## UN FAO: Biofuels a Significant Demand Factor in Food Price Surge

##### 29 May 2008

Although not the sole cause for the worldwide rapid increases in food prices, the biofuels market has created a new and significant source of demand for some agricultural commodities such as sugar, corn, cassava, oilseeds and palm oil. This increase in demand, according to a report prepared by the UN’s Food and Agriculture Organization (FAO) “has been one of the leading factors behind the increase in their prices in world markets which, in turn, has led to higher food prices.”

The report, Soaring food prices: facts, perspectives, impacts and actions required, was prepared as one of the discussion documents for an upcoming conference on world food security in Rome focused on the challenges of climate change and bioenergy.

A “confluence of different forces” has contributed to the rapid increase in food prices, according to the report. On the supply side, these include:

• Weather-related production shortfalls. Cereals production in major exporting countries has declined annually by 4 and 7 percent respectively beginning in 2005. Yields in Australia and Canada fell by about one fifth in aggregate, and yields were at or below trend in many countries.

There was a significant increase in cereal output in 2007, especially in maize in the US, in response to higher prices. On the other hand, production of all the other major food commodity groups by major exporting countries was not affected in a similar way during the same period. The quick supply response for cereals in 2007 came at the expense of reducing productive resources allocated to oilseeds in some countries (especially soybeans in the United States), resulting in an important decline in oilseed production.

• Stock levels. Global stock levels have declined, on average, by 3.4% per year since 1995 as demand growth has outstripped supply. Production shocks at recent low stock levels helped set the stage for rapid price hikes.

• Increasing fuel costs. Increases in fuel prices have also raised the costs of producing agricultural commodities with, for example, the US dollar prices of some fertilizers (e.g. triple superphosphate and muriate of potash) increasing by more than 160% in the first two months of 2008, compared to the same period in 2007. With freight rates doubling within a one-year period beginning in February 2006, the cost of transporting food to importing countries also has been affected.

On the demand side, the surging biofuels market is the significant new factor.

Among all major food and feed commodities, the additional demand for maize (a feedstock for the production of ethanol) and rapeseed (a feedstock for the production of biodiesel) has had the potential for the strongest impacts on prices. For example, out of the nearly 40 million tonne increase in global maize utilization in 2007, almost 30 million tonnes were absorbed by ethanol plants alone, mostly in the US which is the world’s largest producer and exporter of maize. Over 30 percent of that country’s 2008 maize harvest is forecast to be diverted to ethanol distilleries, which amounts to over 12 percent of global maize production. In the EU, the biodiesel sector is estimated to have absorbed about 60 percent of member states’ 2007 rapeseed oil output, which amounts to about 25 percent of global production and 70 percent of the 2007 global trade in the commodity.

The issue is not limited to how much of each crop may be used for biofuels instead of food and feed, but how much planting area could be diverted from producing other crops to those used as feedstock for production of biofuels. To illustrate, high maize prices since mid-2006 encouraged farmers in the US to plant more maize in 2007. Maize plantings increased by nearly 18 percent in 2007. This increase was only possible because of reductions in soybeans and, to a lesser extent, in wheat areas.

Other relevant factors contributing to the rise in prices include operations on financial markets; short-term policy actions; and exchange rate swings.

Despite an expected increase in world cereal production of 2.6% in 2008, low stock levels that are not likely to be replenished quickly, the report notes, and “the possibility of further sharp price hikes and continued volatility as a result of unforeseen events seems to be likely for the next few seasons.

The report concludes that the world could be facing higher agricultural commodity prices for some time.

Of significance in this respect is the possibility of the persistence of demand for biofuels, which would depend on a number of factors, including:

• whether the price of crude oil continues to increase and policies supporting the biofuels sector are maintained;

• whether the rate at which second generation feedstocks—lignocellulosics that do not compete with agricultural products for land resources—are developed and commercialized speeds up sufficiently to replace first generation feedstocks.

