Food vs. fuel
Food versus fuel is the dilemma regarding the risk of diverting farmland or crops for biofuels production to the detriment of the food supply. The biofuel and food price debate involves wide-ranging views and is a long-standing, controversial one in the literature.[1][2][3][4] There is disagreement about the significance of the issue, what is causing it, and what can or should be done to remedy the situation. This complexity and uncertainty are due to the large number of impacts and feedback loops that can positively or negatively affect the price system. Moreover, the relative strengths of these positive and negative impacts vary in the short and long terms, and involve delayed effects. The academic side of the debate is also blurred by the use of different economic models and competing forms of statistical analysis.[5]
Biofuel production has increased in recent years. Some commodities, like maize (corn), sugar cane or vegetable oil can be used either as food, feed, or to make biofuels. For example, since 2006, a portion of land that was also formerly used to grow food crops in the United States is now used to grow corn for biofuels, and a larger share of corn is destined for ethanol production, reaching 25% in 2007.[6] Oil price increases since 2003, the desire to reduce oil dependency, and the need to reduce greenhouse gas emissions from transportation have together increased global demand for biofuels. Increased demand tends to improve financial returns on production, making biofuel more profitable and attractive than food production. This, in turn, leads to greater resource inputs to biofuel production, with correspondingly reduced resources put towards the production of food. Global food security issues may result from such economic disincentives to large-scale agricultural food production. There is, in addition, potential for the destruction of habitats with increasing pressure to convert land use to agriculture, for the production of biofuel.[7] Environmental groups have raised concerns about these potential harms for some years,[8][9][10][11] but the issues drew widespread attention worldwide due to the 2007–2008 world food price crisis.
Second-generation biofuels could potentially provide solutions to these negative effects. For example, they may allow for combined farming for food and fuel, and electricity could be generated simultaneously.[12] This could be especially beneficial for developing countries and rural areas in developed countries.[13] Some research suggests that biofuel production can be significantly increased without the need for increased acreage.[14][15][16]
Biofuels are not a new phenomenon. Before industrialisation, horses were the primary (and probably the secondary) source of power for transportation and physical work, requiring food. The growing of crops for horses (typically oats) to carry out physical work is comparable to the growing of crops for biofuels used in engines. However, the earlier, pre-industrial "biofuel" crops were at smaller scale.
Brazil has been considered to have the world's first sustainable biofuels economy,[17][18][19] and its government claims Brazil's sugar cane-based ethanol industry did not contribute to the 2008 food crisis.[19][20] A World Bank policy research working paper released in July 2008[21] concluded that "large increases in biofuel production in the United States and Europe are the main reason behind the steep rise in global food prices" and also stated that "Brazil's sugar-based ethanol did not push food prices appreciably higher.".[22][23] However, a 2010 study also by the World Bank concluded that their previous study may have overestimated the contribution of biofuel production, as "the effect of biofuels on food prices has not been as large as originally thought, but that the use of commodities by financial investors (the so-called "financialization of commodities") may have been partly responsible for the 2007/08 spike."[24] A 2008 independent study by the OECD also found that the impact of biofuels on food prices are much smaller.[25]
Proposed causes[edit]
Ethanol fuel as an oxygenate additive[edit]
The demand for ethanol fuel produced from field corn was spurred in the U.S. by the discovery that methyl tertiary butyl ether (MTBE) was contaminating groundwater.[44][45] MTBE use as an oxygenate additive was widespread due to the mandates of the Clean Air Act amendments of 1992 to reduce carbon monoxide emissions. As a result, by 2006, MTBE use in gasoline was banned in almost 20 states. There was also concern that widespread and costly litigation might be taken against the U.S. gasoline suppliers, and a 2005 decision refusing legal protection for MTBE, opened a new market for ethanol fuel, the primary substitute for MTBE.[45] At a time when corn prices were around US$2 a bushel, corn growers recognized the potential of this new market and delivered accordingly. This demand shift took place at a time when oil prices were already significantly rising.
