Karol C. Boudreaux: End biofuel/ethanol subsidies and tariffs

Published: Friday, March 11 2011 12:00 a.m. MST

Food prices around the world are skyrocketing. Last month, the UN's Food and Agriculture Organization (FAO) reported that it costs more now than at any time in past 21 years to buy food. Combined with — and related to — high petroleum prices, this spike is a particularly painful blow for the world's poor, who often spend a majority of their limited income on food.

Why are food prices so high this spring? There are a number of reasons, including bad weather in major food-producing countries such as Australia, Canada, and Russia. These weather-related shortages are largely unavoidable. But low supplies also result from U.S. and European Union policies that create incentives for farmers to grow crops for use as ethanol and biofuel. In a December editorial on rising food prices, the Wall Street Journal noted that four out of every 10 rows of U.S. corn is now used for ethanol production compared with only one row 10 years ago. This means less corn is available for food and feed. The policy has other ramifications: the amount of wheat planted has fallen by 30 percent as U.S. farmers respond to incentives and shift to corn production.

Sharply rising demand, particularly in developing countries like China, is another factor. As people rise out of abject poverty they are able to buy more food and often what they buy is meat. The rising demand for protein means that farmers need to buy more feed for their livestock and they (along with other farmers) need to transport their livestock and produce to market. As the demand for grain to feed livestock rises, so does the price of the grain. With petroleum prices soaring, farmers and intermediaries in the food production chain also have to pay more to ship products. And because many fertilizers contain petroleum-based products, farmers are facing higher costs on this front. These costs get passed along to consumers.

The changing food landscape has real consequences. Because they have to pay more for food, people have less money available to pay for other things they need. Medical care, improvements to a home, a school uniform may all get put on hold as families struggle to put some food on their tables. These difficulties spark political protests and worse. During the last food crisis in 2008, governments in Haiti and Madagascar were kicked out by frustrated citizens. Food riots swept through Bangladesh, Egypt, Morocco, Cameroon, and Yemen.

This year, rising food prices are not the sole reason for the unrest in the Middle East and North Africa, but they certainly are contributing to the deep dissatisfaction and hardship of people living in these countries.

What can be done to address and alleviate these problems?

The FAO suggests eliminating tariffs and other taxes placed on imported food, on farm equipment, and on other agricultural inputs, such as irrigation equipment and seeds. These kinds of tariffs and taxes typically protect local producers from competition or they protect local distributors of inputs who have monopolized (or nearly) the market for, say, the sale of tractors. Tariffs protect some local producers (or retailers) at the expense of all local consumers.

These kinds of policy changes meet with fierce resistance, however, because lowering the costs of imports makes locally produced materials less attractive. It may be more politically appealing for countries to focus on reducing red-tape barriers for imported food and inputs. This won't generate the same level of help for poor consumers but it would do some good. Closer to home, U.S. policy-makers should revisit market-distorting programs such as the biofuel/ethanol subsidies.

Not that any of this will be easy. In fact, expect any efforts to address rising food prices by lowering tariffs or eliminating subsidies to lead to one massive food fight.

Karol C. Boudreaux is Affiliated Senior Research Fellow at the Mercatus Center at George Mason University and lead researcher for Enterprise Africa!, an international initiative to promote successful business development in Africa. She is an internationally recognized expert on the role played by private institutions to alleviate poverty and promote prosperity.

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