China Programme • Volume 12 • Number 2 • March 2008
Biofuels: Food vs Fuel Revisited
Soaring prices for staple commodities, such as wheat, soy and corn, have brought the food security implications of increased production of biofuels under greater scrutiny.
Since the biofuel bubble burst into the public realm a few months ago, some countries have scaled back plans to increase the share of such fuels in their domestic energy mix. This is due to both the inevitable necessity of importing feedstocks from developing countries, where their production is perceived to contribute to environmental problems, and the fact that biodiesel profitability has been impaired by high prices of vegetable oils.
Food price inflation caused by food and fuel competition for the same land has also been part of the paradigm, leading many to question whether biofuels are really sustainable in the larger context of food security. All of this has major implications for the world trading system, which has long been characterised by the low value of agricultural commodities.
In the context of an impending recession and new climate change regulations, the food/fuel debate has taken on new urgency. There is no question that food prices have risen, including in countries where large numbers of people are already at risk.
Biofuel development is a factor in some places, but a number of other elements not linked to agriculture also account for the trend.
Factors Affecting Food Prices
Foremost among these are energy price increases. The rise in commodity prices tied to energy markets is unmistakable, and has been a factor for the past 15 months. When the price of crude petroleum rises from US$30 to US$100 a barrel, it inevitably affects food production, which is largely mechanised in most production centres. It also has consequences on transport, processing, packaging, distribution and retail sales, because price increases are usually passed on through the value chain.
Since commodities are valued in dollars, the decline in the dollar exchange rate has also had an effect. Since 2001, the dollar has steadily depreciated vis-à-vis other currencies, and for the last two years has been down 15 percent on a trade-weighted basis.
Trade-linked growth is another factor. China’s 8-10 percent annual growth, accompanied by imports of key industrial and agricultural inputs, has put upward pressure on prices, including those for ocean freight rates.
In addition, some agricultural developments unrelated to biofuels have played a role in world food price increases. For instance, wheat prices have risen sharply due to Australia’s prolonged drought, which has greatly reduced its wheat crop. China’s import demand has surged, particularly for soybeans for vegetable oil and animal feed, putting pressure on soy prices. Dairy prices have also been affected by a worldwide shortage of stocks relative to increases in demand fuelled by higher incomes and changing consumer patterns in emerging economies.
Biofuel Concerns
However, biofuel production is undeniably a major factor in food price increases. This is particularly so in cases where farmers have stepped up cultivation of biofuel feedstocks to fulfil ambitious government mandates to improve the percentage of renewables in the energy mix, and where those feedstocks are also used for food.
Investment in new refining capacity and the continuation of rapid buildout in the biofuel sector, spurred by subsidies, have ensured high feedstock prices. Europe’s biodiesel programme and the US fuel ethanol programme impose a massive additional demand on the farm production base, driving up prices for all grains and oilseeds, which compete for the same land. Many other countries have launched similar programmes without thinking about the aggregate effect on world markets.
This has been the major cause of higher prices for corn, wheat and soybeans. To illustrate: many US farmers grow both soybeans and corn. However, since biofuel mandates subsidise corn ethanol, a large number of producers are devoting more acreage to corn to the detriment of soybeans, which are not primarily used for biofuels in the US. This has created a relative shortage of soy in the market, with corresponding price increases. And, since soy is primarily used to feed livestock, the shift has resulted in higher prices for meat and milk. Corn, also used to feed livestock, is also more expensive because of demand for corn ethanol. Likewise, high fructose corn syrup (HFCS) is now almost as expensive as sugar because it is a corn product.
However, not all commodities used as biofuel feedstocks have experienced price increases. A global sugar surplus has kept the world price comparatively stable, around 10-12 cents a pound.
Are High Prices Here to Stay?
The major question is whether these are short- or long-term trends. Absent subsidies and mandates that artificially keep demand high, the biofuels production would only develop if it remains profitable to grow and refine them for a market. Petroleum supply obviously has a bearing on these conditions. So does climate change regulation, which will create demand for biofuels that reduce net carbon emissions. A worldwide economic slowdown would reduce these upward price pressures, but price volatility would most likely characterise both short- and long-term scenarios. Finally, climate change itself in the long term may make growing the current ‘first generation’ biofuel crops too costly due to reduced yields in their present locations.
The likelihood in the short term is that, even with normal crops, prices are going to stay high compared to historical standards, and short stocks could contribute to increased volatility. Since world grain stocks are now very low, any crop disasters will have a powerful price impact. For instance, bad crops in the US, Europe or China could temporarily push up grain and oilseed prices by as much as 50 percent compared to their present levels. Monetary policies that contribute to a declining dollar will also continue to account for higher commodity prices.
Good or Bad for Developing Countries?
Many developing countries have historically been negatively affected by low commodity prices. What do high prices mean for them? The UN Food and Agriculture Organisation has estimated that high prices in 2006 increased the food import bill of developing countries by 10 percent over 2005 levels. The increase for 2007 was estimated at 25 percent. This assessment does not take into account the benefits of high prices to producers within these countries, some of whom are also exporters. Developing countries that both produce and export grains and oilseeds will benefit from the expanded markets and higher prices that these commodities will command.
However, a recent US government report on the implications of rising food prices makes some sobering assessments for other developing countries.1 Despite a slight increase in food availability in the next decade, less-developed countries that are also highly import-dependent will experience stronger demand for grains and oilseeds, and will have less capacity to access these essential commodities because of price increases. Least-developed countries are on balance becoming more import dependent, and price increases for basic commodities will accentuate this trend and raise the price of food aid (see box). This could account for a food gap by 2016 of 27 million tonnes, on the assumption that the food price increases of 2007 are continued. (The ‘gap’ is the amount of food necessary to raise consumption of all income groups to the nutritional requirement of roughly 2,100 calories a day per person).
It is important to note that biofuel competition for acreage used for grains and oilseeds is an important contributing factor in this scenario, but not the only one. Also implicated are rising energy prices, greater world food demand and stagnant food aid. But because biofuel policy is predicated in part on the assumption that these fuels can reduce greenhouse gas emissions, the ambitious mandates to produce them should also be re-examined in light of the carbon emissions caused by the land and forest conversion that their acreage demands.2 This will be a challenge for national governments that understand the global nature, not only of fuel, but of food, and the need to balance their biofuel policy priorities.
Jane Early is an attorney and managing partner of the Earley & White Consulting Group, LLC, a firm specialising in the international trade and environmental implications of standards in international law pertaining to food and environmental health and safety, and sustainability and other quality-related attributes.
ENDNOTES
1 Rosen, Stacey and Shapouri, Shahla. February 2008. Rising Food Prices Intensify Food Insecurity in Developing Countries. In Amber Waves
2 Fargione, Joseph et al. February 2008. Land Clearing and Biofuel Carbon Debt. In Science Magazine