Other factors[edit]
The fact that food prices went up at the same time fuel prices went up is not surprising and should not be entirely blamed on biofuels. Energy costs are a significant cost for fertilizer, farming, and food distribution. Also, China and other countries have had significant increases in their imports as their economies have grown.[46][47] Sugar is one of the main feedstocks for ethanol, and prices are down from two years ago.[48][49] Part of the food price increase for international food commodities measured in US dollars is due to the dollar being devalued.[50] Protectionism is also an important contributor to price increases.[51] 36% of world grain goes as fodder to feed animals, rather than people.[52]
Over long periods of time, population growth and climate change could cause food prices to go up. However, these factors have been around for many years and food prices have jumped up in the last three years, so their contribution to the current problem is minimal.[53]
Government regulations of food and fuel markets[edit]
France, Germany, the United Kingdom, and the United States governments have supported biofuels with tax breaks, mandated use, and subsidies. These policies have the unintended consequence of diverting resources from food production and leading to surging food prices and the potential destruction of natural habitats.[7][26]
Fuel for agricultural use often does not have fuel taxes (farmers get duty-free petrol or diesel fuel). Biofuels may have subsidies[54] and low/no retail fuel taxes.[55] Biofuels compete with retail gasoline and diesel prices which have substantial taxes included. The net result is that it is possible for a farmer to use more than a gallon of fuel to make a gallon of biofuel and still make a profit. There have been thousands of scholarly papers analyzing how much energy goes into making ethanol from corn and how that compares to the energy in the ethanol.[56]
A World Bank policy research working paper concluded that food prices have risen by 35 to 40 percent between 2002 and 2008, of which 70 to 75 percent are attributable to biofuels.[21] The "month-by-month" five-year analysis disputes that increases in global grain consumption and droughts were responsible for significant price increases, reporting that this had only a marginal impact. Instead, the report argues that the EU and US drive for biofuels has had by far the biggest impact on food supply and prices, as increased production of biofuels in the US and EU was supported by subsidies and tariffs on imports, and considers that without these policies, price increases would have been smaller. This research also concluded that Brazil's sugar cane-based ethanol has not raised sugar prices significantly and recommends removing tariffs on ethanol imports by both the US and EU, to allow more efficient producers such as Brazil and other developing countries, including many African countries, to produce ethanol profitably for export to meet the mandates in the EU and the US.[22][23]
An economic assessment published by the OECD in July 2008[25] agrees with the World Bank report recommendations regarding the negative effects of subsidies and import tariffs but finds that the estimated impact of biofuels on food prices is much smaller. The OECD study found that trade restrictions, mainly through import tariffs, protect the domestic industry from foreign competitors but impose a cost burden on domestic biofuel users and limit alternative suppliers. The report is also critical of limited reduction of greenhouse gas emissions achieved from biofuels based on feedstocks used in Europe and North America, finding that the current biofuel support policies would reduce greenhouse gas emissions from transport fuel by no more than 0.8% by 2015, while Brazilian ethanol from sugar cane reduces greenhouse gas emissions by at least 80% compared to fossil fuels. The assessment calls for the need for more open markets in biofuels and feedstocks in order to improve efficiency and lower costs.[27]
Oil price increases[edit]
Oil price increases since 2003 resulted in increased demand for biofuels. Transforming vegetable oil into biodiesel is not very hard or costly, so there is a profitable arbitrage situation if vegetable oil is much cheaper than diesel. Diesel is also made from crude oil, so vegetable oil prices are partially linked to crude oil prices. Farmers can switch to growing vegetable oil crops if those are more profitable than food crops. So all food prices are linked to vegetable oil prices and, in turn, to crude oil prices. A World Bank study concluded that oil prices and a weak dollar explain 25–30% of the total price rise between January 2002 until June 2008.[21]
Demand for oil is outstripping the supply of oil and oil depletion is expected to cause crude oil prices to go up over the next 50 years. Record oil prices are inflating food prices worldwide, including those crops that have no relation to biofuels, such as rice and fish.[57]
In Germany and Canada, it is now much cheaper to heat a house by burning grain than by using fuel derived from crude oil.[58][59][60] With oil at $120 per barrel, a savings of a factor of 3 on heating costs is possible. When crude oil was at $25/barrel there was no economic incentive to switch to a grain fed heater.
From 1971 to 1973, around the time of the 1973 oil crisis, corn and wheat prices went up by a factor of 3.[61] There was no significant biofuel usage at that time.
Demand for fuel in rich countries is now competing against demand for food in poor countries. The increase in world grain consumption in 2006 happened due to the increase in consumption for fuel, not human consumption. The grain required to fill a 25 US gallons (95 L) fuel tank with ethanol will feed one person for a year.[113]
Several factors combine to make recent grain and oilseed price increases impact poor countries more:
The impact is not all negative. The Food and Agriculture Organization (FAO) recognizes the potential opportunities that the growing biofuel market offers to small farmers and aquaculturers around the world and has recommended small-scale financing to help farmers in poor countries produce local biofuel.[88]
On the other hand, poor countries that do substantial farming have increased profits due to biofuels. If vegetable oil prices double, the profit margin could more than double. In the past rich countries have been dumping subsidized grains at below cost prices into poor countries and hurting the local farming industries. With biofuels using grains the rich countries no longer have grain surpluses to get rid of. Farming in poor countries is seeing healthier profit margins and expanding.[26]
Interviews with local farmers in southern Ecuador[119] provide strong anecdotal evidence that the high price of corn is encouraging the burning of tropical forests in order to grow more. The destruction of tropical forests now account for 20% of all greenhouse gas emissions.[120]
US government subsidies for making ethanol from corn have been attacked as the main cause of the food vs fuel problem.[26][62][63][64][65][66] To defend themselves, the National Corn Growers Association has published their views on this issue.[121][122] They consider the "food vs fuel" argument to be a fallacy that is "fraught with misguided logic, hyperbole and scare tactics."
Claims made by the NCGA include:
Since reaching record high prices in June 2008, corn prices fell 50% by October 2008, declining sharply together with other commodities, including oil. According to a Reuters article, "Analysts, including some in the ethanol sector, say ethanol demand adds about 75 cents to $1.00 per bushel to the price of corn, as a rule of thumb. Other analysts say it adds around 20 percent, or just under 80 cents per bushel at current prices. Those estimates hint that $4 per bushel corn might be priced at only $3 without demand for ethanol fuel.".[123] These industry sources consider that a speculative bubble in the commodity markets holding positions in corn futures was the main driver behind the observed hike in corn prices affecting food supply.