Biofuel not the main culprit behind rising food prices

G Panicker, Business Times 25 Apr 08;

BIOFUEL is getting a bad rap. A formidable array of critics, including the World Bank and the United Nations, have come out in the open against the alternative fuel programme. It is being lambasted as a 'crime against humanity'.

Food crops such as corn, palm oil and soybean go to making biofuel. Biofuel production thus contributes to food price rises and triggers food riots, the critics charge. It has resulted in fresh deforestation in places and loss of wildlife, defeating a campaign to preserve rainforests.

Even the programme's environmental benefits are increasingly questioned. Clearly, biofuel is fast losing friends. The issue is emotive and fodder for politicians quick to make a show of weeping for the poor.

But blaming biofuel as an over-arching problem for developing countries is going a bit too far. Is it the first time Haiti has seen riots? It is true that the biofuel drive has played a part in inflating food prices, mostly since the middle of last year. But those prices have also risen for other reasons.

Chief among them is that grains demand has outpaced even increased production. Several countries in Asia, which accounts 76 per cent of 30 million tonnes of food export, have banned the export of rice to protect domestic consumers and control inflation.

Food preferences in largely vegetarian India are changing with more meat being consumed. The Chinese are also eating more meat. This means more grain is being used to feed animals. For instance, it requires four kilograms of grain to produce a kilogram of pork. The spread of supermarkets in some countries has lifted prices of packed goods for consumers who have been used to prices in local informal markets and street-corner grocers.

The weather has played a huge part in rising prices. Drought over six years has devastated production of wheat and rice in Australia; wheat production is down by half and almost no rice was produced. Floods have affected some other growing areas such as Bangladesh.

Speculation in commodities is also a factor. An analyst said index funds are 'literally running the market'. According to one estimate, since 2006, total futures and options markets for major commodities like corn, wheat and soybeans have grown from about US$85 billion to US$222 billion.

But it is the staples such as rice, wheat and corn that have drawn the ire of biofuel critics. Only about 20 per cent of America's corn production goes into biofuel. Moreover, price increase in corn has trailed price increases in wheat and rice, which are not biofuel sources.

The Indian Finance Minister, who made the 'crime against humanity' remark, should ask why despite the fact that 70 per cent of people work on farms in his country, they do not match the productivity of 2 per cent of the Americans who work on their farms. Could the law of diminishing returns be at work on Indian farms?

India's expected record harvest of 227 million tonnes this year is still far below its potential estimated at 700 million. Worse, India still looks to the annual monsoon rains to irrigate 60 per cent of its arable land and has problems with storage of surplus production. What does he intend to do about these things?

We must also ask, what if we hadn't had this biofuel fever? Oil prices, now approaching US$120 a barrel, would have been still higher and the global economy in worse shape. Billionaire T Boone Pickens, who has reversed his bearish bet on oil, now says it could go to US$150. Soaring oil prices have made agricultural inputs and transportation of goods more expensive, forcing many countries to contemplate biofuel production. Yet few world leaders are railing against oil.

It is Brazil's success with alchohol fuel, from sugar cane, that created the current enthusiasm for biofuel. Nobody pretends that biofuel from food crops is the silver bullet to energy security. But it is a stop-gap before second-generation fuels from non-crops come on stream. In the meantime, biofuel programmes can help lift rural incomes in agricultural countries and raise farm productivity. Growth of farm yields has fallen globally to 1.2 per cent from 2.1 per cent in the 1950S and 1960S.

World food stocks have dropped to the lowest levels since 1980. More importantly, the food situation will not get any better soon, according to the World Bank. As poor economies grow, food demand will also rise. We can get out of the conundrum only by finding long-term solutions to both issues - producing more food and finding viable substitutes for mineral oil.

The writer is with BT's foreign desk