Analysis: How biofuels push up food prices

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http://timesofindia.indiatimes.com/OPINION/Columnists/Swaminathan_A_Aiyar/How_biofuels_push_up_food_prices/articleshow/1839929.cms

How biofuels push up food pricesAdd to Clippings
Swaminathan S Anklesaria Aiyar

[ 1 Apr, 2007 0325hrs ISTTIMES NEWS NETWORK ]

Critics accuse the government of surrendering to food inflation instead
of combating it. The government has raised the effective procurement
price (including bonus) of wheat by a whopping 21%, from Rs 700/quintal
last year to Rs 850/quintal this year.

I think it is utterly wrong to pay Indian farmers less than the world
price, even if it hurts urban consumers. In Chicago, the world's biggest
grain exchange, wheat costs Rs 850/quintal. Inclusive of shipping costs,
the landed price of imported wheat exceeds Rs 1000/quintal. The Indian
farmer deserves as much as the Chicago price.

Why is wheat so costly today? First, the whole world suffered bad
harvests in 2006, so world wheat stocks fell from 148m tonnes to 121m
tonnes.

Second, a weak El Nino warming of Pacific currents threatens poor global
harvests again this year. Third, the world economy has been booming four
years in a row, especially in Asia and Africa, boosting food demand.

But another potent but under-appreciated reason is the rise of petroleum
prices, and the consequent boom in biofuels. In many countries, ethanol
made from maize and sugarcane is being mixed with petrol. Also, edible
oils made from soyabeans, mustard and sunflower are being mixed with diesel.

Global cultivated land cannot be increased instantly. So, crops once
devoted to human consumption are being diverted to fuel production. This
necessarily affects food supply and prices.

The European Union has mandated that biofuels should account for 5.75%
of transport fuel by 2010. If produced entirely from European crops,
this will require the diversion of 17 million hectares, one-fifth of the
entire European cropped area, from food to biofuel crops.

President Bush in the US has called for cutting petrol consumption by
20% in ten years, mainly by substituting it with ethanol. Detroit
car-makers have agreed that fully half their vehicles will, by 2012, be
designed to run on a petrol-ethanol mixture in the ratio 85:15.

In the US, ethanol is made entirely from maize. The area under maize has
shot up from 78 million acres last year to 87 million hectares this
year. Ethanol is expected to swallow a quarter of this year's US maize
production. Ethanol demand has reduced maize stocks to 25-year lows
relative to consumption.

No wonder the price of maize has almost doubled in the last 18 months.
This in turn has pushed up the price of chickens and pork, which are
typically fed on maize.

The total cultivated area in the US is rising. Even so, some land is
being diverted to maize, mainly from soyabeans. The price of soyabeans
has skyrocketed, not merely because of diverted acreage but also because
edible oils are being mixed with diesel in many European countries,
above all in Germany.

This has pushed up the global price of all edible oils, including palm
oil, which India imports in huge quantities. The price of palm oil rose
11% in 2006 and is predicted to be 27% higher on average in 2007. This
has angered middle-class consumers in India, and obliged the government
to slash import duties on edible oils.

After last year's bad harvest (and consequent high prices), US wheat
acreage was expected to shoot up this year. But it has risen only
modestly, from 57m to 60m acres, because of the craze for maize.

In effect, the rise of biofuels and government subsidies to promote them
has integrated world markets for food and fuel. The implications have
barely been recognised or digested. However, hedge fund managers, who
earlier diversified into oil futures, are now diversifying into food
futures too.

Joe Gold, head of commodities in North America has been quoted in the
Financial Times as saying, "Energy has become an integral part of the
agricultural market, and has changed the structure of agriculture."

Does this imply a long-term food problem? Will the price of crops (and
hence, also of poultry and meat) keep rising along with petroleum prices?

I doubt it. Cultivated land may be fixed in the short run but can be
expanded significantly in the medium run. The US has much fallow land
that can be cultivated when needed. Brazil plans to clear millions of
acres of forests to cultivate more sugarcane and soyabeans. Greens are
aghast, naturally.

The current boom in agricultural prices has suddenly made farming very
profitable. Farmers everywhere are responding by using more fertiliser,
boosting yields.

Crop failures in the 1970s obliged the Soviet Union to buy huge
quantities of wheat from the world market, raising prices sharply. Yet,
within three years American farmers increased production so much that
world prices fell back to their earlier levels.

Hopefully, this will happen again. High prices arising from biofuel
demand should induce higher acreage and productivity, easily meeting
world demand for both food and fuel.

So, while agricultural prices may stay high in the immediate future,
they should stabilise and then fall in a couple of years. Prime Minister
Manmohan Singh must hope fervently that this will happen before the 2009
election.
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