In the environment of rising oil prices and issues of climate change looming large, rich countries needed to wean themselves off dependence on fossil fuels. Biofuels seemed like a sure winner – firstly, because supporting biofuels meant supporting domestic agricultural industries. Secondly, because biofuels were thought to be greener than fossil fuels since the amount of greenhouse gases that are emitted during combustion is equivalent to the amount it absorbs in its lifetime. As such, many countries rushed to provide generous policies to encourage the production and use of biofuels. While well intended, these across-the-board policies have had major implications on the world’s food supply as our food needs become increasingly tied to our energy needs.
Commodity War: Food or Fuel?
Biofuels come from various sources – ethanol from corn, sugar beets or sugarcane, oils from seeds and grains such as the oil palm, rapeseed or soybean. These feedstocks can be burned to yield energy in our cars and factories. But, more importantly, these feedstocks are also sources of food for the world. The increased demand for biofuel feedstocks in the western world has led to direct competition for these commodities as food versus fuel.
Additionally, as some crops, such as corn become more profitable to grow because of biofuel subsidies, farmers switch to planting them and reduce their plantings of other types of crops. This lowers the market supply of the other crops and drives up overall prices.
Clay Ogg, an agricultural economist with the U.S. government explains the relationship between US biofuel policy and food prices, “Reductions in U.S. exports of corn and other crops lead to higher, world commodity prices. In the U.S., it is easy to plant less soybeans and more corn when the price of corn doubles, as occurred recently. This raises the world price of soybean oil… so we are a major contributor to the increase in vegetable oil and palm oil prices.”
In Europe, sunflower oil and rapeseed oil that were previously produced for consumption are now being used as biofuels to generate “green” energy. Increased demand for vegetable oils to meet this new energy need, along with increased demand from population growth, continues to drive up prices.
The growth of the biofuel industry has triggered increases not only in the prices of corn, oilseeds, and other grains but also in the prices of seemingly unrelated crops and products. The use of land to grow corn for ethanol is reducing the acreage devoted to other crops. Food processors who use crops such as peas and sweet corn have been forced to pay higher prices to keep their supplies secure and these additional costs are eventually passed on to consumers. The price of livestock and poultry has also gone up since animal feed, which is largely grain-based, is now more costly.
Fuel-friendly Policies over Food Security
A Goldman Sachs report says that forty-one countries are currently pursuing policies to promote the use of biofuels over the next decade. If implemented in full, these policies would increase global biofuel demand from 10 billion gallons per year in 2005 to 25 billion gallons per year by 2010, a 20 percent annualized growth rate.
Although this demand comprises a relatively small portion of total crop demand, about 5.5 percent, the report adds that biofuel production will remain a key driver of strong agriculture demand growth in the coming years, primarily owing to government policies for biofuel usage.
Most of the countries with biofuel production and usage policies are in the northern hemisphere while the most efficient crops for production are in the southern hemisphere. For example, sugarcane, which is the most efficient ethanol crop, grows abundantly in the tropics but not in the north, while jatropha, the most efficient non-food biodiesel crop, grows in southern Asia and Africa. Sunflower oil and rapeseed oil, which are grown in the northern hemisphere, are far less efficient as biofuels. However, rather than promote the use of the most efficient food crops as biofuels, the primary motivation for these blanket policies in the western world is typically to secure the supply of energy and increase self-sufficiency.
This forces the industry to operate on the availability of feedstock or indigenous food crop rather than be determined by the ‘natural’ economics of the market. As a result, these policies generate a much greater strain on resources than would otherwise occur if there were no barriers to trade.
“Many of these subsidies are poorly coordinated and targeted,” says Simon Upton, director of the Global Subsidies Initiative, regarding such across-the-board biofuel policies in the western world. “All indications are that subsidies are being piled on top of one another without policy makers having a clear idea of their potential impact on the environment and the economy. Yet the potential for waste on a grand scale and some spectacularly perverse environmental outcomes is large.”
To highlight Upton’s point – under existing policies, the biofuels industry will, in aggregate, receive support worth over $92 billion within the 2006-2012 time frame. However, the benefits of the policies are limited. A literature review from the Congressional Resource Service concluded that using corn ethanol cuts net greenhouse gas emissions by only about 20 percent because it requires heavy use of fertilizers and pesticides, which are energy-intensive and cause water pollution.
Biofuels: Even More Greenhouse Gases and Still Not Enough Fuel?
Furthermore, even if the entire corn crop in the United States were used to make ethanol, that fuel would replace only 12 percent of current U.S. gasoline use.
Recent research published in Science magazine also suggests that when land-use changes are taken into account, production of corn-based ethanol actually leads to a net increase in greenhouse gas emissions because farmers are starting to plant on land that had previously been protected under a land conservation programme.
Similarly, the diversion of cropland from food to fuel will lead to even more grasslands and forests being cleared to meet both the growing demand for biofuel and food. One study estimates that, over a thirty-year horizon and taking into account these land-use changes, corn-based ethanol doubles the level of greenhouse gas emissions relative to gasoline. In the European Union, similar concerns have prompted a shift in biodiesel policy because it was found to be contributing to the destruction of Indonesian rainforests to produce palm oil for biodiesel.
New Food Prices: Fueling Food Insecurity
The International Food Policy Research Institute, in Washington, D.C., has estimated that the increase in global biofuel production will push global corn prices up by 20 percent by 2010 and 41 percent by 2020. The prices of oilseeds, including soybeans, rapeseeds, and sunflower seeds, are projected to rise by 26 percent by 2010 and 76 percent by 2020, and wheat prices by 11 percent by 2010 and 3 by 2020. In the poorest parts of sub-Saharan Africa, Asia, and Latin America, where cassava is a staple, its price is expected to increase by 33 percent by 2010 and 135 percent by 2020.
What Now?
To mitigate these price increases, the right incentives must be put in place. Instead of promoting more mandates, tax breaks, and subsidies for biofuels, governments should make a major commitment to substantially increasing energy efficiency in vehicles, homes, and factories; promoting alternative sources of energy, such as solar and wind power; investing in research to improve agricultural yields and working to increase the commercial viability of fuels derived from cellulose. Until then, high food prices are likely to be here to stay.
