Competition between Food and fuel

Food versus fuel is the dilemma regarding the risk of diverting farmland or crops for biofuels 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 is 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 (corn), 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 other crops in the United States is now used to grow corn for biofuels, and a larger share of corn is destined to ethanol production, reaching 25% in 2007. Second generation biofuels could potentially combine farming for food and fuel and moreover, electricity could be generated simultaneously, which could be beneficial for developing countries and rural areas in developed countries. With global demand for biofuels on the increase due to the oil price increases taking place since 2003 and the desire to reduce oil dependency as well as reduce GHG emissions from transportation, there is also fear of the potential destruction of habitats by being converted into farmland. Environmental groups have raised concerns about this trade-off for several years, but the debate reached a global scale due to the 2007–2008 world food price crisis. On the other hand, several studies do show that biofuel production can be significantly increased without increased acreage. Therefore, stating that the crisis in hand relies on the food scarcity.

Biofuels are not a new phenomenon. Before the industrialisation, horses were the primary (and humans probably the secondary) source of power for transportation and physical work, requiring food. The growing of crops for horses (typically oat) for carrying out physical work is of course comparable to the growing of crops for biofuels for engines, albeit on a smaller scale, because production since then has increased.

Brazil has been considered to have the world’s first sustainable biofuels economy and its government claims Brazil’s sugar cane based ethanol industry has not contributed to the 2008 food crisis. A World Bank policy research working paper released in July 2008 concluded that “…large increases in biofuels 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 (the so-called “financialisation of commodities”) may have been partly responsible for the 2007/08 spike.” A 2008 independent study by OECD also found that the impact of biofuels on food prices are much smaller.

Food price inflation
From 1974 to 2005 real food prices (adjusted for inflation) 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 commodities 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 fats 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 between 70 to 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 (measured in US dollars). 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 (maize) grown in the US Midwest for ethanol production. (In the case of beer, the barley area was cut in order to increase corn production. Barley is not currently used to produce ethanol.) Wheat is up by almost a factor of 3 in 3 years, while soybeans are up by a factor of 2 in 2 years (both measured in US dollars).

As corn is commonly used as feed for livestock, higher corn prices lead to higher prices in animal source foods. Vegetable oil is used to make biodiesel and has about doubled in price in the last couple years. The price is 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 over $12/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 Nov. 19, 2008, food prices continued to rise in October 2008 and were 6.3 percent higher than October 2007.[dubious – discuss] 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 (MTBE) was contaminating groundwater. MTBE use as an oxygenate additive was widespread due to 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
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 2 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 time periods 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 3 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 (farmers get duty-free petrol or diesel fuel). 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 is 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 were 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 found that the estimated impact of biofuels on food prices are 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 limits alternative suppliers. The report is also critical of limited reduction of GHG 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.

Oil price increases
Oil price increases since 2003 resulted in increased demand for biofuels. Transforming vegetable oil into biodiesel is not very hard or costly so there is a profitable arbitrage situation if vegetable oil is much cheaper than diesel. Diesel is also made from crude oil, so vegetable oil prices are partially linked to crude oil prices. Farmers can switch to growing vegetable oil crops if those are more profitable than food crops. So all food prices are linked to vegetable oil prices, and in turn to crude oil prices. A World Bank study concluded that oil prices and a weak dollar explain 25–30% of total price rise between January 2002 until June 2008.

Demand for oil is outstripping the supply of oil and oil depletion is expected to cause crude oil prices to go up over the next 50 years. Record oil prices are inflating food prices worldwide, including those crops that have no relation to biofuels, such as rice and fish.

In Germany and Canada it is now much cheaper to heat a house by burning grain than by using fuel derived from crude oil. With oil at $120/barrel a savings of a factor of 3 on heating costs is possible. When crude oil was at $25/barrel there was no economic incentive to switch to a grain fed heater.

From 1971 to 1973, around the time of the 1973 oil crisis, corn and wheat prices went up by a factor of 3. There was no significant biofuel usage at that time.

US government policy
Some argue that the US government policy of encouraging ethanol from corn is the main cause for food price increases. US Federal government ethanol subsidies total $7 billion per year, or $1.90 per gallon. Ethanol provides only 55% as much energy as gasoline per gallon, realizing about a $3.45 per gallon gasoline trade off. Corn is used to feed chickens, cows, and pigs, so higher corn prices lead to higher prices for chicken, beef, pork, milk, cheese, etc.

