Burning food: why oil is the real villain in the food crisis

Food is now worth more as petrol than on the table, says Chris Goodall, and the unpalatable truth is that only a long and painful attack on oil consumption will reverse the spiral in food prices

Chris Goodall, The Guardian 30 May 08;

The rising cost of foods is widely being blamed on the use of grains for biofuels, and the case for the prosecution is simply made. About 100m tonnes of maize from this year's US crop will be diverted into ethanol refineries, an increase of a third on 2007's figure. This means one in 20 of all cereal grains produced in the world this year will end up in the petrol tank of US cars, the country that is most aggressively increasing the use of food for fuel.

As we are all increasingly aware, world demand for cereals has recently exceeded the available supply. The UN's food and agriculture organisation (FAO) estimates suggest that the world ran down its stocks of grains by about 50m tonnes during the past year. The 100m tonnes of maize to be used by US ethanol refineries in the next year is double last year's global grain shortfall. Without ethanol production, supply would exceed demand and price inflation might have been kept in check. The IMF largely agrees with this view, saying that growth in biofuels has caused 70% of the increase in maize prices over the last few years.

But the effect is not limited to maize. Price rises in one commodity inevitably spill over to other crops. Farmers switch from producing wheat and other grains as the price of corn rises, reducing the supply of other cereals. Similarly, increasingly expensive corn encourages food manufacturers to switch to other grains, and livestock producers to feed their animals with other foods. Soybeans, for example, are used for cattle feed when the price of corn goes up. The IMF thinks that 40% of the inflation in soybean costs is directly down to the expansion in biofuels around the world.

So can we confidently convict biofuels of the charge of causing a very large part of the spikes in food prices? Not quite. Few will dispute that biofuels have made the problem worse, but the roots of food price inflation are far deeper and even more worrying.

The first factor is one happily raised by the US ethanol industry. It points out that their refineries are using far less corn than is needed to meet the increasing demand from Chinese consumers for meat. One lobbying document points out that Chinese meat consumption per person has doubled in the last decade or so, rising almost to European levels. This increase has required an extra 200m tonnes of grain per year to feed the animals, twice what will be used in 2008 in US ethanol refineries. So rising demand from the growing middle classes in developing countries is driving prices up more than biofuels.

FAO data also indicates that more grain has gone to feed animals in the past 10 years, although their estimates are less alarming than those from the US ethanol industry. The FAO says the grain being used for animal feed has risen by about a 100m tonnes in the past 10 years, but this compares to an increase of only 70m tonnes in the amount directly consumed by people.

This leads on to a second, even more worrying issue that underlies food price inflation. Agricultural productivity is simply not growing fast enough. US government data shows global yields per hectare rose 2% a year between 1970 and 1990 and then fell to 1.1% over the succeeding period. Productivity enhancements over the next 10 years are expected to average less than 1% a year. Since world population growth is averaging somewhat over 1%, we are heading for global hunger, with biofuels only hastening the speed.

We can see this in production data from the FAO: the amount of available grain for every person in the world edged downwards last year. The world could try to compensate for faltering productivity growth by expanding the area given over to crops, but this runs the risk of increasing the rate of worldwide deforestation, already causing a fifth of global CO2 emissions.

Lastly, we must consider a thorny economic issue. Government legislation in the US and the European Union – as well as their large subsidies - may have created the ethanol industry, but the refineries can now stand on their own financial feet. With oil at $135 a barrel, it is very profitable to turn the starch in maize into motor fuel. Simply put, food is worth more as petrol than it is on the table, even if the subsidies are removed. The only way of stopping farmers selling their grain to the refineries would be to introduce an outright ban on adding ethanol to petrol.

The IMF may be correct that the rise of biofuels has caused much of the world's recent food price inflation. But now that we know how to make ethanol efficiently from foodstuffs, it is sky-high oil costs that are keeping up the price of agricultural commodities. For a sustained reduction in food prices, we need oil prices to fall to much lower levels. This would also reduce fertiliser and diesel expenses, helping to restrain the upward march in agricultural prices.

Biofuels advocates reply that by substituting for gasoline, corn ethanol helps to reduce oil consumption. Unfortunately, it is a very bad exchange. America's use of corn for ethanol absorbs 5% of the world's cereal crops but has replaced less than 1% of global oil use. The unpalatable truth is that only through a long, sustained and probably painful attack on oil consumption can the world hope to reverse the spiral in food prices.

• Chris Goodall is the publisher of www.carboncommentary.com. His book on technologies to address global warming will be published by Profile Books later in 2008