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Is Higher Demand for Biofuels Fuelling Food Prices?

One reason for the increase in world food prices is that of food consumption, especially in developing countries. Another is the demand for cereals and food crops to produce biofuels. Which is the more dominant factor that can explain this surge?

COMMENTARYEconomic & Political Weekly EPW august 9, 200837the parting of the ways with the left. Its more seasoned members knew that ap-pearing to be anti-left is not good for its own image. So Manmohan Singh thought of taking the initiative and announcing over the heads of his cabinet colleagues that India was going ahead with the initia-tive with theIAEA. This resulted in the predictable move of the left. It could not have continued supporting the UPA govern-ment without sacrificing basic credibility. It had no option but to quit and quit it did. It did not vote withA or B. It simply took the only way that was open to it, not nec-essarily a bad thing to happen. Yet it is important to see that it was a Congress game plan with the quiet blessing of the Americans. One need not celebrate or regret the outcome. One should however record that there was nothing bizarre about it, to use P Chidambaram’s descri-ption of voting behaviour in the House. So further steps on the nuke deal will be taken fast, credit for the deal would be in the Congress coffers before the new elections are scheduled. Congress will at least have one (what it considers to be) achievement to show. It seems to believe that it will work.It is nevertheless true that the drama over the bribe operations and buying of MPs had all the characteristics of a third rate comedy. That was bizarre except that the finance minister was unwilling to see it. As if that absurd theatre was not enough a member of the central committee ofthe Communist Party of India (Marxist) nar-rated the story of Somnath Chatterji’s re-quest to get the party nomination for president. (In the event the party had pro-posed Pranab’s name, he was apparently willing to settle for vice-presidentship.) Nothing worked. Now the reports say that the prime minister has offered him some-thing. This was when he went to greet Chatterji on his 80th birthday. That indeed is bizarre. All this is absurd theatre, except that it is turning out to be tragic.Is Higher Demand for Biofuels Fuelling Food Prices? Anil SharmaOne reason for the increase in world food prices is that of food consumption, especially in developing countries. Another is the demand for cereals and food crops to produce biofuels. Which is the more dominant factor that can explain this surge? Against the mounting evidence that expansion of biofuels from food crops such as corn, rapeseed, soy-bean and even wheat and other coarse grains has been one of the key drivers of food prices during recent years, policy-makers in both the United States (US) as well as European Union (EU) are trying to sidetrack attention by putting forward ar-guments that increasing demand for food in developing countries is the dominant factor pushing up food prices. While it is true that increased consumption of food in developing countries is an important factor, it has been so for some time now and is not a recent development. It is the sudden and phenomenal rise of biofuel production that has to be properly under-stood to make a fair judgment on the importance of food or fuel demand in pushing food prices. Though the subject of “food versus fuel” has been debated for a while, the gravity of this vexed issue has still not been examined and understood properly. It is the lack of understanding that explains why most of the commentators on this issue have been giving more prominence to other factors over increased production of biofuels. Therefore, the objective of this article is to provide more clarity on this subject. To understand this objectively, we first review the factors triggering increases in food prices that have been identified by various international organisations. Then, we take up the issue of increased demand for bio-fuel production and rising consumption of food in developing countries including China and India to make clear so as to which is the more dominant factor that explains the recent rise in food prices. What Has Triggered the Rise?Commentary on factors that have led to pressures on supplies of food that seem to have contributed to the current price rise is already available from various international agencies including the World Bank, United Nations Conference on Trade and Development (UNCTAD), European Bank for Reconstruction and Development (EBRD), Food and Agricul-ture Organisation (FAO) and Asian Deve-lopment Bank (ADB). The World Bank (2008) says that demand for biofuels, needs of the increasing popu-lation, growing middle class in India and China with increasing purchasing power and erratic weather are among the rea-sons that have pushed food prices. The EBRD andFAO (2008) are of the view that a part of the price increases is the result of temporary supply problems, such as droughts (including those that occurred in south-eastern Europe in mid-2007) and diseases.Anil Sharma (aksharma@ncaer.org) is at the National Council of Applied Research, New Delhi.
