Biofuels and the underlying causes of high food prices

Abstract

International consensus indicates that a number of long-term, slowly-evolving trends are affecting the global supply and demand of food commodities. These trends reflect slower growth in production and more rapid growth in demand contributing to the tightening of world balances. The result is reduced supplies and higher prices. The main drivers of increasing prices are structural and on the demand side, but this alone cannot justify the recent hikes in food prices. Different studies have concluded that the emerging economies have increased demand for food as per capita income has risen. However, there is little hard evidence of significant acceleration during the past two years. For the most part, recent increases in food commodity prices have been due to reduced harvest levels during 2007 as the result of adverse climatic conditions, and flow-on effects of demands placed upon strategic reserve stocks. Increased oil prices and the weakness of the US dollar have also exacerbated these effects, including by pushing hedge funds to buy food commodities which, in turn, have increased prices in what can best be termed a ‘catch-22 situation’. The uncertainty of the adjustment of global supply (also due to natural constraints i.e. the natural cycles for harvesting) to the growing demand could contribute to the persistence of tensions in the global market of raw food materials and to increased sensitivity of prices to global shocks. A closer look at both recent price spikes and the relationship between commodity and food prices is of value in order to evaluate commentary that recent price rises are due to the higher demand of food-derived biofuels. There are a number of factors that have affected cereal prices during the last year, some of which are cyclical or short-term and induce volatility into the market; others are long- term and structural in nature, such as the expansion of the biofuels industry or increased demand from emerging economies. Feed and food uses continue to dominate cereals, sugar and oilseed markets, and there are simply too many factors affecting agricultural and soft commodities to make a close relationship between fuel and food. The persistent critique of biofuels’ impact upon global food price increases (notwithstanding an inability to quantify the extent of this impact) depends upon a number of factors and not least natural constraints, markets and policies development and, importantly, upcoming pipeline technologies. Natural constraints include the potential impact of climate change and desertification on agricultural yields in different parts of the world. Land availability also plays an important role in a number of countries, and particularly given the certification schemes that are in development in different parts of the world – to help ensure the sustainable exploitation of natural resources. Market development implies the eventual removal of subsidies and feed-in tariffs. A growing number of market-oriented policies such as export bans and increased export taxes are used by governments to foster bioenergy development and to protect the agricultural sector. This directly affects the cost-competitiveness of bioenergy production when compared to traditional energy sources, while indirectly it affects the viability of biofuel markets. Subsidies for biofuels that use agricultural production resources implicitly act as a tax upon basic foods. The WTO Doha Round still is to be completed. Failure to reach this goal will continue to have damaging implications for the well-being of global trade long-term, and effort needs to be made to counter short-term damage created by the current crisis with security of food supplies. To help counter this, a number of qualification tools, methods and systems need to be introduced to provide for sustainability, environmental care and social equity – including life cycle analysis, certification of origin, labelling and similar. Qualifications need to be agreed internationally and introduced with skill into global markets so that barriers to trade are not encouraged. Classification of “sustainable bioenergy” could be introduced within WTO rules in order to reduce or, as appropriate, eliminate tariff and non-tariff barriers according to the Doha Development Agenda, paragraph 31 (iii). Policy interventions such as food grain support prices, input subsidies, involvement of public agencies in food grain imports, marketing and distribution tend to be ineffective over the medium-term and to inhibit increases in supply. The industrial countries should act to facilitate flexible responses to drastic price changes by eliminating trade barriers and all non-essential programmes that set aside agriculture resources1. A world confronted with increased scarcity of food needs to trade more – not less – in order to spread trading opportunities more fairly. Moreover, the derivation and adoption of advanced technologies could significantly change existing overall scenarios. New production technologies are drastically increasing yields of agricultural goods, reducing the need for land, water and fertilizers. Technologies such as biofuel production from micro-algae and ‘second generation’ production technologies using ligno-cellulosic feedstock (which will not compete for agricultural resources if sourced from wastes or residues) are expected to circumvent the food-fuel debate. The leaders of international institutions have exhorted governments to use the current food crisis to reform policies that distort agricultural production and trade. Policies such as export restrictions, price controls, price support, optional food grain reserves and input subsidies need to be revised in the light of the higher food prices which may continue to persist into the next period. Hence, policy dialogue is critical to consider what options may be more effective in the short- to medium-term that will help address the immediate impact of food shortages and to restore food price stability.