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Are biofuels to blame for agflation?

The UK’s consumer prices index showed annual food price inflation of 6 per cent in April, the highest level in almost six years and well ahead of overall inflation of 2.8 per cent. In the US, prices have risen by 6.7 per cent, seasonally adjusted, since the beginning of the year, compared to 2.1 per cent for all of 2006. There are some proximate factors driving food prices. Florida promises the smallest orange crop in 17 years. Swine fever in China has pushed up local pork prices. Coffee prices have been pushed up by adverse weather affecting production in Vietnam and Brazil, the two largest producers.

Of course, the relationship between food prices and inflation in general has been weakening. In the late 1940s food accounted for 43 per cent of the US consumer price index. By 1975 it was down to a quarter and its weight in the basket is now just 14 per cent.

Biofuels are gradually taking over as the main growth driver of agricultural demand, Goldman Sachs says that if government policies are adopted in full, global demand for biofuels could increase from 10bn gallons a year to 25bn gallons by 2010. In the US ethanol production accounted last year for 16 per cent of the corn (maize) crop. If farmers are to fill cars as well as stomachs, then there is an argument for structurally higher prices of some agricultural commodities.

Of course, one response in a market system is to increase production, although this is ultimately limited by the availability of suitable land. Indeed, global grain production will rise by 6.2 per cent to a record 1.666bn tonnes in 2007-08, according to the International Grains Council. However, this will not match global consumption forecast at 1.680bn tonnes.

China’s Communist rulers are worried and have announced a moratorium on the production of ethanol from corn and other food crops. In China grain security has been at the top of the party’s political priority list and a 43 per cent increase in the price of China’s staple meat – pork – triggered concern at the highest levels of the party.

The European Commission argues that its 10 per cent 2010 target for biofuels will not put a great strain on food markets. Their analysis suggests that prices for agricultural raw materials in the EU would rise by 3-6 per cent for cerals and 5-18 per cent for the major oilseeds as a result. As the cost of cereals makes up only 1 to 5 per cent of the consumer price of bread, which means that bread prices would increase by less than 1 per cent.

Although concerns have been expressed that planting biofuel crops may contribute to deforestation, biofuels do have clear environmental benefits. Corn-based ethanol gives 35 per cent more energy than it takes to produce. Greenhouse gas emissions per gallon of fuel used are 18 to 29 per cent lower with ethanol than with fossil fuels.

Biofuels are politically popular in the States because they give an income boost for farmers in the electorally marginal Mid West and also seek to address the country’s security concerns about energy dependence on the Middle East. President Bush wants the country to produce 35 billion gallons of corn-based ethanol, a goal that will require an additional 129,000 square miles of farmland, an area the size of Kansas and Iowa combined.

What are implications for the CAP? In an ideal world, the promise of improved market returns should mean that farmers, particularly big grain farmers, would have less need of subsidy. Farmers would no doubt argue that they are recovering from a long period of low incomes and that indeed their real incomes has been falling for a century (although in practice this is offset by much larger scale operations that secure economies of scale).

A real concern is that the rush to biofuels will boost food security discourses. These are seen as the best bet by those who want to return to discredited productionist orthodoxies and to make the claim that farming cannot function as a normal commercial activity but should be subsidised.

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One Reply to “Are biofuels to blame for agflation?”

  1. Wyn, I think your +35% figure for the net energy balance from corn-based ethanol is optimistic. In the US, a lot of the land being used for corn is semi-marginal land that was formerly in the Conservation Reserve Program, or what we in Europe would refer to as long term set aside. The conversion these retired lands into farmland for ethanol production leads to the release of huge amounts of carbon that otherwise would remain stored in plants and soil. The picture is even worse in the tropics where grassland savanna and rainforest are cleared for production of biofuels, or are brought into production for food crops because of the increase in commodity prices. By contrast, where there is potential for biofuels to contribute to reducing greenhouse gas emissions is when they are made from agricultural waste materials or from wood and coppice, which produce much more biomass at much less cost in terms of fertilizer, pesticides and water use. But these ‘second generation’ biofuels are still in the research laboratories and there is a real danger that if inefficient ‘first generation’ biofuels become established and entrenched through subsidy programmes and commercial investment decisions it will be that much harder to transition to the second generation biofuels.

    In both the US and the EU, biofuels are entirely the creature of government subsidy programs. In the US, there is a 54 cents per gallon tariff on imported ethanol which keeps out more efficient sugar cane derived ethanol, for instance from Brazil. An excellent analysis by the Global Subsidies Initiative shows that corn-based ethanol is an incredibly uneconomic way to reduce CO2 emissions. The report’s author calculates that every metric ton equivalent reduction of CO2 emissions costs $500 in federal and state subsidies for corn-based ethanol. That same $500 could buy you 140 tons of CO2 reductions if it were spent at the Chicago Climate Exchange, where CO2 emissions reductions are traded.

    Sadly, the EU appears to be following the US down the same crooked path, albeit with biodiesel, a product of rapeseed. Yet the dangers are the same. All too often biofuels are seen as a pain-free way of maintaining wasteful consumer behaviours such as driving gas guzzling cars and failing to insulate homes and offices.

    The most economically efficient way to proceed would be for policy-makers to decide a price for CO2 emissions (based on global targets for reducing atmospheric CO2 levels) that would then ensure that the most cost-effective path of emissions reductions is followed. This could be done through nascent permit trading systems (best for guaranteeing a firm limit on emissions) or through a carbon tax system (best for giving businesses long term stability in the cost of emissions). If biofuels were an efficient way of reducing CO2 emissions, such a tax or permit-trading system would provide the appropriate incentive. Unfortunately for the biofuels lobby, every independent analysis has shown that giving farmers subsidies to convert conservation land into the production of biofuels or to divert food crops into energy crops is not an economically rational way of combatting global climate change.

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