January 27, 2008
Lester Brown Sees Higher Food Prices Due To Biomass Energy

Higher oil prices are driving up food prices.

We are witnessing the beginning of one of the great tragedies of history. The United States, in a misguided effort to reduce its oil insecurity by converting grain into fuel for cars, is generating global food insecurity on a scale never seen before.

The world is facing the most severe food price inflation in history as grain and soybean prices climb to all-time highs. Wheat trading on the Chicago Board of Trade on December 17th breached the $10 per bushel level for the first time ever. In mid-January, corn was trading over $5 per bushel, close to its historic high. And on January 11th, soybeans traded at $13.42 per bushel, the highest price ever recorded. All these prices are double those of a year or two ago.

As a result, prices of food products made directly from these commodities such as bread, pasta, and tortillas, and those made indirectly, such as pork, poultry, beef, milk, and eggs, are everywhere on the rise. In Mexico, corn meal prices are up 60 percent. In Pakistan, flour prices have doubled. China is facing rampant food price inflation, some of the worst in decades.

In industrial countries, the higher processing and marketing share of food costs has softened the blow, but even so, prices of food staples are climbing. By late 2007, the U.S. price of a loaf of whole wheat bread was 12 percent higher than a year earlier, milk was up 29 percent, and eggs were up 36 percent. In Italy, pasta prices were up 20 percent.

Here's the most interesting part: Oil at $100 per barrel will up ethanol demand to the point that corn goes to $7 per bushel.

A University of Illinois economics team calculates that with oil at $50 a barrel, it is profitable—with the ethanol subsidy of 51˘ a gallon (equal to $1.43 per bushel of corn)—to convert corn into ethanol as long as the price is below $4 a bushel. But with oil at $100 a barrel, distillers can pay more than $7 a bushel for corn and still break even. If oil climbs to $140, distillers can pay $10 a bushel for corn—double the early 2008 price of $5 per bushel.

We are going to find out much corn production can go up.

6 years ago corn was only $2.18 per bushel.

By 2012, the U.S. goal is to produce 7.5 billion gallons of ethanol a year, meaning U.S. annual corn production must rise 22 percent from about 10.9 billion bushels to 13.5 billion bushels to meet the demand.

Corn prices are at their highest level since the drought of 1995, jumping from around $2.18 per bushel in 2002 to $4.78 per bushel this week.

Peak Oil is going to push up the price of food. Though I'm beginning to seriously wonder whether algae biodiesel could provide a way to avoid that. How fast can the technology for algae biodiesel be developed? Can algae biodiesel some day really scale up to thousands of gallons of biodiesel per acre? Any of my regular readers know much about it?

Share |      Randall Parker, 2008 January 27 09:59 PM  Energy Biomass


Comments
Mirco said at January 28, 2008 5:08 AM:

I suppose that many oil nations will start to feel the higher prices of food they need to import:
Iran : Imports http://www.fao.org/es/ess/toptrade/trade.asp?lang=EN&country=102
Iran: Exports : http://www.fao.org/es/ess/toptrade/trade.asp?dir=exp&country=102&ryear=2004
Iran will use 1.5 billions of US $ (4-5 million of tons - wikipedia) to import wheat at 10$ bushel, so if prices doubled they will need 700 M $ more than last year only for wheat.

Raising the oil prices they are rising the food prices also. But they import food from the West.
With higher prices we will be forced to drive less, they will be forced to eat less.
We could devise new ways to live using less energy or with new sources, doing the same with food will be a bit more difficult for them, lacking the technology and the researchers.

greg said at January 28, 2008 5:31 AM:

You are forgetting that the inflation adjusted cost of corn, wheat etc. are still far below the prices during the 70's and 80's. In the late 70's and early 80's corn was $3.25 to $3.75 per bushel. I do not know the exact figures but I am sure that adjusted for inflation, the equivalent price now is at least $7.00. I am sure that the same holds for wheat and soybeans. Everyone has gotten accustomed to low crop prices during the past 10 - 15 years and these increases will just bring things back to where they were 25 years ago. It is the same story for gasoline prices.

