Saturday, August 02, 2008

Why food prices are rising

From Yale's Ernesto Zedillo:

There's little doubt that the present spiral in grain prices is closely linked to U.S. and EU policies enacted to boost production of biofuels. The American and European governments subsidize the production of biofuels, limit their import and mandate their use. The exact extent to which these policies have impacted food prices is still a matter of contention, but not even the most enthusiastic proponents of ethanol can deny that by inducing a greater allocation of agricultural resources toward biofuel production, the amount of grain available for food has been reduced. According to the World Bank, while global production of corn increased by 51 million tons from 2004 to 2007, biofuel use of corn in the U.S. alone increased by 50 million tons, thus leaving no margin to satisfy the increase of 33 million tons in global consumption for other uses during the same period. This explains why some respectable experts, such as the former chief economist for the U.S. Department of Agriculture and a top World Bank agricultural economist, have imputed a large proportion of the rise in food prices to the growing use of food crops for fuel.

Wrongheaded biofuel policies constitute only one aspect of the complex and expensive web of protectionist agricultural policies practiced by most developed countries that the WTO Doha Round was supposed to fix. The leading trading countries have repeatedly failed to commit to real reform, with short-term political convenience overriding their own national long-term interests. The latest example of this anomaly is the new Farm Bill approved by the U.S. Congress in May. Instead of reducing agricultural subsidies, this bill provides for bigger and more distorting ones. Even more than the 2002 Farm Bill, this one has eroded U.S. credibility and leadership at the WTO trade talks and given the other key players yet another excuse to evade their own responsibility to make the Round successful.

Remember where the two presidential candidates stand on ethanol and the farm bill.