By Dr Clive Thomas
Last week I labelled as risky business, the drive by governments to make the production of biofuels mandatory. To be sure, this is being done as a measure to promote energy security. Both governments in the developed world (particularly Japan, the USA and the European Union) as well as those in the major emerging market economies (like China, India and Brazil) have followed this course. From this point of view therefore, the global drive to promote biofuels usage is clearly government-led and not market-led. Private firms are, however, jockeying to become competitive major players. But this is so principally through filling the demand created by governments setting mandatory energy targets and mixes. This as we saw last week can be very risky business and may have already backfired in the worldwide food inflation.
However, despite the tremendous investment flows on a global basis, which I indicated in last week’s column it still remains the case that less than one per cent of the world’s energy needs are now being met by biofuels! This may lead some readers to wonder, why then all the fuss about biofuels? Is this much ado about little?
The answer to this is provided when efforts are made to decompose the factors behind the recent rapid increases in food prices. The general consensus among experts is that taking into account all the factors considered in this column that have been impinging on food prices (for example weather, the declining US dollar exchange rate, rising demand from countries like China and India), biofuels production is indeed the biggest single explanatory factor. Of course this statistical outcome is hugely dependent on which year is used as the starting year for measuring food prices increases. For the purposes of this column the beginning of the millennium (2000) is as good a starting point as any, although readers should be made aware that 2000 was a year of particularly low food prices.
As I pointed out last week, analysts are now claiming that if we took into account the full production cycle for biofuels, one would find that instead of contributing to reducing carbon emissions and greenhouse gases, biofuels are in fact increasing them. The point is made that while the use of biofuel (for example, sugar cane or grain) puts carbon into the atmosphere when burnt, the planting of the next crop to continue the cycle saves on carbon emissions.
However, we often use a carbon-based material (oil) to make the chemicals (weedicides, pesticides and fertilizers) that go along with cultivating the corn or sugar cane, and in several other ways as well.
That is why, instead of offsetting climate change (global warming), biofuels may in fact be adding to it.
This is of course not the end of the story by any means. I have no doubt that more innovation will be sought to offset these negative effects. How might this be done? For example, by improving yields and looking for biological resources where the saving in carbon emissions is more profound. As a result of all this, it is impossible to be certain at this stage as to whether continuing biofuel usage will lead to increasing pressure to divert agricultural supplies from food and feed to fuel, or not.
We need, however, to bear in mind that there are other important concerns connected with biofuels usage.
One of these is the threat to biodiversity and fragile ecosystems, which some scientists perceive in 1) the global drive to develop second generation cellulosic resources like invasive weeds and wild grasses, and 2) the conversion of virgin forest lands to the production of materials for biofuels.
There is no abundant reservoir of good virgin lands available globally to produce food, feed and fuel for the world’s insatiable needs. Because of this unavailability of new lands globally, food and fuel production will inevitably be restricted, if biofuels continue to be pushed. Thus three years ago Brazil had four million hectares devoted to biofuel production, today it is 6 million hectares and in the next few years this is expected to grow to 8 million hectares!
Climate change (global warming)
The discussion on biofuels as a substitute for reliance on oil links directly to concerns about climate change (global warming). It would therefore, be useful to make a few observations on this subject at this point of the presentation. First, those who argue that the present rise in food prices is exceptional and will be a long-lasting factor in climate change as a decisive element. Second, climate change has both supply and demand effects. On the supply side the uncertainties of climate change have negatively disrupted food production, thereby resulting in a tendency for prices to rise. On the demand side it has stimulated the requirement for substitutes to carbon-based energy supplies thus increasing the demand for food crops that would otherwise be used to produce food and feed. Again, this tends to drive prices upwards.
The combination of these supply and demand effects has no doubt led to much of the rapid rise in food prices we have been experiencing.
As a general rule the mismatches in the demand and supply for food crops have been, in comparative historical terms, relatively minor, averaging in important cases less than 5 per cent. However, because in recent years the stock to usage ratio for many agricultural items has been declining, the scope for speculation in the markets for these various food items has risen. In this situation, therefore, both the opportunity (mismatches between demand and supply) and the motive (a declining stock ratio) are there and speculation has become rife. Indeed, what has surprised many analysts is that, given the relatively minor mismatches, the price increases which have occurred have been so startling. This suggests deeper undercurrents in global commodity markets to which we might also add that speculation has produced considerable price volatility.