How
Biofuels Could Starve the Poor
Forests are burned on plantations in Indonesia
to clear land to produce palm oil which is "a key ingredient in biodiesel." Source
of caption quote and photo: online version of WSJ article cited
below.
By
C. Ford Runge and Benjamin Senauer
Summary: Thanks to high oil prices and hefty subsidies, corn-based
ethanol is now all the rage in the United States. But it takes
so much supply to keep ethanol production going that the price
of corn -- and those of other food staples -- is shooting up
around the world. To stop this trend, and prevent even more
people from going hungry, Washington must conserve more and
diversify ethanol's production inputs.
THE ETHANOL BUBBLE
In 1974,
as the United States was reeling from the oil embargo imposed
by the Organization of Petroleum Exporting Countries,
Congress took the first of many legislative steps to promote
ethanol made from corn as an alternative fuel. On April 18,
1977, amid mounting calls for energy independence, President
Jimmy Carter donned his cardigan sweater and appeared on television
to tell Americans that balancing energy demands with available
domestic resources would be an effort the "moral equivalent
of war." The gradual phaseout of lead in the 1970s and
1980s provided an additional boost to the fledgling ethanol
industry. (Lead, a toxic substance, is a performance enhancer
when added to gasoline, and it was partly replaced by ethanol.)
A series of tax breaks and subsidies also helped. In spite
of these measures, with each passing year the United States
became more dependent on imported petroleum, and ethanol remained
marginal at best.
Now, thanks to a combination of high oil prices and even more
generous government subsidies, corn-based ethanol has become
the rage. There were 110 ethanol refineries in operation in
the United States at the end of 2006, according to the Renewable
Fuels Association. Many were being expanded, and another 73
were under construction. When these projects are completed,
by the end of 2008, the United States' ethanol production capacity
will reach an estimated 11.4 billion gallons per year. In his
latest State of the Union address, President George W. Bush
called on the country to produce 35 billion gallons of renewable
fuel a year by 2017, nearly five times the level currently
mandated.
The push for ethanol and other biofuels has spawned an industry
that depends on billions of dollars of taxpayer subsidies,
and not only in the United States. In 2005, global ethanol
production was 9.66 billion gallons, of which Brazil produced
45.2 percent (from sugar cane) and the United States 44.5 percent
(from corn). Global production of biodiesel (most of it in
Europe), made from oilseeds, was almost one billion gallons.
The industry's growth has meant that a larger and larger share
of corn production is being used to feed the huge mills that
produce ethanol. According to some estimates, ethanol plants
will burn up to half of U.S. domestic corn supplies within
a few years. Ethanol demand will bring 2007 inventories of
corn to their lowest levels since 1995 (a drought year), even
though 2006 yielded the third-largest corn crop on record.
Iowa may soon become a net corn importer.
The enormous volume of corn required by the ethanol industry
is sending shock waves through the food system. (The United
States accounts for some 40 percent of the world's total corn
production and over half of all corn exports.) In March 2007,
corn futures rose to over $4.38 a bushel, the highest level
in ten years. Wheat and rice prices have also surged to decade
highs, because even as those grains are increasingly being
used as substitutes for corn, farmers are planting more acres
with corn and fewer acres with other crops.
This might sound like nirvana to corn producers, but it is
hardly that for consumers, especially in poor developing countries,
who will be hit with a double shock if both food prices and
oil prices stay high. The World Bank has estimated that in
2001, 2.7 billion people in the world were living on the equivalent
of less than $2 a day; to them, even marginal increases in
the cost of staple grains could be devastating. Filling the
25-gallon tank of an SUV with pure ethanol requires over 450
pounds of corn -- which contains enough calories to feed one
person for a year. By putting pressure on global supplies of
edible crops, the surge in ethanol production will translate
into higher prices for both processed and staple foods around
the world. Biofuels have tied oil and food prices together
in ways that could profoundly upset the relationships between
food producers, consumers, and nations in the years ahead,
with potentially devastating implications for both global poverty
and food security.
