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Biofuels not to blame for food crisis

A degree of clarity has been brought to the complex biofuels versus food debate. Brian Doidge, on behalf of Ontario Agri-Food Technologies has prepared a presentation that outlines the issues, the arguments and the facts.

Rising food prices all over the world cannot be denied. According to the U.N. Food and Agriculture Organization world wheat and rice prices doubled from 2004 to 2008 and world food prices as a whole have increased 45 percent since late summer 2007.

In response to these skyrocketing prices, the world has seen food riots in the Philippines, Haiti, Egypt, Cameroon, Cote d’Ivoire, Mauritania, Ethiopia and the list goes on. Restrictions or bans on grain and rice exports have been enacted in India, Egypt, and Indonesia among others.

Politically, the blame has fallen primarily on the increasing production of corn for use as biofuel. British Prime Minister Gordon Brown has called for an “investigation whether the conversion of agricultural land from food to biofuel production is contributing to rising food prices.” And Dr. Ian Lee, MBA Director of the Sprott School of Business at Carleton University says that the Canadian government’s investment in biofuel production is “…one of the dumbest decisions ever….”

The argument against biofuels, as outlined in Doidge’s presentation, comes in three parts. First, the rush to biofuels siphons corn away from use as feed for livestock therefore resulting in a rise in price for beef and pork. Second, oilseeds and food grains lose acreage due to the increasing acreage being planted with corn for biofuel. This results in an increase in the prices of oilseeds, wheat and rice. Finally, China’s increasing demand for food is exacerbating the situation.

But according to Doidge, these arguments fail to represent the truth. In response to the first part of the argument, Doidge counters with the fact that pork and beef prices in Canada actually have not increased. In fact, the Canadian federal government is reducing 10 percent of the Canadian swine breeding herd through slaughter and keeping the meat out of the food chain. This program is costing $50 million.

However, Doidge’s argument goes beyond pointing out the obvious fact that beef and pork prices are not increasing. He explains what many fail to realize. When corn is used to make ethanol, one third of a bushel of corn ends up as dried distiller’s grains (DDG) which is used as animal feed. Therefore, although some corn acres may have been diverted away from feed grains to biofuel production, one third of those acres still end up as feed.

Doidge also dispels the common argument that biofuel production diverts acres away from oilseeds, wheat and rice production. According to data from the Foreign Agricultural Service of the United States Department of Agriculture, the world acreage of nearly all major crops either has increased or stayed the same since 2000. Corn acreage has increased 15 percent, oilseed acreage is up 11.4 percent and rice acreage is at a record high of 381.1 million acres, an increase of 1.7 percent since 2000, wheat acres have remained steady. This data does not substantiate the argument that acres of food grains and oilseeds are suffering.

Finally, Doidge puts to rest the argument that China’s growing demand for food is responsible for high food price. Chinese rice imports have declined and they continue to export more rice than they import. The same holds true for pork in China. Chinese pork consumption has declined and their pork exports exceed their imports.

Instead of blaming biofuels for the rising food prices, Doidge outlines an explanation that takes into account many different factors; a “Brutal Convergence of Events,” as the Washington Post describes it.

First, the stability of governments in the developing world must be questioned. Rice imports into Indonesia, Bangladesh, Nigeria and the Philippines have increased dramatically. Imports to Indonesia have quadrupled and imports to Bangladesh have tripled from 2004 to 2006. Nigeria and the Philippines both have doubled their rice imports from 2003 to 2005.

In addition to their soaring imports, the governments in these countries as well as others rely heavily on subsidization of food prices to survive politically. The Asian Development Bank estimates that the Philippines will spend $520 million on rice subsidies in 2008 and Indonesia will spend $2.2 billion on food subsidies in general this year.

“These subsidies helped produce the current crises. Governments kept food prices artificially low in order to buy political stability, but those low prices discouraged farmers in these countries from expanding production” says Jim Jubak, financial analyst and commentator with MSN Money.

Oil prices also play a role in this crisis. India and China have increased their demand for oil, and prices are soaring, more than food prices. These prices cause speculation and transportation costs rise along with the cost of plastics and fertilizers. According to Doidge, the combined effect of these rising prices sparks inflation, recession and unrest.

The final player in this complex issue is the turmoil in the US financial market. Stock markets have plummeted in response to the dissolving mortgage-based asset values. This has freed up money and investment which has flooded into commodity markets. The result of this flood of funds is a sharp increase in prices that is not reflective of supply and demand.

Agricultural commodities are not the only ‘hard’ commodities affected by these new funds. Gold, copper and iron ore along with grains, oilseeds and fertilizers have seen price escalation since late 2007. Doidge’s presentation points out the impossibility of biofuels causing increases in the prices all of these commodities.

According to Doidge, this combination of unstable governments, skyrocketing oil prices and speculative funds provide a far better explanation for the current food crisis than blaming biofuels.