COMMENTARYaugust 9, 2008 EPW Economic & Political Weekly38UNCTAD (2008) concludes that the driv-ing forces behind the current boom in commodity prices have been a combina-tion of strong global demand, led by China and a slow supply response, together with low inventories for a number of com-modities. Commodity prices have also been influenced by speculation, fed by high liquidity in international financial markets and relatively low interest rates, seeking higher returns in comparison to equity and debt securities. The increase in dollar-denominated commodity prices be-tween 2002 and 2006 is also partly ex-plained by the depreciation of the dollar against other major currencies. Finally, a major factor in the current rise in demand for some agricultural commodities, par-ticularly maize and sugar, is the height-ened demand for biofuels, which is closely linked to developments in energy prices.The ADB (2008) has also identified a number of underlying causes for the recent surge in global food prices – some cyclical and some structural, which can be seen most prominently in the international prices of cereals, particularly for the two most important staple foodgrains produced and consumed in Asia – rice and wheat.Clearly, there are several factors that have contributed to these developments in food prices but the general impression that emerges from all these studies is that the increase in prices of food is due to a combi-nation of a series of different events that have more or less occurred at the same time. It is, however, important to note that while most of the supply and demand related factors that have contributed to the current as well as previous booms in commodity prices are easily identifiable, the emer-gence of biofuels during the more recent years has, however, added a completely new dimension to the demand for food crops. Demand Originating from Biofuels Even though the demand originating from biofuels is not an entirely new phenome-non as it has been there after the oil shock of 1970s when Brazil started producing ethanol from sugarcane1 the main differ-ence, however, is in the feedstock that Brazil has been using all these years and what other countries that have started producing biofuels more recently, have been using. Therefore, policies with respect to bio-fuels, their impact in major economies that are pushing biofuel production more vigorously and the timing of these changes need to be examined closely. At the moment, there are three main biofuel producers in the world – the US, Brazil and EU. Estimates suggest that world ethanol production is dominated by the US followed by Brazil and these two account for nearly 73 per cent of world’s ethanol supply [FAO 2007]. Bio-diesel is mainly produced in the EU and the US with the EU being the largest biodiesel producer and consumer in the world (66 per cent share). Other countries have also started producing ethanol and biodiesel but their individual shares in overall production are not very significant. What is remarkable about the changes in the world market for biofuels is that theUS, which was not a major producer of biofuels until a few years ago, has in fact overtaken Brazil as the topmost producer of ethanol in the world with a shareof 39 per cent of total world ethanol output. Further, the EU has become the largest producer of biodiesel in the world with an overwhelming share of 66 per cent of world biodiesel output. These changes have been brought about through domestic policies that boththeUS andEU have pursued in the name of environment and achieving biofuel security. The US Energy Policy Act of 2005, which was in the making for a long time, established a renewable fuel re-quirement for the na-tion mandating 7.5 billion gallons of re-newable fuel by 2012. A more sweeping re-newable fuel standard has been proposed as part of the Biofuels Security Act 2007, which recommended replacing at least 25 per cent of petroleum used as transportation fuels by the year 2025. The EU’s Biofuels Directive (2003) mandated 2 per cent of the energy for transport to come from renewable sourc-es, including both biodiesel and bio-etha-nol, increasing to 5.75 per cent by the end of 2010 and 20 per cent by 2020. The consequence of these policies has been the phenomenal increase in the consumption of corn, soybean, rapeseed- mustard and even wheat, barley and palm oil for making biofuels. As mentioned earlier, Brazil has been using sugarcane as the main raw material for producing etha-nol. Now, of course, even Brazil has begun to use corn for producing ethanol and soy-bean for making biodiesel. The US has been using corn for making ethanol and soybean for producing biodiesel and the EU has started making use of rapeseed for producing biodiesel. To a limited extent, wheat