LUFT/GAFFNEY: Fact vs. fiction on food vs. fuel

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By Gal Luft and Frank Gaffney

COMMENTARY:

The sharp drop in world prices for oil and grain precipitated by the last few months' economic turmoil has literally, if probably temporarily, taken the energy out of last summer's vitriolic "food versus fuel" debate. Suddenly, we're not hearing the denunciations about how ethanol is taking corn from the world's hungry in order to put it in the gas tanks of the world's rich.

Back when oil cost $3 and $4 per barrel, the increased use of ethanol was blamed for high food prices, food riots and starvation of the poor. Senior United Nations official Jean Ziegler called the use of food crops for fuel a "crime against humanity." Anti-American demagogues like Hugo Chavez and Fidel Castro seized the opportunity to pile on to the anti-ethanol jihad.

Competing explanations for the rise in food prices - such as the role of speculators, the rise in oil prices and the increased demand for meat in China and India - were given short shrift by the "smart" people. Ironically, at the very moment that oil prices were at an historical high, the only alternative fuel available to keep gasoline prices from going even higher was facing an unstinting and ferocious attack. The last few weeks have clearly demonstrated all this was a farce.

An immutable fact is now clear for all to see: Food prices track oil prices, regardless of how much corn is used for ethanol production. When oil was selling at a premium, the costs went up for essential components of our food supply - especially those associated with operating agricultural machinery, fertilizers, packing, labor and transportation. When prices came down, the price of corn quickly followed.

In fact, oil has now fallen nearly 50 percent from its record $147 a barrel in July 2008. In the same period, corn prices have fallen by the same percentage, from $7.50 a bushel to under $4 today.

Did the price of corn drop because we used less ethanol? No. To the contrary, since the summer, ethanol production has actually risen nearly 10 percent.

It is now clear it was not ethanol that drove up the price of grain, and therefore the price of food. Rather, it was a result of the same speculative forces that jacked up oil prices. When the bubble created by hedge funds and other speculators popped in the current financial crisis, commodity prices declined.

This is not to say ethanol had no impact at all on food prices. It did. But this impact was marginal in comparison to the other factors at play.

More importantly, on balance, the use of ethanol played a positive role in the U.S. economy and abroad. At the height of the oil crisis, ethanol was responsible for keeping the price of oil 15 percent lower than where it would otherwise have been. This means that as vexing as some find annual ethanol subsidies of roughly $5.6 billion, the use of ethanol saved the U.S. economy in 2008 roughly 10 times that amount, which otherwise would have ended up in the coffers of foreign oil-exporting countries - many of them hostile to us.

The U.S. Agriculture Department has projected a 23 percent increase in farm-grown exports in 2008 over 2007, and ethanol production capacity increased by 60 percent to 11 billion gallons, saving the global oil market almost 1 million barrels of oil per day. America is clearly doing its share in feeding the world as it works to diversify its energy sources.

It is high time we recognize the "food versus fuel" debate for what it is: a myth. It is also past time for us to hold accountable those processed food companies that propagated this narrative to conceal their own contribution to the world's food problems.

Notably, Kraft, Kellogg and Nestle were quick to pass their increased costs on to consumers when grain prices climbed. They sure are taking their time reducing prices, however, now that commodity prices are down dramatically. At a time when the economy is in dire straits and many working Americans struggle to put food on their table, food producers who now pay less for their commodities are reporting profit increases and their shares, while down like everybody else's, have outperformed most other sectors.

For example, Kraft's revenue rose 19 percent from last year, Kellogg's by 9.5 percent. And Nestle's chairman, Peter Brabeck-Letmathe, who wrote an anti-ethanol op-ed in the Wall Street Journal when grain prices were high - declaring that "biofuels are economical nonsense, ecologically useless and ethically indefensible" - recently told the same newspaper that "retail food prices might come down a little, but I don't think it will be anything spectacular."

If anyone can alleviate the cost-of-food crisis at this time, it would be not the ethanol industry but the processed food producers themselves. Those who blamed Big Oil for price-gouging at the pump should now look at what Big Food is responsible for doing on the supermarket shelf.

Sooner or later, the economy will pick up steam and oil prices will most likely rebound, perhaps even to higher levels than we saw earlier this year. At that point, the anti-ethanol coalition will no doubt regroup to resume its misleading and strategically misguided campaign against ethanol as an alternative energy source. When that happens, American consumers and policymakers alike will need to bear in mind the truth that outed in the fall of 2008: Oil prices are the driving force behind food costs and ethanol helps keep oil prices down.

Gal Luft is executive director of the Institute for the Analysis of Global Security. Frank J. Gaffney Jr. is president of the Center for Security Policy. They are founding members of the Set America Free Coalition. (www.SetAmericaFree.org).