Food vs. fuel
Food versus fuel is the dilemma regarding the risk of diverting farmland or crops for biofuel 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. 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.
Biofuel production has increased in recent years. Some commodities, like maize, 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. 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. Environmental groups have raised concerns about these potential harms for some years, 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. This could be especially beneficial for developing countries and rural areas in developed countries. Some research suggests that biofuel production can be significantly increased without the need for increased acreage.
Biofuels are not a new phenomenon. Before industrialisation, horses were the primary source of power for transportation and physical work, requiring food. The growing of crops for horses 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, and its government claims Brazil's sugar cane-based ethanol industry did not contribute to the 2008 food crisis. A World Bank policy research working paper released in July 2008 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.". 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 may have been partly responsible for the 2007/08 spike." A 2008 independent study by the OECD also found that the impact of biofuels on food prices are much smaller.
Food price inflation
From 1974 to 2005, real food prices dropped by 75%. Food commodity prices were relatively stable after reaching lows in 2000 and 2001. Therefore, recent rapid food price increases are considered extraordinary. A World Bank policy research working paper published in July 2008 found that the increase in food commodity prices was led by grains, with sharp price increases in 2005 despite record crops worldwide. From January 2005 until June 2008, maize prices almost tripled, wheat increased 127 percent, and rice rose 170 percent. The increase in grain prices was followed by increases in fat and oil prices in mid-2006. On the other hand, the study found that sugar cane production has increased rapidly, and it was large enough to keep sugar price increases small except for 2005 and early 2006. The paper concluded that biofuels produced from grains have raised food prices in combination with other related factors by between 70 and 75 percent, but ethanol produced from sugar cane has not contributed significantly to the recent increase in food commodities prices.An economic assessment report published by the OECD in July 2008 found that "the impact of current biofuel policies on world crop prices, largely through increased demand for cereals and vegetable oils, is significant but should not be overestimated. Current biofuel support measures alone are estimated to increase average wheat prices by about 5 percent, maize by around 7 percent and vegetable oil by about 19 percent over the next 10 years."
Corn is used to make ethanol and prices went up by a factor of three in less than 3 years. Reports in 2007 linked stories as diverse as food riots in Mexico due to rising prices of corn for tortillas and reduced profits at Heineken, the large international brewer, to the increasing use of corn Wheat is up by almost a factor of 3 in three years, while soybeans are up by a factor of 2 in two years.
As corn is commonly used as feed for livestock, higher corn prices lead to higher prices for animal source foods. Vegetable oil is used to make biodiesel and has about doubled in price in the last couple years. The prices are roughly tracking crude oil prices. The 2007–2008 world food price crisis is blamed partly on the increased demand for biofuels. During the same period, rice prices went up by a factor of 3 even though rice is not directly used in biofuels.
The USDA expects the 2008/2009 wheat season to be a record crop and 8% higher than the previous year. They also expect rice to have a record crop. Wheat prices have dropped from a high of over $12 per bushel in May 2008 to under $8/bushel in May. Rice has also dropped from its highs.
According to a 2008 report from the World Bank, the production of biofuel pushed food prices up. These conclusions were supported by the Union of Concerned Scientists in their September 2008 newsletter, in which they remarked that the World Bank analysis "contradicts U.S. Secretary of Agriculture Ed Schaffer's assertion that biofuels account for only a small percentage of rising food prices".
According to the October Consumer Price Index released on November 19, 2008, food prices continued to rise in October 2008 and were 6.3 percent higher than in October 2007. Since July 2008, fuel costs dropped by nearly 60 percent.
Proposed causes
Ethanol fuel as an oxygenate additive
The demand for ethanol fuel produced from field corn was spurred in the U.S. by the discovery that methyl tertiary butyl ether was contaminating groundwater. 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. 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
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. Sugar is one of the main feedstocks for ethanol, and prices are down from two years ago. Part of the food price increase for international food commodities measured in US dollars is due to the dollar being devalued. Protectionism is also an important contributor to price increases. 36% of world grain goes as fodder to feed animals, rather than people.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.
Government regulations of food and fuel markets
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.Fuel for agricultural use often does not have fuel taxes. Biofuels may have subsidies and low/no retail fuel taxes. 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.
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. 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.
An economic assessment published by the OECD in July 2008 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.