Emerging policy responses to food price volatility
The US government mandate that a huge volume of ethanol be produced from corn is contributing to historically high corn prices and increased hunger for poor people.October 21st, 2011 | by Gawain Kripke
Last week, new legislation (HR 3097) was introduced by a bipartisan group, led by Bob Goodlatte (R-VA) and Jim Costa (D-CA), to try to make the US ethanol mandates more responsive to corn supply and, we hope, less likely to drive food price volatility. Oxfam considers volatility in food prices a major concern for food security. We even have an acronym for it, “FPV”.
This bill would ease the US ethanol mandate if the corn stockpile (stocks-to-use ratio) falls below historical levels. The approach is seen as sort of “relief valve” for the government ethanol mandates.
The bill would require the US EPA to review corn stockpiles twice a year. If the stocks are below 10 percent of overall use, then the ethanol production mandate would be reduced by 10 percent. If the stocks fall below 7.5 percent, the mandate shrinks by 15 percent. If stocks fall very low, the ethanol mandate could be cut by 50 percent.
High food prices make it hard for poor people to access enough nutritious food. When food prices go up, poor people have a hard time affording it. Irregular food prices can be a major obstacle to agricultural producers who must manage their risk–especially difficult for poor farmers who have very few tools to manage this risk to their livelihood. The issue of food price volatility is a concern for major economic and development institutions, like the IMF, which recently hosted a one-day seminar on commodity price volatility (disclosure: Oxfam America’s President Ray Offenheiser was on a panel.)
In food markets, underlying supply and demand factors are pushing prices up as demand from consumers in developing countries grows rapidly and production lags behind. Climate change looms as a threat to supply.
The growth of biofuels is a factor in food prices, albeit hotly debated. Governments around the world are mandating production and consumption of biofuels, which, in turn, consumes important food commodities like corn or palm oil.
The fact that these government mandates are set in law and are inflexible makes prices more volatile. Unlike other consumers, the government mandate doesn’t change when prices for corn go up, or supply goes down. This means other consumers and producers have to make the adjustments and/or pay even higher prices. In the US, the government is mandating that a huge volume of ethanol be produced from corn. This is contributing to historic high prices for corn. Beef producers, for example, who rely on expansive corn to feed their livestock, have reduced their herds to the fewest number of cows in 50 years. The difference between corn at $2/bushel and $7/bushel corn is something like millions of cattle. The difference between corn at $2/bushel and $7/bushel for US ethanol mandates is zero. The difference between high food prices and low for poor people is increased hunger.
The Goodlatte bill is a welcome sign that policy-makers and politicians are beginning to respond and develop policies to reduce volatility. Let’s see if other lawmakers agree.