Other important factors that will be influential over the longer term include population and income growth, as well as intensifying urbanization; climate change impact on agricultural yields in different parts of the globe; land and water resource constraints; and the ability to increase yields of agricultural products through more effective use of existing technologies and/or adoption of new technologies.

Separately, the just released Agricultural Outlook from OECD and the UN Food and Agriculture Organization (FAO) projects that while agricultural commodity prices should ease from their recent record peaks but over the next 10 years they are expected to average well above their mean levels of the past decade.

In OECD countries, at least, the growth of biofuel production has thus far been driven largely by policy measures, and the report says that it is not clear that the energy security, environmental and economic objectives of biofuel policies will be achieved with current production technologies. The report suggests further review of existing biofuel policies.

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OMG “SOARING FOOD PRICES” or is this just another media driven crisis? After more than 40 years of the declining food prices (inflation adjusted), the decline has stopped. For a time in the US, feed corn was a cheaper fuel in a pellet stove than wood pellets. Burning protein?

See the price of Ag commodities is good news for farmers. How many farmers who loved their vocation left for economic reasons will return to full time farming?

Kit P:

Will farmers fully benefit from commodities unbelieveable increase in price in the last (and next) 24+ months?

If they do, we may have many more millionaires and billionaires shorthly.

Too bad that grain/corn ethanol is having such a major impact on world food price. Otherwise, it would have been interesting to grow our gas guzzler (food?) locally instead of importing oil. However, having to chose between the stomach and the large VUS is going to be a tuff choice for many.

Cellulosic (wastes and non-food) agro-fuel may make the process much more acceptable within a few years.

Concurrently, the arrival of many more fuel frugal hybrids, PHEVs and BEVs will reduce liquid fuels demand enough to drive the price down by 2015-20 or so.

Farmers golden days may not last much longer than one or two decades. Investing in vehicle electrification has better chances in the long term.

Indeed, and check the many FAO preparatory documents on the many possible advantages of these higher commodity prices - which have been catastrophically low for the past 30 years, keeping the bulk of the world's poor (75% of who are farmers) in poverty.

So a bit of nuance would add: higher food prices are what we really need to get our act together and do what we should have been doing decades ago, namely investing in developing world agriculture.

Thank God we have biofuels to bring this revolution about. It was about time.

GreenCarCongress has a whole library of new documents there about biofuels, showing the good they're doing. It would be, as Lula says, a "crime against the planet and its people" not to invest in biofuels.

This is slightly related, a replacement for biodiesel.

Sapphire introduces new "Green Crude" breakthru...

http://www.sapphireenergy.com/mediacenter/press_release/1

This is something I've been hoping for in recycling CO2, genetics and photosynthesis breakthru. Think of the potential for such a symbiotic plan. Instead of sequestration, utilize and recycle. This can help eliminate the conflict in food prices/shortages as well in the future.

"Not biodiesel, not ethanol. And no crops or farm land required."

Not sure how far they are from commercial production.

The diversion of food stocks to liquid fuel production caused an increase in food prices.
This is as obvious as a sunrise bringing day light.

Thank you to the UN for admitting the obvious after years of Big oil interests claiming that food diversion had no such effect.

Lulu says this food price increase is just getting started, as the Ethanol boom/bust cycle has not run its course yet. How much food would have to go into this monster's stomach before it's satisfied?

we are now at peak oil, the debate is over and peak oil also means peak food
get ready for a wild ride

"The diversion of food stocks to liquid fuel production caused an increase in food prices."

Biofuels does not reduce food. Biofuels increase food.

For those who did not take the time to read the report, food prices are not soring and biofuels was the least significant factor in the increase. Makes boring reading.

Rationing ahead caused by \$15/gallon gas

The paper discounts growing demand in developing markets as one of the reasons for tighter supplies. According to note 14 on the reason for why Chinese and Indian demand isn't a major cause of the recent price run up is that neither country has been importing grain (both countries have increased imports of oil seeds and related crops). Isn't the meat itself much cheaper to transport? Why didn't they look at meat shipments?

