ROBERT STOCKDILL
The burgeoning popularity of biofuels is steering the world towards a global food price crisis.

As demand for food crops grows from ethanol plants, food crop prices are set to track towards the same value as the equivalent in oil prices.

“We’re looking at competition in the global market between 800 million automobiles and the world’s 2 billion poorest people for the same commodity, the same grains,” says Lester Brown, founder and president of the US-based Earth Policy Institute.

“We are now in a new economic era where oil and food are interchangeable commodities because we can convert grain, sugar cane, soy beans – anything – into fuel for cars. In effect, the price of oil is beginning to set the price of food.”

The UN-back FAO, the head of Nestle and environmentalists have all spoken in recent weeks about the looming crisis.

Brown was speaking at the recent CIES World Food Business Summit in Shanghai – but any doubters of his message will have been quietened by the release of a United Nations report last week which says increased demand for biofuels could drive up prices for many farm products.

One food industry source FOODweek discussed the issue with this week described what Brown calls Ethanol Shock as the industry’s “biggest sleeper issue”.

The US’ biofuels program commenced in 1978 with the conversion of small quantities of corn into ethanol. It was sponsored by a subsidy of 51 cents per gallon.

But when Hurricane Katrina helped push oil prices to over $US60 a barrel, ethanol producers and companies looking to get into the business, have found a viable business model from buying crops for conversion.

“We have seen an explosion in investment across the US,” Brown told the CIES summit. “A trend that had been rising very slowly for 25 years suddenly began to rise almost vertically. Today the total number of ethanol distilleries under construction in the US exceeds the number we built over the last 25 years. When those plants are finished, the demand for grain to produce fuel for our cars will double.



Food, energy economies begin to merge



“We used to have a food economy and an energy economy – two separate entities. Now suddenly, they’re beginning to merge and what is happening is the world price of grain is moving up towards its oil equivalent value because any time the food value of a commodity is less than its fuel value, the market will move that commodity into an energy commodity.”

Brown’s comments cannot be explained away as the enthusiastic rant of an environmentalist: Nestle chairman Peter Brabeck told the Financial Times in China that food prices were set for a period of “significant and long lasting” inflation because of demand from China and India and the use of crops for biofuels.

The Agricultural Outlook 2007-2016, published by the UN Food and Agriculture Organisation (FAO) and the OECD, blames current high commodity prices on factors such as droughts in wheat growing regions and low stocks.

“Biofuels are currently made from such materials as sugar cane, palm oil and maize and, given they can substitute for fossil fuels, hold the potential to substantially reduce greenhouse gas emissions,” the FAO said.

“The growing use of these materials is underpinning crop prices and, indirectly through higher animal feed costs, the prices for livestock products,” the FAO concluded.

In the US, maize-based ethanol output is expected to double between 2006 and 2016 and in Brazil, annual ethanol production is projected to reach some 44 billion litres by 2016, from around 21 billion today.

In the EU, the amount of oilseeds used for biofuels is set to grow from just over 10 million tons to 21 million tons over the same period.

The report noted the higher commodity prices were of particular concern for countries that are net food importers and the urban poor.

Brown predicts food price rises “unlike any we’ve seen before”.

“By the end of next year, nearly 30% of the US grain harvest will be going into the production of fuel for cars and this is starting to affect grain prices throughout the world.

“Don’t assume this is a temporary event. In the past decades we’ve had occasional grain price rises but it’s always been because of weather and once weather returned to normal, then prices followed. Now we’re looking at a very different situation altogether.

“We’ve never faced anything like this before. There is no human agency or international office to mediate the competition between cars and people for food.

“My concern is that as grain prices go up, many of those on the lower rungs of the global economic ladder will begin to fall off.”

Brown is also concerned many consumers will disregard the issue because they don’t eat much corn.

“If you open your refrigerator, you’ll see milk, eggs, cheese, meats, chicken, pork, yogurt, ice cream – these are all corn products. As the price of corn goes up, the price of every one of those products will be affected.”

Besides the economic impact of Ethanol Shock, the humanitarian or ethical aspect was worth noting. Brown said the amount of grain required to fill one SUV tank with ethanol would feed one person in a developing nation for a year.

Food and grocery retailers have been warned to be ready to respond to consumer anger when they see the results of Ethanol Shock on their grocery bills, said Brown.

“You’re going to be under pressure to explain or justify (food price rises) – or if not to justify, then to explain what you are doing to discourage the massive diversion of food commodities to fuel for cars. This is a new issue for you. Neither you nor the world have faced anything like this before,” he told delegates to the CIES summit in China.

“It is something you are going to have to wrestle with.”

Source: Robert Stockdill, Group Editor. Originally published in FOODweek newsletter edition, Friday July 13, 2007.

Read the text of Lester Brown’s presentation here:

Ethanol Shock: Lester Brown’s rationale