I have been involved in international agriculture for 30 years, and in my opinion, the latest price increases will be good for the U.S and good for developing countries. For a chnage, farmers will be able to make a decent return on their investment and their time.

Mirco said at January 28, 2008 6:46 AM:

What cost $3.5 in 1980 would cost $9.37 in 2006. (Using the Inflation Calculator - http://www.westegg.com/inflation/)
So, we are not there, for now.
What is interesting is that Saudi Arabia, Iran, Venezuela and others are using the money gained with oil to keep themselves in power.
When they need more money to feed their people (and keep them submitted), they have less money to finance terror and war.
This imply a more powerful middle class of food producers not dependent from the state for their living.
If the state prevent this, they will have more hungry people.
Also, the scarcity of food will reduce their natality further.

Another point is that the scarcity will not hit all in the same way:
1) If the western will reduce their food intake, this probably will cause them to stay better (we eat too much). Also, higher prices for higher prices could probably shift the consumption from lower quality to higher quality food as the price differences would reduce (say we renounce to bread but not to eggs or meat).
2) the westerns are able to move consumption from other types of consumption (car, driving, computers, home theaters, and so on) to food consumption where others will not be able to.
3) This imply that we are able to siphon the food away from the poor with our spare money (economic wars can do very big damages).
4) They could react, but tyrannical society are slow and clumsy (see USSR in the 1970-1980) and will have problem to cope.
5) Many of their places are unfit to high yield agriculture (bad soil, deserts, etc.) and have not the people needed for it nor the capitals.

Larry said at January 28, 2008 7:05 AM:

It seems obvious that the ocean offers solutions to many resource problems, including food and energy.

We switched from hunting to agriculture long ago on land. It is time we made that same switch on the ocean. We need to learn (and aquaculture is leading the charge) how to farm the oceans, i.e., how to plant, nourish and harvest useful species on a sustainable basis (irrigation kind of takes care of itself!)

As on land, we'll develop technology that allows us to grow mass quantities of food and energy in regions that are relatively barren today, particularly in the Southern Hemisphere.

The trends are already quite positive. The amount of farmed aqua-mass is growing quite rapidly (nearly 9%/year http://www.fao.org/fishery/topic/3459 ), and is poised to outproduce ocean fisheries in less than 10 years.

On the energy side, Planktos, controversially, and others are doing primary research into what happens when we attempt to "fertilize" relatively barren ocean with iron. They have yet to publish any results, but if it works, it could be transformative, remembering that the ocean covers the vast majority of the earth. If we compare "natural" production on land with what farming can do, it is quite possible that the oceans represent a similar opportunity.

Lorne McClinton said at January 28, 2008 7:43 AM:

I've been writing about the plight of farmers for more than a decade now. It wasn't vaguely profitable to grow $2.62 corn without the large levels of subsidies that the US and EU were giving their farmers. The subsidies had the perverse effect of glutting the market and driving the price of corn ever lower requiring bigger subsidies to sustain them and so on.

All of a sudden ethanol comes along. Here is a brand new market with the ability to absorb all excess agriculture production. All of a sudden these mountains of corn people used to ski on in Iowa are gone. We are no longer wrecking third world agriculture by using poor countries as a dumping ground for excess western food. Maybe most of the world's rural poor will finally be able to make enough money to increase production across Africa and Asia. Perhaps now that there is money in grain the countries of the former Soviet Union will make the infrastructure and machinery investments they need to make to bring their production up to North American and EU standards.

A new Study, by Daniel Kammen UC Berkley, published Jan. 27, in the Journal Science, says producing a gallon of ethanol gas requires 95 per cent less petroleum then fossil fuels. He said previous studies that suggested otherwise were either based on in correct conversion formulas or used data based on century old out dated technology. His conclusion is that making ethanol from corn is a very good thing if you want to offset fossil fuels from overseas but only reduces greenhouse gas emissions by 13%.

Fat Man said at January 28, 2008 9:08 AM:

That is very farsighted Lester. When you are 8 months behind me, you are at the tail end of the parade. Now, shut up and use that broom.

