Saturday, June 30, 2007

Are biofuels to blame for agflation?

The UK's consumer prices index showed annual food price inflation of 6 per cent in April, the highest level in almost six years and well ahead of overall inflation of 2.8 per cent. In the US, prices have risen by 6.7 per cent, seasonally adjusted, since the beginning of the year, compared to 2.1 per cent for all of 2006.

There are some proximate factors driving food prices. Florida promises the smallest orange crop in 17 years. Swine fever in China has pushed up local pork prices. Coffee prices have been pushed up by adverse weather affecting production in Vietnam and Brazil, the two largest producers.

Of course, the relationship between food prices and inflation in general has been weakening. In the late 1940s food accounted for 43 per cent of the US consumer price index. By 1975 it was down to a quarter and its weight in the basket is now just 14 per cent.

Biofuels are gradually taking over as the main growth driver of agricultiral demand, Goldman Sachs says that if government policies are adopted in full, global demand for biofuels could increase from 10bn gallons a year to 25bn gallons by 2010. In the US ethanol production accounted last year for 16 per cent of the corn (maize) crop. If farmers are to fill cars as well as stomachs, then there is an argument for structurally higher prices of some agricultural commodities.

Of course, one response in a market system is to increase production, although this is ultimately limited by the availability of suitable land. Indeed, global grain production will rise by 6.2 per cent to a record 1.666bn tonnes in 2007-08, according to the International Grains Council. However, this will not match global consumption forecast at 1.680bn tonnes.

China's Communist rulers are worried and have announced a moratorium on the production of ethanol from corn and other food crops. In China grain security has been at the top of the party's political priority list and a 43 per cent increase in the price of China's staple meat - pork - triggered concern at the highest levels of the party.

The European Commission argues that its 10 per cent 2010 target for biofuels will not put a great strain on food markets. Their analysis suggests that prices for agricultural raw materials in the EU would rise by 3-6 per cent for cerals and 5-18 per cent for the major oilseeds as a result. As the cost of cereals makes up only 1 to 5 per cent of the consumer price of bread, which means that bread prices would increase by less than 1 per cent.

Although concerns have been expressed that planting biofuel crops may contribute to deforestation, biofuels do have clear environmental benefits. Corn-based ethanol gives 35 per cent more energy than it takes to produce. Greenhouse gas emissions per gallon of fuel used are 18 to 29 per cent lower with ethanol than with fossil fuels.

Biofuels are politically popular in the States because they give an income boost for farmers in the electorally marginal Mid West and also seek to address the country's security concerns about energy dependence on the Middle East. President Bush wants the country to produce 35 billion gallons of corn-based ethanol, a goal that will require an additional 129,000 square miles of farmland, an area the size of Kansas and Iowa combined.

What are implications for the CAP? In an ideal world, the promise of improved market returns should mean that farmers, particularly big grain farmers, would have less need of subsidy. Farmers would no doubt argue that they are recovering from a long period of low incomes and that indeed their real incomes has been falling for a century (although in practice this is offset by much larger scale operations that secure economies of scale).

A real concern is that the rush to biofuels will boost food security discourses. These are seen as the best bet by those who want to return to discredited productionist orthodoxies and to make the claim that farming cannot function as a normal commercial activity but should be subsidised.

No comments: