With commodity prices on the rise again, subsidies for biofuels are under renewed scrutiny for potentially diverting already strained crop supplies away from food production, exacerbating food security concerns. While Congress extended key tax credits for ethanol and biodiesel late last year, pressing deficit and budget issues are putting pressure on lawmakers to cut or eliminate those subsidies, even if doing so may impede the development of next-generation biofuels. In this Energy and Climate Brief, Garten Rothkopf examines how the issue of commodity prices is affecting the biofuels debate in Washington, as well as how that debate may affect the future development of the biofuels sector.

The commodity price spike of recent weeks has renewed the debate over biofuels’ sustainability, with the turmoil fueling an already heated debate over biofuels tax credits and the budget in general.  While President Obama reiterated his commitment to biofuels and other renewable energy technologies in the recent State of the Union Address as well as the proposed FY12 budget, fiscal conservatives and opponents of EPA’s GHG regulation are pushing back.  Despite the fact that strong fiscal conservatives from the Corn Belt have historically remained steadfast in their support for corn-based ethanol, the gaping federal deficit, the cost of subsidies, and public concern over rising commodity costs may be enough to undercut support for first generation ethanol and redirect it toward more efficient and higher density fuels.  In this GR Energy and Climate Brief, we explore the confluence of factors contributing to the destabilization of US biofuels policy and assess the road ahead.

Food versus Fuel, Redux

The recent and steep increase in commodity prices has begun to hit dinner tables: the rise in prices for edible commodities in particular is sparking renewed fears of food insecurity.  In the past year, corn prices on the Chicago Board of Trade increased 87%; wheat prices were up 74% over the same period. While the USDA projects US food prices to increase 3-4% over the next year, the impact of commodity prices on food costs in countries such as Egypt and emerging markets such as India and China to be much greater, as food prices weigh heavier on price indexes and have a larger impact on inflation. With high prices and associated unrest spreading, so are calls to address the drivers and secure food stocks.

There is no doubt that ethanol is putting additional upward pressure on corn prices; with production at all-time highs, the growing demand continues to put strain on stocks already in tight supply.  According to the USDA, corn stocks are at 15 years lows.  The ethanol industry consumed roughly 40% of last year’s corn crop, and the industry’s projected corn orders are expected to rise 8.4% in 2011. While statistics like these are often cited by ardent opponents of corn-based ethanol, it is clear that a host of other variables– including drought and inclement weather, rising oil prices, ballooning demand from emerging economies, and commodity speculation, among other factors – are all contributing to food inflation. 

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