THE OIL AND BIOFUEL ECONOMY
In the United States and other large economies, the ethanol
industry is artificially buoyed by government subsidies, minimum
production levels, and tax credits. High oil prices over the
past few years have made ethanol naturally competitive, but
the U.S. government continues to heavily subsidize corn farmers
and ethanol producers. Direct corn subsidies equaled $8.9 billion
in 2005. Although these payments will fall in 2006 and 2007
because of high corn prices, they may soon be dwarfed by the
panoply of tax credits, grants, and government loans included
in energy legislation passed in 2005 and in a pending farm
bill designed to support ethanol producers. The federal government
already grants ethanol blenders a tax allowance of 51 cents
per gallon of ethanol they make, and many states pay out additional
subsidies.
Consumption of ethanol in the United States was expected to
reach over 6 billion gallons in 2006. (Consumption of biodiesel
was expected to be about 250 million gallons.) In 2005, the
U.S. government mandated the use of 7.5 billion gallons of
biofuels per year by 2012; in early 2007, 37 governors proposed
raising that figure to 12 billion gallons by 2010; and last
January, President Bush raised it further, to 35 billion gallons
by 2017. Six billion gallons of ethanol are needed every year
to replace the fuel additive known as MTBE, which is being
phased out due to its polluting effects on ground water.
The European Commission is using legislative measures and
directives to promote biodiesel, produced mainly in Europe,
made from rapeseeds and sunflower seeds. In 2005, the European
Union produced 890 million gallons of biodiesel, over 80 percent
of the world's total. The EU's Common Agricultural Policy also
promotes the production of ethanol from a combination of sugar
beets and wheat with direct and indirect subsidies. Brussels
aims to have 5.75 percent of motor fuel consumed in the European
Union come from biofuels by 2010 and 10 percent by 2020.
Brazil, which currently produces approximately the same amount
of ethanol as the United States, derives almost all of it from
sugar cane. Like the United States, Brazil began its quest
for alternative energy in the mid-1970s. The government has
offered incentives, set technical standards, and invested in
supporting technologies and market promotion. It has mandated
that all diesel contain two percent biodiesel by 2008 and five
percent biodiesel by 2013. It has also required that the auto
industry produce engines that can use biofuels and has developed
wide-ranging industrial and land-use strategies to promote
them. Other countries are also jumping on the biofuel bandwagon.
In Southeast Asia, vast areas of tropical forest are being
cleared and burned to plant oil palms destined for conversion
to biodiesel.
This trend has strong momentum. Despite a recent decline,
many experts expect the price of crude oil to remain high in
the long term. Demand for petroleum continues to increase faster
than supplies, and new sources of oil are often expensive to
exploit or located in politically risky areas. According to
the U.S. Energy Information Administration's latest projections,
global energy consumption will rise by 71 percent between 2003
and 2030, with demand from developing countries, notably China
and India, surpassing that from members of the Organization
for Economic Cooperation and Development by 2015. The result
will be sustained upward pressure on oil prices, which will
allow ethanol and biodiesel producers to pay much higher premiums
for corn and oilseeds than was conceivable just a few years
ago. The higher oil prices go, the higher ethanol prices can
go while remaining competitive -- and the more ethanol producers
can pay for corn. If oil reaches $80 per barrel, ethanol producers
could afford to pay well over $5 per bushel for corn.
With the price of raw materials at such highs, the biofuel
craze would place significant stress on other parts of the
agricultural sector. In fact, it already does. In the United
States, the growth of the biofuel industry has triggered increases
not only in the prices of corn, oilseeds, and other grains
but also in the prices of seemingly unrelated crops and products.
The use of land to grow corn to feed the ethanol maw is reducing
the acreage devoted to other crops. Food processors who use
crops such as peas and sweet corn have been forced to pay higher
prices to keep their supplies secure -- costs that will eventually
be passed on to consumers. Rising feed prices are also hitting
the livestock and poultry industries. According to Vernon Eidman,
a professor emeritus of agribusiness management at the University
of Minnesota, higher feed costs have caused returns to fall
sharply, especially in the poultry and swine sectors. If returns
continue to drop, production will decline, and the prices for
chicken, turkey, pork, milk, and eggs will rise. A number of
Iowa's pork producers could go out of business in the next
few years as they are forced to compete with ethanol plants
for corn supplies.
