A big theme in the local and international news that I’ve been reading has been food prices, namely grains. The main stories I come across when reading US news is the presidential election. Although seemingly quite disparate, I think there’s actually a strong correlation between the two, which I will try to expound on.

Singapore’s PM announced yesterday that Singapore had enough rice stocks. Earlier this week, Malaysian and Thai officials have had to publicly state that grain supplies are ample. Today’s Straits Times had a photo of Filipino troops guarding sacks of rice at a distribution event. While eating dinner last night, the TV showed that food riots are sweeping Latin American, from Argentina to Haiti. Grain shortages and the corresponding rise in prices is not a sudden news event. While in India last year, I noticed constant newspaper headlines about the government adding export bans on various varieties of wheat and rice. Today, almost all grains are banned for export from India. China has banned export of many agricultural commodities as well. This week, the Philippines and Vietnam have halted rice exports. In the past year, the price of rice has nearly doubled. The prices of corn, wheat, soy beans, and a host of other agricultural commodities have had a meteoric rise as well. Good for commodities investors, bad for the majority of the world who depend on these staples for food. Its not so bad for consumers in the developed world, where only 10 to 20 percent of household incomes go towards food. But in many developing countries, over 50 percent of incomes go towards purchasing food, namely grains. Some say that the increase in price is the natural result of simple supply-demand economics. Others argue that we’re in a commodities bubble (including oil, gold, etc.) driven by, among other things, volatile capital markets. I believe that there is a shortage of grain worldwide (whether or not sufficient government stockpiles exist doesn’t mean supply exists, if those governments will not open up the silos), but other factors are driving up the food prices as well.

Most experts and economists accept that the price increases are caused by three main factors, although each factor’s weighting is disputed: climatic factors that are hurting agriculture, a rapidly growing global population, and the increased demand for agricultural products as developed nations try to move away from petroleum towards biofuels. A leading cause or not, part of the reason grain prices are skyrocketing is the potential demand to use them in the production of biofuels, namely ethanol. The movement to produce ethanol from corn, soy, and other grains was based on two things: cleaner fuel and cheaper fuel. Proponents argued that corn-based ethanol is cleaner burning than current fuels, thus helping to reduce global warming and it is cheaper than oil, which will help the US (and the world) to reduce its dependence on oil. In the past year and a half though, the promise of ethanol as an alternative fuel source has been shot-down, as both of its advantages have evaporated. One, several studies have shown that ethanol is not any cleaner burning. It does produce less greenhouse gasses than current fuels, but when you include the greenhouse gases emitted during the production of ethanol, the total pollution is more than traditional oil-based fuels. So its actually worse for the environment than what cars run on today. Secondly, ethanol was at one time cheaper. But the price increases in corn and soya have wiped out its competitive advantage there as well. Yet despite numerous environmental studies and cost projections, the demand for ethanol as an alternative fuel source is still driving up the prices of the related commodities. Why is the demand for grains to produce ethanol increasing, even as ethanol has been rejected as a viable fuel source?

This is where the US presidential elections come in. The only people in the world that still support ethanol as a viable fuel source are American farmers that have seen windfall profits in the past couple years due to the spike in grain prices. But why should that matter, since they’re such a small demographic numerically? I believe the answer lies in the structure of the American presidential election. The electoral college was designed to protect small states’ interests from large states, who would dominate in a popular vote. Thus, in the US presidential election, people is smaller states get a “louder” voice than residents of larger states. A South Dakotan’s vote matters more than a New Yorker’s, in terms of population relative to electoral votes. The last two elections have been nearly evenly-divided and candidates are fighting for every last electoral vote. Consequently, the only reason the idea of ethanol as a fuel-source is still alive is because there’s things like Iowa caucuses. Presidential hopefuls cater to small Midwestern states, by pouring money into the industry to get votes, and (the other BIG factor in all-time high prices) aware and opportunistic investors hop on to capitalize on the commodity boom.