Lagniappe

 

 

Global Insight : Biofuels come
under attack over rising food prices

 

Global Insight Perspective

The recent rise in world food prices has intensified the debate over food versus fuel and is prompting some countries to re-evaluate their positions on biofuels, although the world's largest producers remain undeterred.
Global Insight Perspective

Significance

Food-fuel competition resulting from an expansion in ethanol production in the United States is just one of a several factors contributing to rising food prices.

Implications

Nonetheless, the identification of biofuels as a culprit is generating a lot of negative press for the fuel, prompting leaders in the United Kingdom, Bolivia, and Peru in the past few days to call for a rethink on increasing the use of biofuels and putting the world's two largest ethanol producers, the United States and Brazil, on the defensive.

Outlook

The growth in ethanol production in the United States and Brazil is unlikely to slow, but the European Union (EU) is likely to raise its emphasis on sustainability and on developing second-generation biofuels as it looks to ramp up biofuels consumption; nonetheless it will have to give clearer signs of commitment to the 2020 target if it is to avert a slowdown in investment in the sector.

Food Versus Fuel Debate Heats Up

Rising international prices for agricultural commodities have triggered protests in a number of developing countries around the world in recent weeks from Egypt to Haiti and Indonesia and are threatening to create a backlash in the developed world against the use of food crops to produce biofuels. Some media reports on the global food shortages are now portraying biofuels as part of the problem, just two years after they were being widely lauded as the solution to the problems of dwindling global oil supplies and climate change. The UN official who last year described biofuels as a "crime against humanity", is no longer a lone voice and a number of international organisations are becoming increasingly vocal in their criticisms of biofuels.

These criticisms have put the leaders of the world's two largest ethanol producers Brazil and the United States on the defensive, with Presidents Luiz Inácio Lula da Silva and George W. Bush trying to downplay the contribution of their countries' respective ethanol programmes to rising food prices in speeches this month. In the case of Brazil, President Lula's long-running campaign against global hunger and his active promotion of Brazil's ethanol and biodiesel programmes are starting to look uncomfortably at odds with each other, especially in the light of a series of announcements by governments across the region this week of measures aimed at averting a potential food crisis. Speaking at a conference of the UN's Food and Agriculture Organization (FAO) in Brazil last week, President Lula said that "Biofuels aren't the villain that threatens food security." He reiterated this message at the 12th session of the UN Conference on Trade and Development (UNCTAD) in Ghana this week, calling for increased food production and a reduction in European and U.S. agricultural subsidies instead of targeting biofuels.

Getting Things into Perspective

According to a recent report from the FAO, international wheat and rice prices at the end of March were around double their level a year ago, while corn prices were over one-third higher. However, the relationship between the expansion in global biofuels production and consumption seen over the past year and food prices is more complex than some of the recent headlines suggest. Biofuels are just one of the contributors toward rising food prices. Other factors include rising transportation and fertiliser costs (as a result of higher oil prices) and, in the case of the recent rice price spike, higher consumer demand in the Far East because of stronger economic growth and the imposition of export restrictions by major producers. With regard to the U.S. agricultural sector, higher prices for cereals and soybeans also reflect a shift in financial investments to commodity markets as a result of the lower value of the U.S. dollar.

It is also necessary to make a distinction between sugar-based and corn-based ethanol production. Ethanol production from sugar cane in Brazil is not generally regarded as a direct threat to domestic food supplies. The share of the sugar cane crop allocated to ethanol production, rather than sugar production, may have risen, but the government has consistently maintained that the country has enough available land to permit further increases in production without threatening either the Amazon rainforest or the production of other crops. The production of corn-based ethanol in the United States is a different case. Increased ethanol production in the United States has contributed to a rise in corn prices (currently at around US$6 per bushel), which have in turn negatively affected other foodstuffs as corn is also used as a feed for cattle. The impact of higher U.S. corn prices has also been felt outside the country's borders particularly in Mexico and Central America.