Proponents of corn-based ethanol argue that acreage and yields
can be increased to satisfy the rising demand for ethanol.
But U.S. corn yields have been rising by a little less than
two percent annually over the last ten years, and even a doubling
of those gains could not meet current demand. As more acres
are planted with corn, land will have to be pulled from other
crops or environmentally fragile areas, such as those protected
by the Department of Agriculture's Conservation Reserve Program.
In addition
to these fundamental forces, speculative pressures have created
what might be called a "biofuel mania":
prices are rising because many buyers think they will. Hedge
funds are making huge bets on corn and the bull market unleashed
by ethanol. The biofuel mania is commandeering grain stocks
with a disregard for the obvious consequences. It seems to
unite powerful forces, including motorists' enthusiasm for
large, fuel-inefficient vehicles and guilt over the ecological
consequences of petroleum-based fuels. But even as ethanol
has created opportunities for huge profits for agribusiness,
speculators, and some farmers, it has upset the traditional
flows of commodities and the patterns of trade and consumption
both inside and outside of the agricultural sector.
This craze will create a different problem if oil prices decline
because of, say, a slowdown in the global economy. With oil
at $30 a barrel, producing ethanol would no longer be profitable
unless corn sold for less than $2 a bushel, and that would
spell a return to the bad old days of low prices for U.S. farmers.
Undercapitalized ethanol plants would be at risk, and farmer-owned
cooperatives would be especially vulnerable. Calls for subsidies,
mandates, and tax breaks would become even more shrill than
they are now: there would be clamoring for a massive bailout
of an overinvested industry. At that point, the major investments
that have been made in biofuels would start to look like a
failed gamble. On the other hand, if oil prices hover around
$55-$60, ethanol producers could pay from $3.65 to $4.54 for
a bushel of corn and manage to make a normal 12 percent profit.
Whatever happens in the oil market, the drive for energy independence,
which has been the basic justification for huge investments
in and subsidies for ethanol production, has already made the
industry dependent on high oil prices.
CORNUCOPIA
One root of the problem is that the biofuel industry has long
been dominated not by market forces but by politics and the
interests of a few large companies. Corn has become the prime
raw material even though biofuels could be made efficiently
from a variety of other sources, such as grasses and wood chips,
if the government funded the necessary research and development.
But in the United States, at least, corn and soybeans have
been used as primary inputs for many years thanks in large
part to the lobbying efforts of corn and soybean growers and
Archer Daniels Midland Company (ADM), the biggest ethanol producer
in the U.S. market.
Since
the late 1960s, ADM positioned itself as the "supermarket
to the world" and aimed to create value from bulk commodities
by transforming them into processed products that command heftier
prices. In the 1970s, ADM started making ethanol and other
products resulting from the wet-milling of corn, such as high
fructose corn syrup. It quickly grew from a minor player in
the feed market to a global powerhouse. By 1980, ADM's ethanol
production had reached 175 million gallons per year, and high
fructose corn syrup had become a ubiquitous sweetening agent
in processed foods. In 2006, ADM was the largest producer of
ethanol in the United States: it made more than 1.07 billion
gallons, over four times more than its nearest rival, VeraSun
Energy. In early 2006, it announced plans to increase its capital
investment in ethanol from $700 million to $1.2 billion in
2008 and increase production by 47 percent, or close to 500
million gallons, by 2009.
ADM owes much of its growth to political connections, especially
to key legislators who can earmark special subsidies for its
products. Vice President Hubert Humphrey advanced many such
measures when he served as a senator from Minnesota. Senator
Bob Dole (R-Kans.) advocated tirelessly for the company during
his long career. As the conservative critic James Bovard noted
over a decade ago, nearly half of ADM's profits have come from
products that the U.S. government has either subsidized or
protected.
