Economic Recovery May Rekindle Food/Fuel Debate

Karl Plume, Reuters 23 Mar 09;

CHICAGO - The steep drop in energy prices from last year's peaks has cooled the food-versus-fuel debate for the moment, but the battle may be rekindled by an eventual global economic recovery or energy price rebound.

The push to produce more biofuels like corn-based ethanol or biodiesel made from soybean oil or palm oil helped drive prices of raw food commodities to record highs last year, prompting double-digit food price inflation in some countries.

It also set off a debate over the morality of using food crops to make fuel while millions around the world go hungry.

Now, initiatives to expand the production and use of renewable fuels in the name of national security, domestic job growth or to combat climate change may further fan the controversy, according to several food and agriculture company executives and industry analysts speaking at the Reuters Food and Agriculture Summit in Chicago and elsewhere.

"At the moment, the food-versus-fuel debate has been put on the back burner given what we have seen in the commodities markets," said Doug Whitehead, a soft commodity analyst at Australia & New Zealand Banking Group Ltd.

"But it (biofuel) is still a very significant demand source for the feed grains and ... it is likely to increase with the US government looking to increase their ethanol blending mandates," he said, referring to recent calls to raise the percentage of ethanol allowed in US gasoline blends.

Food and energy prices have retreated since last summer amid wider global economic woes, but with a large biofuels industry now in place and poised to expand once economic conditions allow, competition for the limited supply of food crops will heat up again.

With next-generation biofuels made from non-food sources including grasses and agricultural waste still years away from widespread commercialization, food crop based fuels will be the primary source of bioenergy for now.

HIGHER US ETHANOL BLENDS

US ethanol makers were projected to use nearly a third of corn output this year, up from about a quarter last year, according to the latest US Agriculture Department data.

Ethanol supporters in the United States recently petitioned the Environmental Protection Agency to increase the amount of ethanol that blenders can mix into the US fuel supply from the current 10 percent to 12 to 13 percent or more.

Industry sources said higher blends would consume 200 million more bushels of corn, given current fuel demand.

Meanwhile, global demand for both food and fuel will continue to accelerate as a growing middle class in developing nations like China and India consumes higher quality foods while industrialization increases energy demand.

"We keep adding mouths to feed. As long as you don't have another collapse in some of the major economies like China or India, we will see continued demand growing in those areas," said Mark Palmquist, executive vice president and chief operating officer of US farmer cooperative CHS Inc.

Demand for energy will also continue to grow as countries emerge from the current grim economic climate.

"The world's demand for energy is going to continue to increase at an accelerating rate," said Brett Begemann, executive vice president of global commercial businesses at seed company Monsanto. "We ought to be pursuing all alternatives for producing energy."

He said advances in biotech seed technology can help boost grain yields needed to increase ethanol output.

BIOFUEL PROFITABILITY

But the future of renewable fuels is murky in some parts of the world as a lack of government support for the industry in some producing nations clashes with price-distorting import tariffs and government subsidies elsewhere.

The biodiesel sector needs high oil prices and low vegetable oil prices to remain competitive with traditional diesel made from crude oil.

"Without subsidies and without support from the government, I can't see how biodiesel production is at all economically viable," said Martin Bek-Nielsen, executive director at United Plantations in Kuala Lumpur.

"The only reason why first-generation biofuels are economically viable in Europe is because of the enormous subsidies."

(Reporting by Karl Plume, additional reporting by Naveen Thukral in Kuala Lumpur, editing by Matthew Lewis)