Sunday, April 1, 2012

…literally, driving up prices

By kay.e.strong

It’s curious how something as seemingly innocent as a morning-mocha latte-run can be connected to widespread food insecurity, food riots and growing global social instability!

For decades Americans have lived in a fuzzy cocoon of denial, believing that the world’s hunger problems and social unrest belonged to the world’s ineptitude—over breeding, local conflict, poor agricultural infrastructure, over exploitation of the environment—and not our own. 

Last month the New England Complex Systems Institute (NECSI) released a report entitled The Food Crises.  NECSI researchers successfully created a dynamic model fitting the volatility inherent in the UN Food and Agricultural Organization’s (FAO) Food Price Index time series from 2004-2011.  Source: http://necsi.edu/research/social/foodprices/update/index.html

“In 2008 and 2011 increases in global food prices triggered hunger, food riots and social unrest in North Africa, the Middle East, and elsewhere, at a cost to global stability which policy makers can no longer ignore. Over the past decade, world unrest has sharply increased at time of peak food prices; now the long-term price trend is getting close to what used to be episodic peaks.”

NECSI researchers predict the next food price bubble—a year away. “In 2013 we expect prices to be even higher and may lead to major social disruptions," according to Professor Bar-Yam President of NECSI in his remarks on speculation in global commodity markets to the World Economic Forum.

“According to the new study, the next food price peak will take place in about a year. The results will be dramatically higher prices than we have encountered thus far. The study warns that should ethanol production continue to grow according to multiyear trends, even the underlying trend will reach social-crisis levels in just one year.”

The two key drivers behind the rise in food prices are investor speculation—shifting portfolios between commodities, equities and bonds—and the rush to convert corn into fuel ethanol.

Expectations of increased food price volatility over the next decade are tied to stronger linkages between more frequent extreme weather events and between agricultural and energy markets.

The EPA acknowledges that the composition of the atmosphere is being altered as a result of human activities and that the climate is changing. Human-induced climate change has the potential to alter the prevalence and severity of extremes such as heat waves, cold waves, storms, floods and droughts.  And bad weather is key to commodity speculation.  Over this past year, almost every single major agricultural commodity has experienced a dramatic leap in price—with corn futures contracts up 94% since June, soybeans are up 51% since June, and wheat is up 80% since June 2010 (USDA).  FAO food price index for February 2012 reported cereal price index had increased to 227 from 85 in 2000—the year before US energy policy began prompting biomass production (corn ethanol).

Wonder why your consumer dollar buys less at the grocery store?

Thanks to our “alternative energy” policy, primary food commodities once reserved for human and animal consumption are being mainlined into our gas tanks. A refresher for those not “from down on the farm”—corn is used to feed chickens, cows, and pigs, so higher corn prices lead to higher prices for chicken, beef, pork, milk, cheese and any processed food derived from corn—fruit drinks (HFCS), corn oil, gluten, breakfast cereal, breads, tortillas, ice cream, as well as non-food products including aspirin, cough syrup, toothpaste and vitamins. 

Mobility and the Western diet—loosely defined as one high in saturated fats, red meats, ‘empty’ carbohydrates—are the envy of the world!  Four out of seven billion people live in Asia. China with a population of 1.3 billion and economic growth rates of 9-10% annually surpassed Japan in 2010 to become the world’s second largest economy. India has the world’s second largest population (1.2 b.) and annualized economic growth rates on par with China.  By 2015, Brazil (205 m.) and Russia (138 m.) are projected to move into fifth and eighth place among world economies. Growing incomes portend growing demand for meat and automobiles.

Current trends of economic growth and motorization will significantly increase demand for higher efficiency fuels (oil, gas, and electric power). Global energy demand projections from 2008 through 2035 are anticipated to increase by 53 percent, with China and India accounting for half of the growth. US International Energy Outlook expects China and India to consume 31 percent of the world’s energy by 2035, up from 21 percent in 2008. In 2035, Chinese energy demand will exceed that of the United States by 68 percent. Source: http://www.nytimes.com/2011/09/20/business/energy-environment/energy-demand-is-expected-to-rise-53-by-2035.html

The US Energy Information Administration projects that the transportation sector will account for 73 percent of total liquid fuels consumption in 2035. In 2008 eighteen percent of our grain output and 25 percent of the whole corn crop (2009) went to ethanol.  Ethanol production is projected to displace approximately [only!] 12 percent of gasoline demand in 2035 on an energy-equivalent basis. Source: http://www.eia.gov/forecasts/aeo/MT_liquidfuels.cfm

In case you got this far and are still feeling properly smug, economists will remind you: TANSTAFL, even, with ethanol.

That cup-of-joe run now spews formaldehyde into the atmosphere leading to significantly larger photochemical reactivity that generates much more ground level ozone. The Clean Fuels Report comparing fuel emissions shows that ethanol exhaust generates 2.14 times as much ozone as gasoline exhaust.  When added into the custom Localised Pollution Index (LPI) of The Clean Fuels Report, the local pollution (pollution that contributes to smog) is 1.7 on a scale where gasoline is 1.0 and higher numbers signify greater pollution. The California Air Resource Board formalized this issue in 2008 by recognizing control standards for formaldehydes as an emissions control group, much like the conventional NOx and Reactive Organic Gases (ROGs). Source: http://en.wikipedia.org/wiki/Ethanol

Americans constitute less than 5 percent of the world’s population. Yet, we act as though the other 95% do not matter.  Our everyday actions have huge repercussions for every man, woman and child on the planet.  With every passing mile, we literally drive up the cost of life’s most basic necessity, food. 

We’ve learned to “share the road.” Now, let’s move onto learning how to “share the planet”—one less mile at a time!

Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu

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This blog lives under the auspices of the Department of Economics whose mission has been to hold high the lantern beaming an "economic way of thinking" onto the world. Selfishness, rationality and equilibrium have been central to the teaching of an economic way of thinking rooted in the Renaissance. And, in this regard, the department has faithfully stayed the course. The intent of this blog, thinking out loud..., however, is to entertain exchanges which may challenge the centrality of economics as we teach it.