For those who don't follow, one of the causes of the run up that has been put forward is the increased spending on meat products in the developing world. Meat requires much greater quantities of food per final calorie since the animals burn energy sustaining themselves while they grow.

Kit P writes: See the price of Ag commodities is good news for farmers. How many farmers who loved their vocation left for economic reasons will return to full time farming?

It's good news for Archer Daniels Midland and a relatively small number of millionaire farmers. I doubt that many who left farming will be in a financial position to come back. Kit, only you could call this "just another media driven crisis".

Kit P writes: For those who did not take the time to read the report, food prices are not soring and biofuels was the least significant factor in the increase. Makes boring reading.

Do tell. So what are the most important factors in the increase? 12% of global maize production going to ethanol seems like a lot for the "least significant" factor.

Agro-fuels (and beef) is not a very efficient way to produce useful energy. Current low efficiency solar panels do much better per land area and can be stacked to multiply effectiveness even more.

Future higher efficiency solar panels (30+%), installed on non-productive desert land (or walls and roofs, etc), will make all agro-based energy systems obsolete within one or two decades.

Fertile land areas (except northern Alberta) will soon be returned to food production to feed future generations.

Forgot again..

@Mickel

here is how to include a clickable web link in your post.

Remove the "." character to expose the HTML control sequence

Not only meat consumption but also manufactured food is a major cause of over priced food in America.Food that is processed and bagged and then put into a box increases the overall weight of the trucks delivering food to your supermarket and wastes resources.Corn Ethanol although inefficient has actually lowered the price of petroleum products and therefore may have kept food prices from going higher.Higher food prices in 3rd world countries is more the cause of US trade policies and speculation than ethanol.

Thanks to the actual investment in algae biofuel, we will soon have an abundant and cheap source of animal feed (as well as lots of biofuel). The algae don't only produce tens of times more biofuel per acre, but also tens of times more protein-rich algae-cake per acre, that could be used to feed all the cows, chickens and pigs in the world.
Once large-scale algae production has started for biofuel, it will soon be used for animal-feed as well, solving two problems at once.
A little calculation shows that when you produce enough algae to cover 50% of the national fuel-need, you have a 'byproduct algae-cake' containing more animal feed than the entire national production, at very low cost.
(a person needs about 3000 kCalories a day, which is about 12 MJ or 300ml of gasoline or 4kWh. compare that to the amount of gasoline your car needs each day)

American yellow dent corn is not used as human food. Running yellow dent corn through an ethanol plant or through a hog are equivalent operations -- the conversion of a low value, high volume raw commodity into a higher value, lower volume product. This is called value added processing. The number one agricultural product here in Minnesota is hogs, fed by the number two product, corn, and the number three product, soybeans.

In constant dollars, corn is still not as expensive as the average price for it from the mid-1950s to the mid-1960s when U.S. agricultural policy included production controls. Raw agricultural commodities became undervalued after Nixon's Ag Secretary Earl Butz moved American agriculture onto an export focus. The recent increase in price of food commodities is a readjustment to food's true value.

In spite of the large world food trade, 80% of the world's food is produced in-country for its own population. The best way to increase food production is to increase food cost. This provides the capital and incentive for improved agronomic practices. Malawi is a good example of how a little bit extra cash flowing into the system can greatly increase production.

High commodity prices have been good for all farmers and the local rural economy. As a retired farmer, I know from experience that you need one really good year and three moderately good years every ten years to get caught up on bills and put some money aside, because the other six years are going to be generally bad. We had a big shakeout in farming in the mid-1980s and only the very best operators survived. There is no fat in the system.

