to say is that market signals do not result in immediate implementation or even pursuit of the most efficient market mechanism. Even an immediate retooling of most passenger cars would take decades to reach a penetration rate of even a sizeable minority of transportation fuel sold in North America.

The Energy Policy Act of 2007, signed into law on December 18, calls for the production of 36 billion gallons of biofuels by 2022. That’s a more than five-fold increase above current levels. How might we meet our energy needs through biofuels and increased efficiency? We need a plan, a national plan, to usher in a transition that utilizes all the tools available to us now and in the future. We need to consider all the arrows in our quiver; biodiesel, cellulosic ethanol, hydrogen fuel cells, coal derived diesel fuels, hybrid-electric, electric, and high efficiency engines. This plan and any renewable fuels standard, needs to have requirements attached to punitive consequences, just as renewable portfolio standards do for requirements governing serving utility customers with renewable electricity.

Only through this carrot and stick approach of market and legislation will we meet our need to shift our economy, with the least amount of pain to the prices of other goods and services.