The false promise of biofuels

Evidence continues to mount that the world’s growing appetite for energy produced from agricultural products is having a serious impact on food and other commodity prices as farmers, particularly in the United States, convert cropland from food production. Over time the impact will be large and mostly detrimental on income distribution around the world. It will probably be abandoned within a decade.

Fidel Castro, the octogenarian Cuban caudillo, roused himself in late June from the autumn of his patriarchy to denounce US support for the use of food crops in fuel production, saying support for such uses could cause huge numbers of deaths from hunger. Last week Achim Steiner, the head of the U.N. Environment Program echoed Castro’s concerns, saying there is serious reason for concern about the potential for ethanol production to threaten food supplies for the poor.

With its astonishing ability to convert sunlight and rain into energy, Asia’s tropical belt is at the epicenter of this new environmental chimera. But across the planet, while weather and other supply factors have been at work for some crops and in some locations, they are only a small part of the explanation for food prices.

Wheat, for instance, has risen from US$325 a ton to US$620 over the past 12 months, soybeans from US$675 to US$875, corn from US$225 to US$375, rice from US$7 a bushel to US$10. Indeed of the most-traded basic foodstuffs, only sugar is about where it was a year ago, at 10 US cents a pound, and even hit 20 cents in between.

Of industrial crops, cotton has been erratic but is back at 60 cents a pound compared with 50 cents a year ago and there are growing indications that a shift in land from cotton to corn and other bio-fuel crops in China and the US will lead to supply shortfalls in the not too distant future. Even rubber output may be squeezed if the palm oil boom, resulting from its appeal as a source of bio-diesel, leads to further conversion of rubber plantations to palm oil.

Much of the marginal demand for the food crops is directly attributable to the rush to make ethanol and bio-diesel in the name of reducing carbon emissions, whether or not the substitution is justified on economic grounds, let alone environmental ones.

That is not to condemn bio-fuels out of hand. Brazil has been producing ethanol from sugar cane since the first oil crisis and now does so very profitably. But Brazil already has the world’s lowest production costs for sugar. Sugar’s international price has long been depressed by subsidies elsewhere – notably the EU’s sugar beet subsidy and US domestic support prices for sugar. It is possible that Thailand can get a net benefit from turning both sugar cane and tapioca (otherwise a low-value crop grown on marginal land) into ethanol. In the short run at least, Malaysia and Indonesia are benefiting from a rise in palm oil prices, which they hope will be underwritten for the longer term by investing in bio-diesel plants which will sustain demand.

Almost everywhere, from the US to the EU to Malaysia, rules and tax breaks have been created to push bio-fuel output and usage. The additional demand for feedstock for the multiple bio-fuel plants now under construction or planned is hard to estimate. However, even if oil prices collapse and many plants never get built, government regulations and existing installed capacity are likely to ensure that crop prices remain high for the foreseeable future. Indeed the price rises of the past year may be just the beginning.

Yet even on the most optimistic estimates bio-fuels can have no more than a marginal impact on carbon emissions.

While the West basks in the idea that bio-fuel is cleaning up the planet, additional carbon releases are being created by the clearance of tropical forests for oil palm in Southeast Asia and soybeans in Brazil. Inefficiencies are rising from US and EU agricultural policies, with the US subsidizing corn producers by subjecting Brazil’s sugar-based ethanol to prohibitive tariffs and the EU’s ethanol policy absorbing surplus food and thereby delaying the reform of its agricultural policy, which has disrupted world markets for decades. In addition, chemical inputs and fossil-fuel burning machinery are needed to bring marginal land into production.

There will also be a major global impact on income distribution. Farmers generally will benefit from a rise in product prices, which is a plus. In most countries farmers have suffered from a decline in the terms of trade relative to their urban compatriots. However, much of the benefit will go to the largest farmers in rich and middle income countries with large agricultural surpluses – US, Canada, Argentina, Malaysia, Australia etc – and to corporate agriculture.

Populous countries such as India, China and Vietnam, with a high proportion of their population still rural, face a dilemma. Higher farm prices are good but they must also take into account the needs of the majority, whether urban or rural, who are not farmers. That means either suppressing farm gate prices by one means or another, or using central government funds that should be allocated to education or health, to subsidize basic foods.

The bottom line is that the poorer a person or family, the higher the proportion of income that is spent on food. A rise in food prices relative to other goods necessarily shifts income from the poor to the relatively rich, whether the car-owning majority in rich countries or the car-owning minority in poor ones. It could also lead to a reversal of the tendency towards improving diet. Producers of animal pigs, chickens, farmed fish, and egg all turn crops into animal protein and hence their prices will rise almost as fast as those of the inputs. Even the cost of simple cotton clothing may rise as a result of a shift of land into other uses.

Bio-fuels may salve the consciences of energy-intensive rich countries and benefit the few poorer ones that have an abundance of useful ingredients such as palm oil. But a few years from now the notion that enforced use of bio-fuels could be good for the planet will be see as one of the sillier ideas to have gripped the world at the beginning of the 21st century.

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