U.S. Senators introduced the BioFuels Security Act in 2006. “It’s time for Congress to realize what farmers in America’s heartland have known all along – that we have the capacity and ingenuity to decrease our dependence on foreign oil by growing our own fuel,” said U.S. Senator for Illinois Barack Obama.

Two-thirds of U.S. oil consumption is due to the transportation sector. The Energy Independence and Security Act of 2007 has a significant impact on U.S. Energy Policy. With the high profitability of growing corn, more and more farmers switch to growing corn until the profitability of other crops goes up to match that of corn. So the ethanol/corn subsidies drive up the prices of other farm crops.

The US – an important export country for food stocks – will convert 18% of its grain output to ethanol in 2008. Across the US, 25% of the whole corn crop went to ethanol in 2007. The percentage of corn going to biofuel is expected to go up.

Since 2004 a US subsidy has been paid to companies that blend biofuel and regular fuel. The European biofuel subsidy is paid at the point of sale. Companies import biofuel to the US, blend 1% or even 0.1% regular fuel, and then ship the blended fuel to Europe, where it can get a second subsidy. These blends are called B99 or B99.9 fuel. The practice is called “splash and dash”. The imported fuel may even come from Europe to the US, get 0.1% regular fuel, and then go back to Europe. For B99.9 fuel the US blender gets a subsidy of $0.999 per gallon. The European biodiesel producers have urged the EU to impose punitive duties on these subsidized imports. In 2007, US lawmakers were also looking at closing this loophole.

Freeze on first generation biofuel production
The prospects for the use of biofuels could change in a relatively dramatic way in 2014. Petroleum trade groups petitioned the EPA in August 2013 to take into consideration a reduction of renewable biofuel content in transportation fuels. On November 15, 2013 the United States EPA announced a review of the proportion of ethanol that should be required by regulation. The standards established by the Energy Independence and Security Act of 2007 could be modified significantly. The announcement allows sixty days for the submission of commentary about the proposal. Journalist George Monbiot has argued for a 5-year freeze on biofuels while their impact on poor communities and the environment is assessed.

A 2007 UN report on biofuel also raises issues regarding food security and biofuel production. Jean Ziegler, then UN Special Rapporteur on food, concluded that while the argument for biofuels in terms of energy efficiency and climate change are legitimate, the effects for the world’s hungry of transforming wheat and maize crops into biofuel are “absolutely catastrophic”, and terms such use of arable land a “crime against humanity”. Ziegler also calls for a 5-year moratorium on biofuel production. Ziegler’s proposal for a five-year ban was rejected by the U.N. Secretary Ban Ki-moon, who called for a comprehensive review of the policies on biofuels, and said that “just criticising biofuel may not be a good solution”.

Food surpluses exist in many developed countries. For example, the UK wheat surplus was around 2 million tonnes in 2005. This surplus alone could produce sufficient bioethanol to replace around 2.5% of the UK’s petroleum consumption, without requiring any increase in wheat cultivation or reduction in food supply or exports. However, above a few percent, there would be direct competition between first generation biofuel production and food production. This is one reason why many view second generation biofuels as increasingly important.

Non-food crops for biofuel
There are different types of biofuels and different feedstocks for them, and it has been proposed that only non-food crops be used for biofuel. This avoids direct competition for commodities like corn and edible vegetable oil. However, as long as farmers are able to derive a greater profit by switching to biofuels, they will. The law of supply and demand predicts that if fewer farmers are producing food the price of food will rise.

Second generation biofuels use lignocellulosic raw material such as forest residues (sometimes referred to as brown waste and black liquor from Kraft process or sulfite process pulp mills). Third generation biofuels (biofuel from algae) use non-edible raw materials sources that can be used for biodiesel and bioethanol.

It has long been recognized that the huge supply of agricultural cellulose, the lignocellulosic material commonly referred to as “Nature’s polymer”, would be an ideal source of material for biofuels and many other products. Composed of lignin and monomer sugars such as glucose, fructose, arabinose, galactose, and xylose, these constituents are very valuable in their own right. To this point in history, there are some methods commonly used to coax “recalcitrant” cellulose to separate or hydrolyse into its lignin and sugar parts, treatment with; steam explosion, supercritical water, enzymes, acids and alkalines. All these methods involve heat or chemicals, are expensive, have lower conversion rates and produce waste materials. In recent years the rise of “mechanochemistry” has resulted in the use of ball mills and other mill designs to reduce cellulose to a fine powder in the presence of a catalyst, a common bentonite or kaolinite clay, that will hydrolyse the cellulose quickly and with low energy input into pure sugar and lignin. Still currently only in pilot stage, this promising technology offers the possibility that any agricultural economy might be able to get rid of its requirement to refine oil for transportation fuels. This would be a major improvement in carbon neutral energy sources and allow the continued use of internal combustion engines on a large scale.

