by Pete Geddes

Created on: May 09, 2008   Last Updated: June 13, 2009

The World Bank reports that over the past three years global food prices have nearly doubled. I see three primary reasons, and greed isn't one of them.

First, as populations grow and people become wealthier, they change their diet. They demand not only staples, but also now regularly eat once out-of-reach luxuries like meat, dairy, and poultry. All are grain fed. Second are government policies mandating an increased role for biofuels, such as ethanol. This forces the conversion of food to fuel. Third is the high price of petroleum products. Not only fuel, but also fertilizer and agricultural chemicals are now more expensive.

Concerns about climate change drive the push for biofuels. President Bush signed legislation mandating the production of 36 billion gallons of biofuels (most from corn ethanol) by 2022. This is about five times the current level of ethanol production.

Mandates for the production of goods, whether corn or computer chips, set predictable forces in motion. Here's how this experiment with Soviet style command economics works.

U.S. corn subsidies push prices above their natural levels. Farmers respond by moving production out of food crops, like wheat and soybeans, and into corn. As the acres devoted to wheat and soybeans fall, and yields decline, prices for these crops rise. Consumers respond by shifting demand to other grains, such as rice. Increased demand for rice raises its price.

Policies intended to protect unborn generations from the effects of climate change instead harm real people now. Worse still, Science recently reported that, on net, the production of biofuels produces more CO2 emissions than conventional fossil fuels. Can you imagine a more perverse situation?

This is not a problem caused by free markets. The mess above is entirely the product of governmental action. The market process would simply not have produced these sorry results, but policies that distort prices have.

Both government action and markets produce errors in systematic ways. One thing we stress at FREE's conferences is recognizing the circumstances in which such problems occur. We know, for example, that markets often ignore those things that have no price and no owner. Endangered species and ecosystem services are examples.

The ethanol experience illustrates how special interest groups, e.g., corn farmers and large agri-businesses, hijack government policy. They seek unnatural economic profits, those above what they could get in the market. Interest groups expend

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