and barley are also being used for making ethanol in the EU.2 Majority of the analysts have argued that these pro-grammes have just begun and are too small to have a significant impact on food prices. However, the question is – is this really true because the actual data tell an entirely different story.In a span of four years, between 2004 and 2007, the share of US corn production that is used for making ethanol has shot up from 11 per cent of cornoutputin 2004to 25 per cent of corn output in 2007 (Table 1). As the US is a major producer of corn in the world and has a share of 43 percent in the world’s corn output, the quantity of corn that was used for making ethanol is significant and jumped from 34 million tonnes in 2004 to 81 million tonnes in 2007. The amount of corn used for makingethanol is evidently not smallwhen compared with the total world trade in corn, which was roughly 89 milliontonnes in 2007-08. This figure is equally alarming when viewed in relation to the total world trade in coarse cereals, which in 2007-08 stood at 114 million tonnes. Similarly, the share of soybean produc-tion in the US that is used for making Table 1: Usage of Corn and Soybean for Biofuel Production in US Corn(Maize)SoybeanYear Used for Share in Share of Used for Share in Share of Producing Total World Producing Total World Ethanol Output Trade Ethanol Output Trade (million tonnes) (%) (%) (million tonnes) (%) (%)2004 33.611.245.90.50.50.72005 40.714.454.81.41.62.22006 53.820.163.64.55.26.82007 81.324.591.38.211.611.4There may be a small variation in data on share of world trade because the production and usage data is for calendar year (2004, 2005, 2006 and 2007) and trade data is for financial year (2004-05, 2005-06, 2006-07 and 2007-08).Sources: (1) National Corn Growers Association for production and quantity of corn used for producing ethanol and USDA for trade. (2) National Soybean Growers Association for production and quantity of soybean used for producing ethanol and USDA for trade.
COMMENTARYaugust 9, 2008 EPW Economic & Political Weekly40and also their effectivenessinreducing GHG emissions.First, the potential for biofuels to re-place fuel oil is relatively small, which implies that the scope to improve energy security through increased biofuel pro-duction is rather limited. The International Energy Agency [IEA 2007] estimates sug-gest that the share of biofuels in road transport is likely to increase from just about 1 per cent today to 7 per cent in 2030.What it essentially means is that considerable amounts of resources, particularly agri-cultural land would be needed to produce cereals and oilseeds to replace even a moderate amount of fuel oils. Second, there are huge inefficiencies in biofuel production, particularly in deve-loped countries. It is widely recognised that domestic production and trade poli-cies are promoting proliferation of the bio-fuel industry. For example, cereals and oilseeds such as soybean account for the bulk of subsidies that are provided to farmers in theUS [OECD 2007]. Further, the new farm bill has promised a much bigger bonanza for producers of these commodities. For the biofuel industry, a significant amount of tax incentives are provided to ethanol blenders and produc-ers. There is also a $0.54 per gallon tariff on imports of ethanol, which prohibits the entry of cheap ethanol from countries such as Brazil. Similarly, in theEU, wheat, coarse cereals and rapeseed-mustard also account for a major proportion of the total support that is provided by the EU (ibid). And, under the new Common Agricultural Policy, reform farmers in the EU would continue to get subsidies in the form of single farm payment every year. There are quite a lot of incentives for producers of biofuels under the EU energy policy, which plans to increase the share of renewable energy sources considerably.Third, even the earlier positive assess-ment regarding the impact of biofuel production on environment has been questioned. Previous studies had found that substituting biofuels for fossil fuels will reduce greenhouse gas emissions but more recent evidence suggests that these studies failed to count the carbon emis-sions that occur as farmers worldwidere-spond to higher prices and convert forest and grassland tonew cropland to replace the grain (or crop-land) diverted to bio-fuels. Searchinger et al (2008) using a worldwide agricultur-al model have found that corn-based etha-nol, insteadof produc-ing 20 per cent sav-ings, nearly doubles greenhouse emissions over 30 years and increases GHGs for 167 years. And biofuels from switch grass, if grown onUS corn lands, increase emis-sions by 50per cent. Similarly Fargione et al (2008) also question the low carbon content of food based biofuels. Their analysis shows that