Soybean oil, which only represents half of the domestic raw materials available for biodiesel production in the United States, is one of many raw materials that can be used to produce biodiesel.

Non-food crops like Camelina, Jatropha, seashore mallow and mustard, used for biodiesel, can thrive on marginal agricultural land where many trees and crops won’t grow, or would produce only slow growth yields. Camelina is virtually 100 percent efficient. It can be harvested and crushed for oil and the remaining parts can be used to produce high quality omega-3 rich animal feed, fiberboard, and glycerin. Camelina does not take away from land currently being utilized for food production. Most camelina acres are grown in areas that were previously not utilized for farming. For example, areas that receive limited rainfall that can not sustain corn or soybeans without the addition of irrigation can grow camelina and add to their profitability.

Jatropha cultivation provides benefits for local communities:

Cultivation and fruit picking by hand is labour-intensive and needs around one person per hectare. In parts of rural India and Africa this provides much-needed jobs – about 200,000 people worldwide now find employment through jatropha. Moreover, villagers often find that they can grow other crops in the shade of the trees. Their communities will avoid importing expensive diesel and there will be some for export too.

NBB’s Feedstock Development program is addressing production of arid variety crops, algae, waste greases, and other feedstocks on the horizon to expand available material for biodiesel in a sustainable manner.

Cellulosic ethanol is a type of biofuel produced from lignocellulose, a material that comprises much of the mass of plants. Corn stover, switchgrass, miscanthus and woodchip are some of the more popular non-edible cellulosic materials for ethanol production. Commercial investment in such second-generation biofuels began in 2006/2007, and much of this investment went beyond pilot-scale plants. Cellulosic ethanol commercialization is moving forward rapidly. The world’s first commercial wood-to-ethanol plant began operation in Japan in 2007, with a capacity of 1.4 million liters/year. The first wood-to-ethanol plant in the United States is planned for 2008 with an initial output of 75 million liters/year.

Other second generation biofuels may be commercialized in the future and compete less with food. Synthetic fuel can be made from coal or biomass and may be commercialized soon.

Protein rich feed for cattle/fish/poultry can be produced from biogas/natural gas which is presently used as fuel source. Cultivation of Methylococcus capsulatus bacteria culture by consuming natural gas produces high protein rich feed with tiny land and water foot print. The carbon dioxide gas produced as by product from these plants can also be put to use in cheaper production of algae oil or spirulina from algaculture which can displace the prime position of crude oil in near future. With these proven technologies, abundant natural gas/ biogas availability can impart full global food security by producing highly nutrient food products with out any water pollution or green house gas (GHG) emissions.

Biofuel from food byproducts and coproducts
Biofuels can also be produced from the waste byproducts of food-based agriculture (such as citrus peels or used vegetable oil) to manufacture an environmentally sustainable fuel supply, and reduce waste disposal cost.

A growing percentage of U.S. biodiesel production is made from waste vegetable oil (recycled restaurant oils) and greases.

Collocation of a waste generator with a waste-to-ethanol plant can reduce the waste producer’s operating cost, while creating a more-profitable ethanol production business. This innovative collocation concept is sometimes called holistic systems engineering. Collocation disposal elimination may be one of the few cost-effective, environmentally sound, biofuel strategies, but its scalability is limited by availability of appropriate waste generation sources. For example, millions of tons of wet Florida-and-California citrus peels cannot supply billions of gallons of biofuels. Due to the higher cost of transporting ethanol, it is a local partial solution, at best.

Biofuel subsidies and tariffs
Some people have claimed that ending subsidies and tariffs would enable sustainable development of a global biofuels market. Taxing biofuel imports while letting petroleum in duty-free does not fit with the goal of encouraging biofuels. Ending mandates, subsidies, and tariffs would end the distortions that current policy is causing. The US ethanol tariff and some US ethanol subsidies are currently set to expire over the next couple years.[when?] The EU is rethinking their biofuels directive due to environmental and social concerns. On January 18, 2008 the UK House of Commons Environmental Audit Committee raised similar concerns, and called for a moratorium on biofuel targets. Germany ended their subsidy of biodiesel on Jan 1 2008 and started taxing it.

