US pledge $770 million as biofuels come under attack

Posted by Daniel Palmer on 2nd May 2008

US President George W Bush has pledged $770 million to assist with international food aid following the surge in global food prices. The spiralling cost of food has already seen riots in many countries and requires a global solution to the issue. “We’re sending a clear message to the world that America will lead the fight against hunger for years to come,” said Mr Bush. The US commitment comes following a UN task-force being set up to discuss potential solutions to combat decreasing food supplies and rising prices. The UN have been seeking to raise $755 million for the World Food Program, which was set to be under-funded this year.

The cause of the food prices is not limited to one issue but rather a range of individual issues which have combined to create major concern. Firstly, biofuels have led to many farmers selling food commodities for fuel resulting in a decreased amount of food being sold by farmers. This situation has been mainly prevalent in the US where the ‘food for fuel’ program has heavily subsidised the ethanol industry and made it lucrative for farmers to grow corn and sell it to make ethanol. As a result about a quarter of the corn produced in the US is now directed toward ethanol production.

The biofuels debate has been under the spotlight for the past few weeks with the UK prepared to reassess their biofuel goals and US Secretary of State Condoleezza Rice admitting that they have been in some way responsible for the escalating cost of food. An alliance of 19 influential groups in the US have expressed their concern about the impact of biofuels in a letter to the two Democrats leading hearings on federal food-to-fuel mandates. The alliance of 19 includes US restaurant, grocery and environmental groups. Ethanol industry professionals, meanwhile, continue to try and stress the importance and benefits of their industry.

The true impact of biofuels on food prices is difficult to judge with contradicting values provided by different sources. The US Department of Agriculture believes it has played a key role in the price hikes, attributing almost 20% of price rises to biofuels while the ethanol industry maintains the figure is below 5%.

Other issues leading to the price surge have been increased global demand, droughts in some farming areas and speculators looking to cash-in on the fear evoked by media reports of food shortages. Global demand has been led by a surge in the population and increased wealth in countries like China which has resulted in more people demanding meat. This demand for meat has meant more land has been required for livestock, decreasing supplies of food commodities.

Drought in countries like Australia has put greater pressure on supply and, with demand on the rise and supply impacted by weather conditions, speculators have decided to buy food commodities. The increased interest in food commodities has sparked a flood of buying particularly as investors have viewed food as a safer investment than volatile stock markets. Fortunately, positive news stories about wheat supplies has seen the price of wheat fall back to the price it was in November but, according to several economic analysts, prices of other food commodities are unlikely to have a significant fall this year.

For every boom there is always a bust and, in the case of food prices, it is likely to only take some sound policy changes and good farming conditions to contribute to a bust. How long it is until that happens, however, is at this stage unclear.