The world has decided that much of the blame for the rising cost of foods can be ascribed to the use of grains for biofuels. The case for the prosecution is simply made. About one hundred million tonnes of maize from this year’s US crop will be diverted into ethanol refineries, an increase of a third on 2007’s figure. The maize used for ethanol represents almost 5% of global production of all types of grain. One in twenty cereal grains produced in the world this year will end up in the petrol tank of US cars. Other countries are also pushing ethanol, but the US has moved most aggressively to increase the use of food for fuel.
As we are all increasingly aware, world demand for cereals has recently exceeded the available supply. FAO estimates suggest that the world ran down its stocks of grains by about 50 million tonnes during the last year. The 100 million 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 would 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. The effect is not limited to maize. Price rises in one commodity inevitably spill over to other crops. Farmers switch out of 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, even though ethanol cannot be made economically from beans. Other studies also suggest strong linkages between the growth of biofuels and commodity price inflation. One witness appearing before the US Congress in early May said that increases in biofuel demand since 2000 had caused 39% of the rise in corn prices.
So can we confidently convict biofuels of the charge of causing a very large part of the spikes in food prices? Yes and no. Few will dispute that biofuels have made the problem worse, but the roots of food price inflation are far more diverse than we might think. And, if anything, these other causes should make us even more uncomfortable about the future balance of supply and demand for food.
The first counter-attack is led by the US ethanol industry. It points out that American 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 200 million tonnes of grain to feed the animals, twice what will be used this year in American ethanol refineries. Since it takes an average of about five kilos of feed to create one kilo of meat, increasing Asian prosperity is diverting vital grain from the poorest citizens, both in Asia and elsewhere. Many independent commentators agree with the thrust of this argument. FAO data shows more grain going to feed animals in the last ten years, although the numbers are much less alarming than the US ethanol industry suggests. The total amount of grain being used for animal feed has risen by about 100 million tonnes in the last ten years, compared to an increase of only 70 million tonnes in the amount used for human food consumption.
This leads on to a second point. Underlying the food price inflation of the last few years is an even more worrying trend. Agricultural productivity is simply not growing fast enough. US government data shows yields per hectare rising 2% a year between 1970 and 1990 and then falling to 1.1% over the succeeding period. Productivity enhancements over the next ten 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 or without biofuels. 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 can 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.
Another piece of expert testimony to the US Senate in early May should wake us to a further issue. Government legislation in the US and the European Union – as well as large amounts of subsidy – may have created the ethanol industry but the refineries can now stand on their own financial feet. With oil at $120 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. The only way of stopping farmers selling their grain to the refineries is to introduce an outright ban on adding ethanol to petrol. As Professor Babcock said in his testimony, ‘agricultural commodity prices and gasoline prices are now inextricably linked through existing ethanol plants and the knowledge of how to convert corn into transportation fuels.’ Other researchers have shown a similar linkage between increasing sugar costs and high oil prices. Like corn, sugar cane can be turned into biofuel.
At today’s oil prices, the 600 million wealthy car owners in the world can comfortably afford to outbid the rest of the world’s 6 billion people for the globe’s food resources. Professor Babcock’s estimate is that immediately reversing all forms of US government support for biofuel production would mean a fall of only a fifth in ethanol production. He says that the high level of continued demand for maize even after subsidies have been removed would mean that prices would only fall by 13%, a trivial change compared to the tripling in corn prices since 2002. If he is right, there is only one conclusion. The IMF may be correct that the push into biofuels 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, thus removing the incentive for producers to convert crops into ever more valuable fuels. Lower oil costs would also reduce fertiliser and diesel expenses, helping to restrain the upward march in agricultural prices.
The tiny number of remaining biofuels advocates around the world argue that by substituting for gasoline corn ethanol does help 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 is that it only through a long, sustained and probably painful attack on oil consumption that the world can hope to reverse the spiral in food prices.
A version of this article was published in the Guardian on Friday 30 May 2008.