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Page added on October 21, 2010

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Food Versus Fuel – Again

Consumption

I am off to Malaysia on Saturday for a business trip. I will actually spend some time in Bintulu, so I am looking forward to driving by and seeing Shell’s gas-to-liquids (GTL) plant there. I am unsure about my prospects for Internet access over the following week. When I was in India, I was without Internet for eight days, but I have been told that most likely I will have Internet for the duration of my stay. But this is a business trip, so I probably won’t have all that much time to write anyway.

I do have three essays in the pipeline that I will trickle out while I am gone. The first is a guest essay from Global Intelligence Report on oil exploration in the Caspian Sea. The second is an interview that I recently conducted with Tom Hicks, the Deputy Assistant Secretary of the Navy (Energy). We spoke at length about what the Navy is doing to secure energy supplies for the future, the greening of their fleet, and what they are doing internally versus the work that is being done externally. The third is an assessment of using hemp to produce biofuel. Since I started writing about energy, I have probably had 50 people ask me about the viability of hemp, but this will be the first time I have ever addressed the subject.

Food Versus Fuel

Today I want to revisit the food versus fuel debate. This debate has started to gain strength again due to rising corn prices, arguments that ethanol production is fueling the price rise, and reports that food prices will be higher as a result. I have taken a pretty conservative position in this debate. I generally agree with those who have suggested that the increase in food prices is driven more by high energy prices than by higher corn or soybean prices. I also agree that in the U.S., food is cheap. In fact, junk calories are very cheap, which is a reason that nearly 70% of Americans are overweight. So one could argue that there would be health benefits from making certain foods in the U.S. more expensive. If junk food was more expensive and healthy foods were less expensive, we would all be better off.

However, I think it is naive to suggest that there is no impact on food prices from things like corn, soybean oil, and palm oil being diverted into biofuel production. In fact, the Congressional Budget Office (CBO) investigated this issue in 2009 (See The Impact of Ethanol Use on Food Prices and Greenhouse-Gas Emissions), and concluded “CBO estimates that from April 2007 to April 2008, the rise in the price of corn resulting from expanded production of ethanol contributed between 0.5 and 0.8 percentage points of the 5.1 percent increase in food prices measured by the consumer price index.” They further indicated that a larger portion of that 5.1 percent increase in food prices was due to escalating energy prices.

So an American family that spends $200 per week on food saw their annual food costs increase by a total of $530 on the year, with ethanol contributing between $52 and $83 per the CBO report. While other studies have suggested that the impact is much greater, I would tend to think that for Western countries the CBO numbers aren’t that far off the mark. Cumulatively, $52 per year across 115 million families in the U.S. amounts to annual increased food costs due to ethanol of nearly $6 billion, but for individual families in wealthy countries the impact is not large.

However, one doesn’t have to travel far to find starving people. Many of those people are starving because they can’t afford food. For them, this is a more serious issue. So if one views the argument from a Western-centric point of view, you could indeed make the case that the increased costs due to biofuel competition are insignificant. But from a global perspective, some people are going to be impacted by a much larger degree than those of us in the west. Further, certain food producers are impacted far more than others. Poultry and beef producers are hit hard by rising grain prices, which is why you see those industries lining up against policies that would increase corn ethanol production. In this case what happens is a transfer of wealth from the cattle rancher to the corn farmer. My father is a cattle rancher, so I am well aware of the impact rising corn prices has had on him.

In addition, when we use arable land to produce fuel, we set up the potential for a much more serious crisis in the future. As long as there are record crops year after year, the issue may not come into sharp focus. If there are droughts, floods, etc. that cause crops to come in much lower than expected, when food and fuel are both competing for the same feedstocks, there is the potential for much higher prices for both food and fuel at the same time. I have discussed these risks several times, including recently in The Lesson from Rising Ethanol Prices.

But There’s a But

But, the fact is that we need both food and fuel. And some of the so-called solutions to this issue have not been well-thought out. When someone proposes to grow a non-food crop for the purpose of biofuel production (wood, jatropha, etc.) — but they do it on arable soil, there is no difference than if a food crop was grown there and then diverted into energy production. What we need to do is to make sure we are maximizing the use of marginal soil, or land otherwise unsuitable for crop production, for energy production. For instance, trees can grow well on marginal or hilly soil that is otherwise unsuitable for food production. To the extent that they can be used in those situations to produce energy, the food-versus-fuel debate can be avoided. But it can’t be avoided by growing non-food fuel crops on arable land.

There are instances in which energy components can be extracted from the food crop, leaving the food value intact. I would rather see high fructose corn syrup (which is now being rebranded “corn sugar“) diverted into ethanol production instead of ending up as a cheap sweetener in many of our foods. That is the sort of situation that could be a win-win; the corn can produce energy but then its value as food is undiminished. This happens to some extent now with the DDGS co-product from ethanol production. Ethanol can be produced from corn, and then the DDGS can be fed to animals.

But unintended consequences are an ever present danger, and we need to keep a close eye on the risks as we try to supply the world with both food and energy. We saw this happen with palm oil as a result of Western biofuel policies. Due to Western mandates, demand for palm oil increased, and therefore an incentive was provided for converting peat bogs and rain forest into palm oil plantations. That is an unintended consequence that can’t be undone, so we have to put more forethought into the potential risks of our energy policies. But this also brought an overreaction from many Western countries that painted palm oil as undesirable, period. While we don’t want to incentivize the destruction of virgin rain forest for palm oil production, we should also recognize that palm oil is a very cost-effective biofuel that can be a good source of income for developing countries. We just have to balance our desire for fuel with the value of the orangutan, which could see its habitat completely destroyed in a rush to produce fuel.

We need to be aware that just because energy policies in Western countries may have seemingly minimal negative impact to those countries, the impact on developing countries can be much more pronounced. We also must clearly recognize the risk that crop shortfalls pose to both food and fuel when they are competing for the same arable land. In the long run, we need to minimize the potential for food-versus-fuel conflicts.

R-Squared Energy Blog Robert Rapier



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