Kevin Elliott said at January 28, 2008 10:53 AM:

A question for Greg, who said he'd been in international agriculture for 30 years and thought that the higher prices will help U.S. and developing world farmers. I've been hearing anecdotal reports that U.S. farmers aren't benefiting as much as one would think, because all their input costs are increasing as well. Given the fact that farmers generally get squeezed between powerful economic interests on both sides (both the input providers and the processors), how much do you think they'll really benefit from these higher prices? Are the dynamics much different in developing countries?

Your claim may very well be correct, but I'd be curious to hear more.

David Govett said at January 28, 2008 11:14 AM:

Stop eating food containing high-fructose corn syrup. It will not only ease demand for corn, which will lower its price, but less gas will be required to transport your slimmer body.

Ned said at January 28, 2008 1:07 PM:

Here's an interesting thing on corn-free, dollar-a-gallon ethanol:

http://oblate-spheroid.blogspot.com/2008/01/bacteria-delivers-buck-gallon-biofuel.html

Randall Parker said at January 28, 2008 3:49 PM:

Greg,

You make a very interesting point. So I went looking for inflation-adjusted corn prices. Found a chart that purports to go back to 1973. Well, if we are to believe this chart (and I would welcome other sources for confirmation) in 2006 dollars the price of corn was $13.43 in 1973, $14.60 in 1974, $11.72 in 1975, $9.91 in 1976, and $6.30 in 1977.

I wonder what the inflation adjusted price of corn was going back into the 1960s.

Randall Parker said at January 28, 2008 3:52 PM:

Mirco,

What would be a very interesting chart: A ratio of the prices of oil and corn. Start out at some time (say 1970) where some quantity of corn cost $100 and some other quantity of oil also cost $100. Show a ratio of 1. Then show them down thru time. What would that look like?

The price of oil has gone up much more rapidly than the price of corn. But I suspect there was a threshold effect in the last few years where oil prices finally got high enough to justify extensive use of corn to create ethanol. So there's a bigger coupling between the prices of corn and oil now than there was 10 years ago.

Randall Parker said at January 28, 2008 3:58 PM:

Greg,

High prices helping Third World farmers: But a rising percentage of the poorest people live in urban areas and not on farms.

Larry,

Very interesting trend with aquaculture. 10 years till surpassing wild caught? Might happen sooner if more fisheries collapse.

cancer_man said at January 28, 2008 4:51 PM:

There is something funny about seeing a post on Lester Brown on futurepundit. Has his forecasts ever been correct?
He will be wrong about future food prices as well as innovations continue.

Peak oil... Scientists and engineers have to start learning basic economics.

Daniel Kammen was mentioned above, and he is another with very strong science credentials yet completely strikes out on economics. That is a major problem when discussing anything related to the environment or energy. You can listen to him on a Science Friday show on NPR debate with an economist about solar use. It is hilarious how glib he is and how he at one point snickers at her explanation -- but she was 100% correct!

I think one problem is that those like Kammen (and Randall) don't realize how economic certain variables shift because they do not study economics.

Randall Parker said at January 28, 2008 5:03 PM:

Lorne McClinton,

Over on the Science magazine web site I checked the current issue and the two most recent issues and couldn't find a paper with Kammen and/or ethanol in it. This year the current weekly issue is January 25, not 27.

I wonder where you saw this. Back in January 2006 Kammen's group found a small energy advantage (10%-15%) for using fossil fuels to grow corn to make ethanol. Has he found such a huge improvement in 2 years after meticulously comparing 6 studies against better data in 2 years ago?

Randall Parker said at January 28, 2008 5:10 PM:

cancer_man,

I got an A in macroeconomics and an A+ in microeconomics. They were really easy because the equation you'd learn one week was just the integral or derivative of the equation you learned the previous week.

But how about facts? You mention that you listened to Kammen on NPR. But what precisely did he say? What precisely did the econ lady say?

I responded to the comment about Kammen by checking the current issue of Science and digging up what Kammen said that conflicts with Pimentel (Pimental?) and Patzek. That took about a 15 more minutes of effort than your response. But that is why you didn't provide useful facts. That'd take more effort.