Partly
as a result of such government support, ethanol (and to a
lesser extent biodiesel) is now a major fixture of the
United States' agricultural and energy sectors. In addition
to the federal government's 51-cents-per-gallon tax credit
for ethanol, smaller producers get a 10-cents-per-gallon tax
reduction on the first 15 million gallons they produce. There
is also the "renewable fuel standard," a mandatory
level of nonfossil fuel to be used in motor vehicles, which
has set off a political bidding war. Despite already high government
subsidies, Congress is considering lavishing more money on
biofuels. Legislation related to the 2007 farm bill introduced
by Representative Ron Kind (D-Wis.) calls for raising loan
guarantees for ethanol producers from $200 million to $2 billion.
Advocates of corn-based ethanol have rationalized subsidies
by pointing out that greater ethanol demand pushes up corn
prices and brings down subsidies to corn growers.
The ethanol industry has also become a theater of protectionism
in U.S. trade policy. Unlike oil imports, which come into the
country duty-free, most ethanol currently imported into the
United States carries a 54-cents-per-gallon tariff, partly
because cheaper ethanol from countries such as Brazil threatens
U.S. producers. (Brazilian sugar cane can be converted to ethanol
more efficiently than can U.S. corn.) The Caribbean Basin Initiative
could undermine this protection: Brazilian ethanol can already
be shipped duty-free to CBI countries, such as Costa Rica,
El Salvador, or Jamaica, and the agreement allows it to go
duty-free from there to the United States. But ethanol supporters
in Congress are pushing for additional legislation to limit
those imports. Such government measures shield the industry
from competition despite the damaging repercussions for consumers.
STARVING THE HUNGRY
Biofuels may have even more devastating effects in the rest
of the world, especially on the prices of basic foods. If oil
prices remain high -- which is likely -- the people most vulnerable
to the price hikes brought on by the biofuel boom will be those
in countries that both suffer food deficits and import petroleum.
The risk extends to a large part of the developing world: in
2005, according to the UN Food and Agriculture Organization,
most of the 82 low-income countries with food deficits were
also net oil importers.
Even major
oil exporters that use their petrodollars to purchase food
imports, such as Mexico, cannot escape the consequences
of the hikes in food prices. In late 2006, the price of tortilla
flour in Mexico, which gets 80 percent of its corn imports
from the United States, doubled thanks partly to a rise in
U.S. corn prices from $2.80 to $4.20 a bushel over the previous
several months. (Prices rose even though tortillas are made
mainly from Mexican-grown white corn because industrial users
of the imported yellow corn, which is used for animal feed
and processed foods, started buying the cheaper white variety.)
The price surge was exacerbated by speculation and hoarding.
With about half of Mexico's 107 million people living in
poverty and relying on tortillas as a main source of calories,
the
public outcry was fierce. In January 2007, Mexico's new president,
Felipe Calderón, was forced to cap the prices of corn
products.
The International Food Policy Research Institute, in Washington,
D.C., has produced sobering estimates of the potential global
impact of the rising demand for biofuels. Mark Rosegrant, an
IFPRI division director, and his colleagues project that given
continued high oil prices, the rapid increase in global biofuel
production will push global corn prices up by 20 percent by
2010 and 41 percent by 2020. The prices of oilseeds, including
soybeans, rapeseeds, and sunflower seeds, are projected to
rise by 26 percent by 2010 and 76 percent by 2020, and wheat
prices by 11 percent by 2010 and 30 percent by 2020. In the
poorest parts of sub-Saharan Africa, Asia, and Latin America,
where cassava is a staple, its price is expected to increase
by 33 percent by 2010 and 135 percent by 2020. The projected
price increases may be mitigated if crop yields increase substantially
or ethanol production based on other raw materials (such as
trees and grasses) becomes commercially viable. But unless
biofuel policies change significantly, neither development
is likely.
The production of cassava-based ethanol may pose an especially
grave threat to the food security of the world's poor. Cassava,
a tropical potato-like tuber also known as manioc, provides
one-third of the caloric needs of the population in sub-Saharan
Africa and is the primary staple for over 200 million of Africa's
poorest people. In many tropical countries, it is the food
people turn to when they cannot afford anything else. It also
serves as an important reserve when other crops fail because
it can grow in poor soils and dry conditions and can be left
in the ground to be harvested as needed.
