Time for a renewed debate on biofuels

The latest world price index from the FAO shows that commodity foods are now more expensive than in the spike of 2008. After a generation of falling prices for basic foodstuffs, the world is now seeing substantial inflation in major crops, taking prices in real terms back up to the level of the 1970s. We are simultaneously watching an unsteady but sharp rise in the price of crude oil as industrial demand, particularly in China, continues to rise. During the inflation of 2008, observers frequently noted the connections between food and oil, focusing on the impact of the biofuels initiatives of the US and EU. These connections are now ever more obvious. Why aren’t we demanding that countries rein back their food into fuel programmes? In particular, why are European electorates not attempting to reverse the EU’s target of getting 10% of all transport fuel from ‘renewable’ sources by 2020, up from less than 4% today? We used to think that the food and energy markets were separate. Changes in supply and demand in one would not dramatically affect the other. The growth of state-mandated biofuels in the last decade has now intertwined the two markets. The most obvious example is the use of maize to make ethanol (a petrol substitute) in the US. About one quarter of all the global production of coarse grains, including maize, are now used to make ethanol. (263m tonnes out of 1,102m tonnes, source FAO). The global harvest of these grains, including in the Southern Hemisphere, is forecast to have fallen 2% in the last year while non-food uses rose 2%. These small changes reduced stock levels, helping to tighten world prices. The other main trend, almost unnoticed in the West, is the increasing use of the cassava root - better known as tapioca to middle aged Britons like me -  as a feedstock in Asian ethanol refineries, reducing the already limited supply of this important source of carbohydrate.

I hope that one simple comparison may help illustrate the close interconnection of liquid fuel and food markets. We eat foods principally for their energy content and need about 1000 calories to survive and about 2,000 to be healthy and active. A calorie is a unit of energy. (Specialists will know that when nutritionists refer to a calorie, they are actually talking of a kilocalorie, or one thousand calories). A simple piece of arithmetic can convert calories into kilowatt hours, the most-used measure of energy use. Our daily need of 2,000 calories is very approximately equal to 2 kilowatt hours. The energy value of any foodstuff can be expressed as a number of kilowatt hours per tonne. Wheat, for example, is about 4,500 kilowatt hours per tonne of grain. At today’s wheat prices (about £350 a tonne) the energy in the food is costing us about 4.5 pence per kilowatt hour. A similar calculation for oil shows a figure of almost 4 pence per kilowatt hour. In other words, the energy in oil costs very slightly less than the energy in wheat. But if oil rises to $120 a barrel, and wheat remains at the same price, both cost about the same for each kWh.

The important implication is this: when oil prices rise, food tends to get sucked from human consumption to use in ethanol and biodiesel refineries. If oil falls in price, grain ethanol becomes uncompetitive, and less of it is used. The long run downward trend in food prices has been interrupted, perhaps for ever, by the close linkage between foodstuffs and liquid hydrocarbons which seem likely to be in increasingly short supply. Our chance to reduce hunger has been catastrophically disrupted by our urgent need for rising quantities of oil and oil substitutes.

We saw a steady fall in world hunger until about 1995. Since then the number of undernourished people has increased sharply but erratically. The current serious bout of food inflation may push the number of undernourished people above 1 billion for the first time this year. There is genuine debate about the impact of biofuels on the degree of food price inflation. Nevertheless, I think that the evidence that diversion of crops into refineries reduces global food stocks and increases the likelihood of sharp spikes in the world prices of foodstuffs is strong. Global food production is relatively predictable from year to year (last year was disrupted by climate-related events but was still probably the third best ever) but the linkage with oil markets has introduced a new source of volatility into demand and thus prices. To be clear, it may be that the world needs higher food prices to encourage increases in supply, particularly in Africa, but unpredictable and reversible rises in foodstuff costs may not provide a consistent price signal for poor farmers and may just induce hunger, as is the case today.

More generally, the rich world’s biofuel policies seem to be a clear case of selfishness. In order to improve their security of supply of liquid fuels the prosperous nations are increasing the price of food. As this policy proceeds, the impact on food supply is going to get worse. The world’s food production today is somewhere about 4 kilowatt hours person. Some of this is eaten – very inefficiently – by cattle and pigs, reducing the world supply to about 2.5-3.0 kilowatt hours per head. The daily world oil supply of about 85 million barrels is equivalent to about 18 kilowatt hours, perhaps six or eight times as much. In other words even if we use the world’s entire food production for conversion into fuels, and at 100% efficiency, we can never hope to make more than a small fraction of the total liquid fuel needed from our foods.

Such a policy is perhaps the most regressive public policy ever initiated. It makes the petrol of the rich consumer marginally cheaper while pushing hundreds of millions of the world’s poorest into hunger.  Think back, if you will, to the cost of food expressed in pence per kilowatt hour. Today’s wholesale wheat prices tell us that wheat costs about 10p a day to feed an active and healthy person, before considering local costs. We don’t know the precise number of people living on under $1 (60p) a day but it is probably over a billion. For these people, the food price inflation of the last year has reduced their standard of living by perhaps 20%. The car driver in the rich world has probably benefited by less than 1% from the slight reduction in oil prices caused by competition from food-generated ethanol. This is not just madness, it is wicked.