Greg said at January 29, 2008 7:50 AM:

Kevin Elliott

I know a lot more about International farming than I do the States right now, but I think a good indication of how American farmers are doing is to look at the equipment suppliers. All of the manuafacturers of farm equipment, irrigation equipment, fertilizer, seed etc are doing very well right now. Obviously farmers are upbeat to be buying this much stuff. I am currently sourcing equipment for a project in Africa and we will be waiting at least 6 months to get our equipment.

Randall

On corn pricing, and food pricing in general, the percentage of income that we spend on food has shrunk tremendously during the past 100 years. Part of that equation is that crop prices, adjusted for inflation, were much,much higher during the early 1900's and have steadily declined. If I remember correctly corn prices per bushel were around $2 even as far back as the 40's.

And why do you think cities in the developing countries are growing so fast? Because with the low crop prices no one could make a living in the rural areas. To make matters worse, I have seen in many African countries instances where the government has purposely kept prices paid to farmers low. This keeps food prices low which benefits the city folk, who are the people who vote and who cause the most trouble to the government.

Lorne McClinton said at January 29, 2008 12:45 PM:

Randall,

I came across the Kammen ethanol study in a story written by Live Science writer Bjorn Carey on live science. After reading your question I checked further. The study was actually published Jan 27th 2006 in Science so it isn't a new study. Apparently my RSS reader picked up a story originally posted in January 2006. The year was clearly posted in the article but I read the date not the year. The study is still posted on the UC Berkeley website and the figures quoted in the article can be found in the executive summary at http://rael.berkeley.edu/ebamm/summary.html.

Speaking of grain prices lets look at wheat. Wheat was trading on CBOT today at just under $10/ bushel more than double what it was a few years ago. It is worthwhile to remember that from the 1940's through to 1971 a bushel of wheat and a barrel of oil were both worth just a little under $2.00. Two dollar wheat in 1970, taking into account 451.72% inflation rate since then, according to the bank of Canada's inflation calculator (www.bankofcanada.ca/en/rates/inflation_calc.html), since then would be $11.03 today. Canadian wheat was selling for $2.21 a bushel in 1917 and rose to $2.63 in 1919. There was just under 1000% inflation between 1919 until 2007 so $2.63bushel wheat would be worth $28.88 today. In 1933, at the height of the great depression, Canadian wheat prices dropped to just 33 cents a bushel, according to some sources the lowest nominal price in 300 years. However once you consider that there was 1477% inflation from 1933 to 2007 that .33 cent wheat would have been the equivalent of $5.21 in 2007 money. Interesting to see that there was 400% deflation from 1919 and 1933, I didn't run the numbers but from what I understand this all occurred from 1930 to 1933.

cancer man said at January 30, 2008 3:31 AM:

I don't think 1 in a 100 economists would worry about peak oil because they understand 1)prices adjust and demand along with it 2)the oil market is driven by a cartel so that prices don't signal costs (the real price should be closer to $20/barrel) 3)they keep finding more and more oil. Every 10 years there is a peak oil warning, and every 10 years much more is discovered. All three need to be kept in mind. I'd love to bet against peak oil people.

Kammen was interviewed on Science Friday in fall 2006, discussing solar costs. He insisted that states should invest in solar, biomass, etc, while she pointed out the huge costs to taxpayers for just small gains because the technology is still mostly premature.

If Kammen said states should invest billions in A.I., we know that it wouldn't make of a dent as Intel and AMD, etc pour in billions a year themselves and can only increase computer speeds by so much.

People like Kammen contradict themselves. They say all this technology is available now, yet when asked about global warming projections out to 2050, they quickly say "you can't count on technology, it is unknown."

http://www.npr.org/templates/story/story.php?storyId=6261530

start at 36:30...he laughs, but the economist is correct.

Paul F. Dietz said at January 30, 2008 5:49 AM:

Lester Brown has been wrongly predicting food crises for decades. He's a poster child for crying wolf.

Post a comment
Comments:
Name (not anon or anonymous):
Email Address:
URL:
Remember info?

                       
Go Read More Posts On FuturePundit
Site Traffic Info
The contents of this site are copyright ©