Thanks
to its high-starch content, cassava is also an excellent
source of ethanol. As the technology for converting it to
fuel
improves, many countries -- including China, Nigeria, and Thailand
-- are considering using more of the crop to that end. If peasant
farmers in developing countries could become suppliers for
the emerging industry, they would benefit from the increased
income. But the history of industrial demand for agricultural
crops in these countries suggests that large producers will
be the main beneficiaries. The likely result of a boom in cassava-based
ethanol production is that an increasing number of poor people
will struggle even more to feed themselves.
Participants in the 1996 World Food Summit set out to cut
the number of chronically hungry people in the world -- people
who do not eat enough calories regularly to be healthy and
active -- from 823 million in 1990 to about 400 million by
2015. The Millennium Development Goals established by the United
Nations in 2000 vowed to halve the proportion of the world's
chronically underfed population from 16 percent in 1990 to
eight percent in 2015. Realistically, however, resorting to
biofuels is likely to exacerbate world hunger. Several studies
by economists at the World Bank and elsewhere suggest that
caloric consumption among the world's poor declines by about
half of one percent whenever the average prices of all major
food staples increase by one percent. When one staple becomes
more expensive, people try to replace it with a cheaper one,
but if the prices of nearly all staples go up, they are left
with no alternative.
In a study of global food security we conducted in 2003, we
projected that given the rates of economic and population growth,
the number of hungry people throughout the world would decline
by 23 percent, to about 625 million, by 2025, so long as agricultural
productivity improved enough to keep the relative price of
food constant. But if, all other things being equal, the prices
of staple foods increased because of demand for biofuels, as
the IFPRI projections suggest they will, the number of food-insecure
people in the world would rise by over 16 million for every
percentage increase in the real prices of staple foods. That
means that 1.2 billion people could be chronically hungry by
2025 -- 600 million more than previously predicted.
The world's poorest people already spend 50 to 80 percent
of their total household income on food. For the many among
them who are landless laborers or rural subsistence farmers,
large increases in the prices of staple foods will mean malnutrition
and hunger. Some of them will tumble over the edge of subsistence
into outright starvation, and many more will die from a multitude
of hunger-related diseases.
THE GRASS IS GREENER
And for
what? Limited environmental benefits at best. Although it
is important to think of ways to develop renewable energy,
one should also carefully examine the eager claims that biofuels
are "green." Ethanol and biodiesel are often viewed
as environmentally friendly because they are plant-based rather
than petroleum-based. In fact, even if the entire corn crop
in the United States were used to make ethanol, that fuel would
replace only 12 percent of current U.S. gasoline use. Thinking
of ethanol as a green alternative to fossil fuels reinforces
the chimera of energy independence and of decoupling the interests
of the United States from an increasingly troubled Middle East.
Should corn and soybeans be used as fuel crops at all? Soybeans
and especially corn are row crops that contribute to soil erosion
and water pollution and require large amounts of fertilizer,
pesticides, and fuel to grow, harvest, and dry. They are the
major cause of nitrogen runoff -- the harmful leakage of nitrogen
from fields when it rains -- of the type that has created the
so-called dead zone in the Gulf of Mexico, an ocean area the
size of New Jersey that has so little oxygen it can barely
support life. In the United States, corn and soybeans are typically
planted in rotation, because soybeans add nitrogen to the soil,
which corn needs to grow. But as corn increasingly displaces
soybeans as a main source of ethanol, it will be cropped continuously,
which will require major increases in nitrogen fertilizer and
aggravate the nitrogen runoff problem.
Nor is
corn-based ethanol very fuel efficient. Debates over the "net energy balance" of
biofuels and gasoline -- the ratio between the energy they
produce and the energy
needed to produce them -- have raged for decades. For now,
corn-based ethanol appears to be favored over gasoline, and
biodiesel over petroleum diesel -- but not by much. Scientists
at the Argonne National Laboratory and the National Renewable
Energy Laboratory have calculated that the net energy ratio
of gasoline is 0.81, a result that implies an input larger
than the output. Corn-based ethanol has a ratio that ranges
between 1.25 and 1.35, which is better than breaking even.
Petroleum diesel has an energy ratio of 0.83, compared with
that of biodiesel made from soybean oil, which ranges from
1.93 to 3.21. (Biodiesel produced from other fats and oils,
such as restaurant grease, may be more energy efficient.)