Electricity and portable liquid fuels are not equivalent energy forms. They are very different in quality. Electricity has a storage problem. "Portable" electricity is workable as a transportation fuel for light duty use, such as private passenger automobiles, but not for heavy duty industrial applications such as farming, construction, over-the-road trucking, aircraft, and marine applications, because of the huge amount of kilowatt-hours of storage required. Battery powered cars are a trivial problem in comparison.

Interesting commentary Fred. Being from Minnesota, you most likely are understand that one of the most important concepts of food and energy is having it available when you need. Would you comment on the role of farm community sized ethanol production plants in processing biomass into a form where the protein value and the energy value can be stored more efficiently?

When looking at the 2005 Energy Bill, the production tax credit for ethanol was capped at a size that would favor farm community sized ethanol production plants rather than massive ADM type facilities. It looks like corn growers are now paying more taxes (at a lower rate) for being productive rather than getting price subsidies for corn.

It seems pretty simple to me -- no new fossil fuel or nuclear generator plants -- instead build wind turbines up north where the weather is crappy and windy, build solar panels in California's, Nevada's, and Saudi Arabia's baking deserts, and finally bring out electric cars which are charged by those wind turbines (at night) and solar panels (in the day). It just seems absurdly simple, with solar panels soon to be grid-competitive, and wind turbines already competitive. It seems more an issue of politics than technology.

For the rest of the specialized industries like aviation and heavy duty trucking - just throw all our waste into gasifiers (no more landfills, thankfully), pull out the hydrogen and use this as a fuel in ICE's.

Save our valuable land for growing food, forests, and generally making the world a nice place.

"It just seems absurdly simple, with solar panels soon to be grid-competitive, and wind turbines already competitive. It seems more an issue of politics than technology."

Yes, because the cost and range problem of electrics are omitted. The even bigger cost, storage and distribution problems of hydrogen are also omitted. Electrics are close but they aren't here now. There are very few on the road and it will take a while to ramp up production. Hydrogen isn't ready. We don't even have the infrastructure. Biofuels work in what we have now, and they can continue to work in air, long haul, marine, and range extended vehicles for some time to come.

the cost and range problem of electrics are omitted.
The Tesla Roadster supposedly gets 350 km per charge. That seems pretty good to me. If you want to go from city to city, go to your local U-Haul and rent a Gen-trailer. That takes care of the range issue.

Regarding cost, well, we all know the big auto companies have been stalling for as long as is humanly possible on this front. Tesla has plans to bring out a family-oriented sedan in a coupe years for 40-50K or so. So far, Tesla has by in large kept its word to bring its sports car to market in 2008, with a few glitches as would be expected.

Follow this trend down the road, and I think within 10 years electric cars will be everywhere. If Tesla can offer a few hundred cars that are faster than a Ferrari, for 100 K, what do you think the cost of a less-performance oriented car would be if a big manufacturer applied their economies-of-scale to it? That takes care of the cost issue.

Considering it takes at least 5-10 years for a new energy generation plant to get going, that means we should now be heavily investing in wind and solar farms in anticipation of the shift towards electric cars.

Ill agree that for aviation and transport hydrogen is still impractical. Well maybe that will have to wait a while, maybe that can take up some of the drop in demand for oil when passenger vehicles switch to electric. I still see no logical reason for pursuing biofuels, with their negligible, arguably negative, impact on greenhouse gas emission reductions, their impact on tropical deforestation, and their competition with food agriculture

You can say, oh well just take waste biomass and use that for biofuel production, but how effective a bureacracy are you going to need to police that?

Oil is better than biofuels.

“I still see no logical reason ...”

Mark, I see many good reasons. Maybe you can explain why you look for the negatives in solutions that are working while latching on to unproven solutions that are clearly a pipe dream.

“Oil is better than biofuels.”

What does Minnesota have mote of, oil or corn? Oh gosh Mark those stupid people in Minnesota really want to destroy the rain forest rather than create local jobs. Of course they are also putting up wind turbines too for those “family-oriented sedan in a coupe years for 40-50K or so”.

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