Record high food prices? Blame the Corn Bubble

Have you noticed the ridiculously high prices at the grocery store lately? Blame it on the Corn Bubble.

Reuters reports that earlier this month, “the World Bank and other international organizations called on governments to stop their ethanol subsidies because of concerns they were driving up food prices” – and pushing millions of people worldwide into poverty.

A new study found that U.S. ethanol subsidies – which the U.S. Senate recently voted 73-27 to eliminate – may have artificially jacked up corn prices a whopping 17 percent in 2011.

Iowa State Economics Professor Bruce Babcock, who authored the study for the Geneva-based International Centre for Trade and Sustainable Development, writes: “The fact that the world has had two agricultural commodity price spikes in the last three years has heightened the importance of knowing the extent to which biofuels and biofuel policies are contributing factors,” suggesting that high gasoline prices may have actually intensified demand for more ethanol, resulting in record food prices.

“Under these tight conditions, the added demand incentive from the [45 cents per gallon] blender tax credit can have a significant impact on maize prices,” says Babcock.

He added that “There is no rationale for the blender tax credit. It does little to help the biofuel industry as long as mandates are in place except in years when high gasoline prices have already stimulated demand beyond mandated levels. In this situation, the extra demand stimulus does help biofuel manufacturers – but at great cost to the livestock sector because it pushes world maize prices even higher than either energy prices or mandates would support.”

Ironically enough, Professor Babcock noted that left to its own devices, the market would have increased the demand for ethanol even without $5.7 billion in annual federal subsidies:

“Higher crude oil prices would have increased the demand for biofuels and would have created strong market-driven investment incentives that would have resulted in a large expansion of the US ethanol industry even without the subsidies. The investment incentives were only modestly higher with subsidies.”

Either way, the biofuel industry wins – while U.S. taxpayers (and millions of hungry people worldwide) lose.

Beltway ConfidentialIowa StatereutersUS

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