Backlash from Consumers

Concerns over the impact of biofuels on food prices are also seeing intense debate within Europe, one of the world's largest biofuel consumers. As part of its efforts to battle climate change, in January the European Union (EU) established a target for biofuels to provide 10% of all transport energy by 2020. The target will require a significant increase in efforts to promote biofuels uptake—2005 biofuels consumption represented a market share of just 1% and the bloc is set to miss its previously set target of providing 5.75% of transport energy from biofuels by a long way. The targeted increase in biofuels consumption has fuelled fears over the potential negative effects of greater biofuels consumption on both the environment and global food supplies. The EU has sought to remedy these fears by attaching "sustainability criteria" to its biofuels targets, such as that biofuels must provide at least a 35% emissions saving over oil, that they must not be produced from land of high biodiversity or high carbon stocks, and that they must be produced from farming that employs the best available agricultural practices. However, the EU's ongoing efforts to finalise these criteria have reportedly highlighted the difficulties of significantly increasing biofuels consumption—as would be required by the EU 2020 target—while avoiding negative side effects, drawing suggestions that the EU could in fact back down from mandated consumption targets for biofuels. The EU this week moved to reject such suggestions, however. Asked by reporters whether media reports that the EU was reconsidering the biofuels target were true, a spokesperson for the European Commission (EC) said: "The answer is very simple—no." Nevertheless, some individual member states appear to be acknowledging the concerns over climbing biofuels production—the U.K. government this week announced that it would review its current biofuels policy with a specific focus on the impact of biofuels on food prices and the environment. In a sign of the rapidly changing nature of the debate, the announcement of the review came just one week after the United Kingdom's Renewable Transport Fuels Obligation came into force.

Outlook and Implications

The recent rise in food prices may turn out to be a temporary phenomenon, in which case the backlash against biofuels may fade, but the food versus fuel debate is a reminder of the limits of biofuels and a warning that first-generation biofuels can only ever be part of the answer to the challenge of reducing the world's ever-increasing dependence on fossil fuels.

What Does This Mean for Biofuels Policy?

Public confidence in biofuels is critical to the success of established and emerging biofuels programmes around the world as their dependence on a strong regulatory framework means that political support is paramount. For this reason, any sign that biofuels may be falling out of favour will raise questions about the continued commitment of policymakers to biofuel mandates and targets. For developing countries that have been promoting biofuels as a way to generate new export revenue, any shift in policy in the major consumer markets will have a knock-on effect.

Latin America: Concerns about ethanol and food production are unlikely to slow the development of Brazil's ethanol sector as the country's ethanol programme is well established and the bulk of production is still destined for domestic consumption.

Brazil is also likely to continue to push ahead with its biodiesel programme, which is set to see the mandatory biodiesel blend in diesel rise from 2% to 3% in July and 5% from 2013. As for exports, Brazilian ethanol's competitive advantage in terms of reducing greenhouse gas emissions and the fact that it does not compete with other food crops means that it is well positioned to tap new demand from export markets as long as it can satisfy any sustainability criteria agreed by the EU including tackling problems related to working conditions for labourers on sugar plantations. However, the same cannot be said for other countries in the region.

Peru's President Alan Garcia, who has seen his popularity fall as a result of rising food prices, on Monday said that biofuels were threatening food production, suggesting that the government is about to review its support for biofuels.

Countries in Central America and the Caribbean that have been eying biofuels with increased interest as a means to reduce their soaring oil import bills may also decide to rethink their strategies. Meanwhile, the Mexican government is already cautious about ethanol, following a wave of protests last year against rising corn prices.

United States: In contrast, policymakers in the United States continue to show strong support for biofuels. The corn farmers’ lobby is a powerful one and while prices are high there will be increased incentives for future production increases, despite the higher production costs. Improved crop yields should also contribute to increases in production in the coming years, while the December 2007 Energy Independence and Security Act (EISA), which sets a mandatory Renewable Fuel Standard (RFS) requiring fuel producers to use at least 36 billion gallons of biofuel in 2022, will provide increased demand for ethanol, although not all of that will be corn-based.

Europe: While the EC has denied any suggestion that it will back down from its 2020 biofuels target, it does appear that the regulator is finding it more challenging to balance a significant increase in biofuels consumption with robust sustainability criteria than it may originally have thought. The 10% target looks likely to remain in place, but the EC is now likely to trade a lower emphasis on the achievement of the target with a greater emphasis on sustainability. Concerns over the impact of biofuels on food prices in particular are likely to prompt a greater focus on developing effective second-generation biofuels—those that do not rely on food inputs. The food versus fuel debate has only served to emphasise the double-edged sword that is the EU's biofuels target and the bloc will have to tread very carefully from now on in order to avoid criticism of neglecting social and environmental impacts on developing countries in order to secure its own ambitions as a global leader on addressing climate change.

Juliette Kerr and Matthew Hall are Global Insight's Energy Analysts (juliette.kerr@globalinsight.com). Petroleumworld does not necessarily share these views

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Petroleumworld News 04/27/08

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