Friday, July 15, 2011

Everybody Hates Biofuels

I hope that reports from international agencies will include some interesting facts, but I don't expect them to have policy recommendations that are more than fluff. Thus, it's stunning to me that a June 2011 report from 10 international agencies--FAO, IFAD, IMF,OECD, UNCTAD, WFP, the World Bank, the WTO, IFPRI and the UN HLTF--have come out with a strong and clear recommendation that governments drop their biofuel subsidies. 

The report is called "Price Volatility in Food and Agricultural Markets: Policy Responses." It describes the situation of global prices in agricultural products over the last few years like this:

"Irrespective of any conclusion that might be drawn concerning the long term trends, there is no doubt that the period since 2006 has been one of extraordinary volatility. Prices rose sharply in 2006 and 2007, peaking in the second half of 2007 for some products and in the first half of 2008 for others. For some products the run-up between the average of 2005 and the peak was several hundred percent. On the rice market the price explosion was particularly pronounced. The price rises caused grave hardship among the poor and were a major factor in the increase in the number of hungry people to more than one billion.8 Prices then fell sharply in the second half of 2008, although in virtually all cases they remained at or above the levels in the period just before the run-up of prices began. Market tensions emerged again during 2010 and there have been sharp rises in some food prices. By early 2011, the FAO's food price index was again at the level reached at the peak of the crisis in 2008 and fears emerged that a repeat of the 2008 crisis was underway."

The 10 agencies point to a number of factors affecting food prices: growing world population and incomes, weather-related disruptions, and others. But then they focus quite particularly on biofuels subsidies (I've dropped footnotes and paragraph numbers from the quotation that follows).

"Between 2000 and 2009, global output of bio-ethanol quadrupled and production of biodiesel increased tenfold; in OECD countries at least this has been largely driven by government support policies. ...  Biofuels overall now account for a significant part of global use of a number of crops. On average, in the 2007-09 period that share was 20% in the case of sugar cane, 9% for both oilseeds and coarse grains (although biofuel production from these crops generates by-products that are used as animal feed), and 4% for sugar beet. With such weights of biofuels in the supply-demand balance for the products concerned, it is not surprising that world market prices of these products (and their substitutes) are substantially higher than they would be if no biofuels were produced. Biofuels also influence products that do not play much of a role as feedstocks, for example wheat, because of the close relations between crops on both the demand side (because of substitutability in consumption) and the supply side (due to competition for land and other inputs).

"At the international level, crop prices are increasingly related to oil prices in a discrete manner determined by the level of biofuel production costs. ... Since both energy and food/feed utilise the same input, for example grain or sugarcane, increases in the production of ethanol reduce the supply of food and result in increases in its price. This relationship between the prices of oil, biofuels and crops arises due to the fact that, in the short run, the supply of crops cannot be expanded to meet the demand by both food and energy consumers.

"If oil prices are high and a crop's value in the energy market exceeds that in the food market, crops will be diverted to the production of biofuels which will increase the price of food (up to the limit determined by the capacity of conventional cars to use biofuels - in the absence of flexfuel cars and a suitable distribution network). Changes in the price of oil can be abrupt and may cause increased food price volatility. Support to the biofuel industry also plays a role. Subsidies to first-generation biofuel production lower biofuel production costs and, therefore, increase the dependence of crop prices on the price of oil. Such policies warrant reconsideration."
And so the 10 international agencies offer what strikes me, by the standards of these kinds of reports, as a shockingly blunt recommendation:

"Recommendation 6: G20 governments remove provisions of current national policies that subsidize (or mandate) biofuels production or consumption."