Similar results emerge when biofuels are compared with gasoline
using other indices of environmental impact, such as greenhouse
gas emissions. The full cycle of the production and use of
corn-based ethanol releases less greenhouse gases than does
that of gasoline, but only by 12 to 26 percent. The production
and use of biodiesel emits 41 to 78 percent less such gases
than do the production and use of petroleum-based diesel fuels.
Another
point of comparison is greenhouse gas emissions per mile
driven, which takes account of relative fuel efficiency.
Using gasoline blends with 10 percent corn-based ethanol instead
of pure gasoline lowers emissions by 2 percent. If the blend
is 85 percent ethanol (which only flexible-fuel vehicles can
run on), greenhouse gas emissions fall further: by 23 percent
if the ethanol is corn-based and by 64 percent if it is cellulose-based.
Likewise, diesel containing 2 percent biodiesel emits 1.6 percent
less greenhouse gases than does petroleum diesel, whereas blends
with 20 percent biodiesel emit 16 percent less, and pure biodiesel
(also for use only in special vehicles) emits 78 percent less.
On the other hand, biodiesel can increase emissions of nitrogen
oxide, which contributes to air pollution. In short, the "green" virtues
of ethanol and biodiesel are modest when these fuels are made
from corn and soybeans, which are energy-intensive, highly
polluting row crops.
The benefits of biofuels are greater when plants other than
corn or oils from sources other than soybeans are used. Ethanol
made entirely from cellulose (which is found in trees, grasses,
and other plants) has an energy ratio between 5 and 6 and emits
82 to 85 percent less greenhouse gases than does gasoline.
As corn grows scarcer and more expensive, many are betting
that the ethanol industry will increasingly turn to grasses,
trees, and residues from field crops, such as wheat and rice
straw and cornstalks. Grasses and trees can be grown on land
poorly suited to food crops or in climates hostile to corn
and soybeans. Recent breakthroughs in enzyme and gasification
technologies have made it easier to break down cellulose in
woody plants and straw. Field experiments suggest that grassland
perennials could become a promising source of biofuel in the
future.
For now, however, the costs of harvesting, transporting, and
converting such plant matters are high, which means that cellulose-based
ethanol is not yet commercially viable when compared with the
economies of scale of current corn-based production. One ethanol-plant
manager in the Midwest has calculated that fueling an ethanol
plant with switchgrass, a much-discussed alternative, would
require delivering a semitrailer truckload of the grass every
six minutes, 24 hours a day. The logistical difficulties and
the costs of converting cellulose into fuel, combined with
the subsidies and politics currently favoring the use of corn
and soybeans, make it unrealistic to expect cellulose-based
ethanol to become a solution within the next decade. Until
it is, relying more on sugar cane to produce ethanol in tropical
countries would be more efficient than using corn and would
not involve using a staple food.
The future can be brighter if the right steps are taken now.
Limiting U.S. dependence on fossil fuels requires a comprehensive
energy-conservation program. Rather than promoting more mandates,
tax breaks, and subsidies for biofuels, the U.S. government
should make a major commitment to substantially increasing
energy efficiency in vehicles, homes, and factories; promoting
alternative sources of energy, such as solar and wind power;
and investing in research to improve agricultural productivity
and raise the efficiency of fuels derived from cellulose. Washington's
fixation on corn-based ethanol has distorted the national agenda
and diverted its attention from developing a broad and balanced
strategy. In March, the U.S. Energy Department announced that
it would invest up to $385 million in six biorefineries designed
to convert cellulose into ethanol. That is a promising step
in the right direction.
C.
Ford Runge is Distinguished McKnight University Professor of
Applied Economics and Law and Director of the Center for International
Food and Agricultural Policy at the University of Minnesota. Benjamin
Senauer is Professor of Applied Economics and Co-director
of the Food Industry Center at the University of Minnesota. Petroleumworld
not necessarily share these views.
Editor's Note: This article was first published by Foreign
Affairs, May/June 2007. Petroleumworld
reprint this article in the interest of our readers. Petroleumworld
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