Monday, April 21, 2008

The Biofuel-Food Red Herring

Real Problem is Oil Dependence

by Brooke Coleman

It is an argument that seems to make intuitive sense …

We are having trouble feeding the planet. The new commitment to biofuel puts more pressure on grain markets; and therefore, makes it even harder to feed the planet.

The same logic is used to draw a connection between biofuels and food prices in the grocery aisle. There is only so much food to go around; biofuels are pushing food markets to the brink.

Problem is, at closer look, the argument begins to fall apart. Consider, for example, what some food experts are saying …

“Consumers are legitimately nervous when the cost of eating is rapidly outpacing the means of paying for food … [t]he food industry has been capitalizing on these fears by focusing on higher costs for one of their key ingredients: corn … [but] the correlation between crop prices and retail grocery prices remains elusive.” - Food & Water Watch

“Higher commodity prices do not necessarily translate into higher food prices in developing countries. In fact, higher commodity prices could actually increase food security in developing countries by reducing agricultural dumping.”
- Institute for Agriculture & Trade Policy

"Closing your eyes and blaming the current high [food] prices to biofuels is just too simplistic."
- Loek Boonekamp, Organisation for Economic Cooperation and Development (OECD). Boonekamp went on to say that the surge in farm product prices would have happened even without the increase in biofuel production.

How could this be true? Actually, the answer is pretty simple.

Higher grain prices have only a marginal impact on the price of food in the grocery aisle, because grain is such a small part of the price of retail food.

- For example a recent analysis (not funded by the ethanol industry) estimated that as a fraction of the consumer’s food expenditure dollar, the cost of corn used to produce the food is on average 3.2 percent. That means that 96.8% of the cost of food depends on other factors. This is only one of several studies showing generally the same thing.

But what about world hunger? It may be counter intuitive, but higher grain prices (within reason) are not necessarily a bad thing for developing countries (and may even be a good thing).

- For example, consider what the Institute for Agricultural & Trade Policy said about this dynamic: “[t]he dumping of agricultural products—the selling of products below their cost of production—is perhaps the most damaging of all current market distortions in world trade. Developing country agriculture, vital for food security, rural livelihoods, poverty reduction and generating foreign exchange, is crippled by the competition from major commodities dumped onto world markets. In 2003, U.S. corn was exported (dumped) at an average price of 10 percent below the full cost of production.”

- The Worldwatch Institute raises the possibility of reduced surpluses (i.e. higher prices) from biofuels being a positive thing: ““Potentially, using up surplus grain supplies in developed countries for biofuels could actually have a positive impact on the problem of hunger in poor countries… If rich countries were no longer dumping cheap food on the commodities market, farmers in developing nations would have a better chance of staying in business,” (Suzanne Hunt, Worldwatch Institute).

It is important to note that these are not isolated opinions. Any agricultural economist will tell you that, as a fraction of the overall cost of food, the grain portion is very small. Any world hunger expert will admit that dumping subsidized agricultural products (like under-priced corn) on world commodity markets is disastrous for domestic food production in developing countries.

So why are so many organizations and individuals overplaying the role of biofuels in food markets?

The answer is most likely a combination of several factors, including but not limited to the opposition to biofuels being well-funded and well-organized, the state of the press, the complicated nature of the issue, and the emotional nature of the issue.

Without any one answer being the “right” answer, this is what we know about the food issue:

1) The oil industry has been stoking the “food fear” issue vigorously, primarily because corn ethanol companies are taking an increasingly deeper cut of U.S. motor fuel markets.

2) The livestock industry has been stoking the “food fear” issue – most recently by funding several economic studies of “food versus fuel” – largely because they believe corn ethanol ended the era of unnaturally low (i.e. subsidized to below cost prices) feed corn prices; in other words, the livestock guys prefer unnaturally cheap corn because it allows for larger profit margins.

3) The “anti biofuels crowd” (in essence, those that do not believe in “farmed fuels” for sustainability reasons) has been stoking the “food fear” issue, largely because they do not believe that biofuels are part of the solution to global warming or sustainable energy production.

Sourcing aside, the biofuel-food debate is a red herring because it distracts policymakers and the general public from the real causes of food price increases:

1) Skyrocketing oil prices; and,
2) Increasing worldwide demand for coarse grains.

Consider the following:

- An April 2008 report published by Texas A&M concluded that, “[u]nderlying all the changes in agriculture and the economy is $100 per barrel oil and, generally, higher energy costs … Important food items like bread, eggs, and milk have high prices that are largely unrelated to ethanol or corn prices, but to fundamental supply/demand relationships in the world.” The report also notes that: (1) the price of corn itself has been driven higher by oil prices, which increase fertilizer, energy and tillage costs on the farm; and, (2) rolling back U.S. biofuel policy will not reduce food prices.

- Loek Boonekamp, of the Organisation for Economic Cooperation and Development (OECD), said in January 2008 that the surge in farm product prices would have happened even without the increase in biofuel production. He pointed to the increased demand for coarse grains from developing countries like China and India, and reduced grain surpluses from drought as the major catalysts in worldwide food price increases.

So what is the solution? This much is clear:

1) Rolling back U.S. biofuel policy is not a solution to the food price issue, because it is not a central cause of the food price issue;

2) If oil prices are the primary catalyst for food price increases, then reducing our dependence on oil should be regarded as a primary remedy for the food price problem.

3) If biofuels are part of the solution to oil dependence, we must promote them in a way that does not create unintended consequences.

Recent critics of biofuels seem to have forgotten that the new federal policy (signed into law in December 2007) includes greenhouse gas reduction standards, land use protection standards, and commits to no more than 15 billion gallons per year of corn ethanol. Authors and supporters of these sections of the bill were well-aware of the potential unintended consequences of devoting too many resources to biofuel production ... which brings this post full circle ...

Is today’s food issue an unintended consequence of biofuel policy?

The facts belie the argument. The answer is no.

1 comment:

Melissa M Baldwin said...

Hey Brooke,
Thanks for these helpful posts. My client is also concerned about ILUC getting into the California LCFS...

We agree with your points and we want to help out.

I believe that we can have a sustainable, responsible biofuels industry that will reduce greenhouse gas emissions.

Thanks for all you are doing.