converting rainforests, peat lands, savan-nas or grasslands to produce food-based biofuels in Brazil, south-east Asia, and the US creates a “biofuel carbon debt” by re-leasing 17 to 420 times more carbond-ioxide than the annualGHG reductions these biofuels provide by displacing fossil fuels. In contrast, biofuels made from waste biomass or from biomass grown on abandoned agricultural lands planted with perennials incur little or no carbon debt and offer immediate and sustained GHG advantages.The results of these studies and above analysis raise serious concerns about large biofuel mandates and in fact, high-light the value of using waste products or biomass grown on marginal and aban-doned agricultural lands. Clearly, prime land meant for food production must not be diverted to meet the growing demand for the biofuel industry because the prog-nosis suggests that prices of food are likely to remain high over the medium-term. There are several reasons for being cautious due to factors such as reduced inventories, continued subsidisation of agriculture in the US, Europe and Japan, rising input costs and increased food and feed demand. The world must guard itself against the impending food crisis, which is leading to impoverishing the poor. Food and fuel issues have never been intertwined so closely, therefore, for the short to medium term nothing less than a suspension of biofuel production from food crops can only save the world from such crises. Notes1 Initially the government of Brazil underwrote the price of ethanol, encouraged investment in new units by means of preferential interest rates and subsidised the purchase of vehicles running on pure ethanol. However, in the 1990s, the pro-gramme underwent a major overhaul. The gov-ernment planned to encourage the use of blends by withdrawing public subsidies for the purchase of vehicles running on pure ethanol. During the period between 1997 and 1999, Brazil opened up the ethanol market and ended price guarantees. The volumes consumed were guaranteed in part, for the government required that 22-24 per cent of ethanol be added to gasoline. 2 In other countries, such as Canada, China and a few other Asian countries that have also joined the bandwagon, the quantity of raw materials used for making biofuels is rather small. Except for Canada and China these countries are not us-ing grains, but crops such as sugarcane (Thailand and India) and palm oil (Indonesia and Malaysia) for making biofuel. 3 In addition to soybean, other food crops such as canola oil and other fats and oils are also being used to produce biodiesel in the US. However, their combined share in bio-diesel production is rather small, just about 8 per cent in 2007 [FAPRI 2008].ReferencesADB (2008): Soaring Food Prices: Response to the Crisis, Asian Development Bank, Manila.EBRD and Food and Agriculture Organisation (FAO) (2008): Fighting Food Inflation through Sustain-able Investment, European Band for Reconstruc-tion and Development, London.Fargione, Joseph, Jason Hill, David Tilman, Stephen Polasky and Peter Hawthorne (2008): ‘Land Clearing and the Biofuel Carbon Debt’, Science, Vol 319, No 1235. FAO (2007): A Review of the Current State of Bio-en-ergy Development in G8+5 Countries, Food and Agriculture Organisation, Rome. – (2008): Food Outlook, May, FAO, Rome. FAPRI (2008): 2008 World Agricultural Outlook, Centre for Agricultural and Rural Development, Iowa State University, Iowa. IFP (2005): A Look at Biofuels Worldwide, IFP, France. IEA (2007): ‘Renewables in Global Energy Supply’, International Energy Agency, Paris.National Corn Growers Association (various years): World of Corn, NCGA, Washington DC. OECD (2007):Agricultural Policies in OECD Countries – Monitoring and Evaluation 2007, Organisation for Economic Cooperation and Development, Paris. Searchinger, Timothy, Ralph Heimlich , R A Houghton, Fengxia Dong, Amani Elobeid, Jacinto Fabiosa, Simla Tokgoz, Dermot Hayes and Tun-Hsiang Yu (2008): ‘Use of US Croplands for Biofuels Increas-es Greenhouse Gases through Emissions from Land Use Change’,Science, Vol 1126.UNCTAD (2008):The Changing Face of Commodities in the Twenty-first Century, United Nations Con-ference on Trade and Development , Geneva.World Bank (2008): Rising Food Prices: Policy Options and World Bank Response, World Bank, Washington DC.Table 4: Domestic Utilisation of Cereals(Million tonnes) China and India Other Net Food Rest of the World ImportingCountries Year Food Feed FoodFeedFoodFeed2004-05 376.3 117.1 256.5 38.2335.5 589.22005-06 372.8 118.5 271.6 46.4342.1 582.32006-07 375.0 118.0 278.7 48.6340.3 574.82007-08 378.3 122.0284.2 48.5344.1 586.3Average annual change (%) 0.2 1.4 3.5 8.7 0.9 -0.2Source: Food and Agriculture Organisation.

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