What good is green if the poor go hungry?

24 July 2007, Globe and Mail
URL: http://www.theglobeandmail.com/servlet/story/RTGAM.20070720.wibreguly0720/BNStory/Business/columnists

Rome: Rome's obsession with food goes beyond the pizzerias and the trattorias that make it a gastronomical wonder. Appropriately, the city is also home to three United Nations food agencies whose job, ultimately, is to keep the undernourished fed. They wonder whether biofuel is an item that should be struck from the planet's menu.

Biofuel is any fuel made from plants. Corn from Canada, sugar cane from Brazil and jatropha from India can be used to make fuels such as ethanol and biodiesel. As oil prices climb, more and more agricultural land is being devoted to fuel crops, not food crops. Less food translates into higher food prices and perhaps more hunger. Fill your tank with ethanol and you might contribute to famine in Africa. As if you didn't feel guilty enough owning an SUV.

No one is suggesting - yet - that biofuel production is leading to starvation. But biofuel is suddenly a big business and demanding the attention of farmers everywhere.

In the United States alone, some 100 ethanol plants are under construction and vast amounts of corn are being grown to supply them. Soaring biofuel production is at least partly blamed for food inflation (Statscan this week reported a 3.1-per-cent rise in Canadian food prices from last year).

In Rome, the World Food Program, the UN agency charged with fighting famine, said its budgets are being strained because of surging food prices. It blames biofuel production, rising food demand from China and India, and harsh weather. The agency will have to find more donor money or feed fewer people; there are no other options.

There is no doubt food prices are climbing rapidly. Nestlé chairman Peter Brabeck-Letmathe told the Financial Times this month that food prices are set for "significant and long-lasting inflation." The International Monetary Fund recorded an unprecedented 23-per-cent rise in food prices in the past 18 months. The U.S. Agriculture Department says global grain inventories are at their lowest levels in 30 years. The International Grains Council predicts industrial use of grains will rise 23 per cent to 229 million tonnes in 2007-08, with the ethanol industry chewing through almost half that amount.

Is a biofuel backlash coming? The world has 800 million cars. If filling them with ethanol and other plant-derived fuels keeps pushing prices up, the world's two billion poor people will have something to say about it. Retaliation seems inevitable.

While clamping down on biofuels seems the humane thing to do, it may not necessarily be the best thing to do. The first thing to remember is that agricultural commodity prices have declined dramatically, measured in real (inflation-adjusted) terms for the past 40 years or so. In spite of the recent rise, prices are still well below their historic norm.

The second thing to remember is that biofuels may (or may not) fit into any farmer's needs. Farmers around the world have three basic requirements - they need cash, they need food for themselves and they need to feed their farm animals. If growing plants for biofuels boosts cash generation with scant damage to the other two requirements, the farmer might be better off.

Vinit Raswan, a technical adviser in Rome to the UN's International Fund for Agricultural Development (IFAD), also notes that technology has to be factored into the equation. In a plant, the greatest sugar content resides in the stock, not the fruit or the leaves. The latest plant technology might allow farmers to grow plants with bigger stalks. If this works, biofuel production could rise without severely hurting food production.

What is certain is that farmers, like other business people, react to market signals. The signals now tell them to plant crops for biofuels. The problem is that, in many parts of the world, biofuels are heavily subsidized by the taxpayer. This is especially true in the United States and Canada, where corn-based ethanol would not exist without the endless government handouts. The market signals, in other words, are warped.

Left on its own, the market in time would find a balance between food and fuel production. As it is, the billions in subsidies are encouraging a dramatic rise in biofuel production that would not otherwise occur.

This is partly why the UN food agencies are worried. Too much biofuel is coming to the market too quickly and the casualties might be the poor who can't afford the sharply rising food prices.

* Commentary by Eric Regul