Reduce farmland reserves and set asides
To avoid overproduction and to prop up farmgate prices for agricultural commodities, the EU has for a long time have had farm subsidy programs to encourage farmers not to produce and leave productive acres fallow. The 2008 crisis prompted proposals to bring some of the reserve farmland back into use, and the used area increased actually with 0.5% but today these areas are once again out of use. According to Eurostat, 18 million hectares has been abandoned since 1990, 7,4 millions hectares are currently set aside, and the EU has recently decided to set aside another 5–7% in so called Ecological Focus Areas, corresponding to 10–12 million hectares. In spite of this reduction of used land, the EU is a net exporter of e.g. wheat.

The American Bakers Association has proposed reducing the amount of farmland held in the US Conservation Reserve Program. Currently the US has 34,500,000 acres (140,000 km2) in the program.

In Europe about 8% of the farmland is in set aside programs. Farmers have proposed freeing up all of this for farming. Two-thirds of the farmers who were on these programs in the UK are not renewing when their term expires.

Sustainable production of biofuels
Second generation biofuels are now being produced from the cellulose in dedicated energy crops (such as perennial grasses), forestry materials, the co-products from food production, and domestic vegetable waste. Advances in the conversion processes will almost certainly improve the sustainability of biofuels, through better efficiencies and reduced environmental impact of producing biofuels, from both existing food crops and from cellulosic sources.

Lord Ron Oxburgh suggests that responsible production of biofuels has several advantages:

Produced responsibly they are a sustainable energy source that need not divert any land from growing food nor damage the environment; they can also help solve the problems of the waste generated by Western society; and they can create jobs for the poor where previously were none. Produced irresponsibly, they at best offer no climate benefit and, at worst, have detrimental social and environmental consequences. In other words, biofuels are pretty much like any other product.

Far from creating food shortages, responsible production and distribution of biofuels represents the best opportunity for sustainable economic prospects in Africa, Latin America and impoverished Asia. Biofuels offer the prospect of real market competition and oil price moderation. Crude oil would be trading 15 per cent higher and gasoline would be as much as 25 per cent more expensive, if it were not for biofuels. A healthy supply of alternative energy sources will help to combat gasoline price spikes.
Continuation of the status quo
An additional policy option is to continue the current trends of government incentive for these types of crops to further evaluate the effects on food prices over a longer period of time due to the relatively recent onset of the biofuel production industry. Additionally, by virtue of the newness of the industry we can assume that like other startup industries techniques and alternatives will be cultivated quickly if there is sufficient demand for the alternative fuels and biofuels. What could result from the shock to food prices is a very quick move toward some of the non-food biofuels as are listed above amongst the other policy alternatives.

Impact on developing countries
Demand for fuel in rich countries is now competing against demand for food in poor countries. The increase in world grain consumption in 2006 happened due to the increase in consumption for fuel, not human consumption. The grain required to fill a 25 US gallons (95 L) fuel tank with ethanol will feed one person for a year.

Several factors combine to make recent grain and oilseed price increases impact poor countries more:

Poor people buy more grains (e.g. wheat), and are more exposed to grain price changes.
Poor people spend a higher portion of their income on food, so increasing food prices influence them more.
Aid organizations which buy food and send it to poor countries see more need when prices go up but are able to buy less food on the same budget.

The impact is not all negative. The Food and Agriculture Organization (FAO) recognizes the potential opportunities that the growing biofuel market offers to small farmers and aquaculturers around the world and has recommended small-scale financing to help farmers in poor countries produce local biofuel.

On the other hand, poor countries that do substantial farming have increased profits due to biofuels. If vegetable oil prices double, the profit margin could more than double. In the past rich countries have been dumping subsidized grains at below cost prices into poor countries and hurting the local farming industries. With biofuels using grains the rich countries no longer have grain surpluses to get rid of. Farming in poor countries is seeing healthier profit margins and expanding.

Interviews with local farmers in southern Ecuador provide strong anecdotal evidence that the high price of corn is encouraging the burning of tropical forests in order to grow more. The destruction of tropical forests now account for 20% of all greenhouse gas emmisons.

Source from Wikipedia