Drought stokes debate over biofuel

Posted on August 12, 2012

Crops drought©Bloomberg

When Barack Obama arrives in corn-growing Iowa for a three-day tour on Monday, he will be confronting a fierce debate over whether the grain is worth more as food or fuel.

The 2007-08 food crisis highlighted the impact of diverting crops such as corn, rapeseed and sugarcane to produce biofuels including ethanol and biodiesel. Now the worst drought in 50 years in the US has devastated the corn crop, increasing costs and bringing the discussion about the merits of biofuels to the political agenda.

    “The food versus fuel debate is raging in Washington,” says Marie Brill, senior policy analyst with ActionAid, an international development charity.

    The debate is spreading beyond the US as food aid campaigners, UN agencies and companies such as Cargill ask governments within the EU to scrap mandates that force the diversion of crops into biofuels.

    The UN’s Food and Agriculture Organisation
    is trying to launch a global debate about biofuels. In a report to the Group of 20 leading economies last year, the FAO and other international bodies, including the International Monetary Fund and World Bank, warned that “government-imposed consumption mandates [of biofuel] aggravate the price inelasticity of demand that contributes to volatility in agricultural prices”.

    The report urged G20 countries to “remove provisions of current national policies that subsidise (or mandate) biofuels production or consumption”.

    In recognition of the politics and economics of biofuels, the FAO also provided for a second best option: when global markets face a food shortage, the countries should replace the rigid biofuel production or consumption targets with more flexible arrangements.

    The US Department of Agriculture forecasts that ethanol refiners will consume roughly 40 per cent of the corn crop, returning a portion of it to the livestock industry in the form of feed. In Europe, the biodiesel industry consumes about 60 per cent of the continent’s rapeseed crop, while Brazilian ethanol plants consume half the country’s sugarcane crop, according to estimates by the Rome-based FAO.

    The momentum against biofuels among multilateral organisations and campaigners is unlikely to force an immediate U-turn in policy, particularly in the US, officials say.

    Bill Lapp, of Advanced Economic Solutions, – a food-consultancy in Omaha, Nebraska – points that waiving government-mandated use of corn-made ethanol will lower corn prices and hit farming -states.

    “It will potentially impact the presidential election,” Mr Lapp, a former chief economist with ConAgra, a major food company, says.

    Mr Obama’s trip to Iowa highlights the importance of the corn-belt states in US politics. For the US president, it will be his fifth trip this year as Mr Obama tries to repeat his 2008 election victory, when he carried the state by a healthy 9.5 percentage point margin.

    In depth

    Rising food prices

    Global food crisis

    The world is braced for a repeat of the 2007-2008 food crisis as the worst US drought in 50 years pushes up the prices of staple commodities

    The ethanol policy has strong supporters among Mr Obama’s cabinet, including Tom Vilsack, secretary of agriculture. Mr Vilsack, a former Iowa governor, has in the past decade supported corn-based ethanol production as a means to raise rural incomes and improve US energy security, urging the corn and biofuel industry to challenge the public perception that it is responsible for food price increases.

    There is also strong support among Republican lawmakers, even if some challenge the industry as government welfare because of the subsidies it receives. Mitt Romney, the presumptive Republican presidential candidate, has embraced the ethanol industry.

    The biofuel industry not only enjoys bipartisan political support in the US and elsewhere but it also has strong policy arguments in its favour.

    In the US, for example, the Renewable Fuel Standard, authored by Congress, requires fuel companies to blend more than 13bn gallons of conventional corn ethanol with petrol in 2012. But even without the mandate, analysts, industry executives and officials say that oil companies will still consume several billion gallons of ethanol to produce petrol. Refiners use ethanol to adjust the octane level of petrol and also to meet environmental targets in states such as California. The predicament is similar in Europe, where refiners even import ethanol from Brazil.

    In addition, biofuels account in the US for about 800,000 barrels a day of oil supplies – or nearly 5 per cent of the country’s oil consumption.

    Without those supplies, petrol prices would inevitably rise. Globally, the International Energy Agency, the western countries’ oil watchdog, estimates that biofuel production equals to roughly 2m barrels a day, or more than the oil production of Opec countries such as Libya or Algeria.

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