26 April 2008

The real crisis has yet to come (Part 2)

If, as we argue, the worst of the current "food crisis" may be over – in the short-term – if the obscene rush to turn food into fuel continues, we will over the medium to long-term be seeing massive shortages of food, precipitating a global crisis. The problems of the last two years will be seen as but a harbinger.

The devil, as always, is in the detail, and that detail is extremely difficult to find – itself a telling indicator. But, starting that the beginning, the figures tell an alarming tale. Here, we rely on an 2006 FAO report, ethanol production had expanded by 53 percent from 30 billion litres in 2000 to about 46 billion litres in 2005.

That report was based on the EU share of renewable fuels in total transport rising to 5.75 percent, when it was expected that world ethanol consumption (the favoured biofuel) would reach 54 billion litres by 2010. As we know, though, the EU is not stopping there. It current 2020 target is ten percent.

In broad terms, the FAO provides a damning indictment of that target. It estimates that the EU would need to convert about 70 percent of its agricultural land to provide that amount of energy, adding that the United States, Brazil, and Canada would require about 30, 3, and 0.3 percent of agricultural land, respectively.

At the moment though, we have an interesting situation. Ethanol production in Europe is in a state of collapse. Owing to the bizarre tax situation which allows US ethanol to undercut European-produced product, much of the supply is produced from US-grown corn (maize).

The problem here is that this situation cannot last. According to latest market reports, global maize production is currently 772 million tons, with US corn at 332 million.

Next year, the harvest is only expected to increase to 777 million tons, which will not meet the increased ethanol demand arising from the United States. As a result, it is expected that we will see a global decrease in stocks of 103 million tons. Furthermore, since corn is also used for animal feed, increased production in this sector would require replacement by sorghum, barley, oats, and wheat, creating pressures elsewhere in the supply chain.

From that, it would appear that increased European demand to meet the EU target - which has just been increased to 2.5 percent of total transport fuel consumption, as an interim step toward the 10 percent target - cannot be met from US sources.

Nor is that situation likely to improve. The week before last, President Bush proposed a new energy bill which would increase the US biofuels mandate to 162 billion litres by 2022, or quadruple the volume required under the current "Renewable Fuel Standard". This alone dwarfs the 75 billion litres previously predicted for 2020, based on earlier targets set in the United States, China, Europe, Japan and Brazil.

Brazil is a good indicator of the way things are going. Initially, EU member states though they could rely on importing some of their requirements. One place they looked was Brazil, which is planning to increase its ethanol production from sugar, producing 32.7 billion litres in 2015, as compared to 13.5 billion in 2005.

Unfortunately, Brazil intends to absorb most of its increased production domestically and is looking to export only six billion litres of ethanol per year. That would barely dent Europe's needs, which – according to one estimate - are expected to grow to 21.5 billion litres a year. For each ton of wheat, 336 litres (approx) of ethanol is produced, so this would need 63.9 million tons of wheat, nearly half the EU's total wheat harvest.

That is the measure of the scale of the EU's problem, even if the figure came from a Brazilian website. That we had to look there illustrates the extraordinary difficulty in finding hard data on the level of biofuel needed to meet the EU's ten percent quota.

The only hard figure we were able to find from commission sources, in a study dated 2001, related not to the 10 percent target, but to the original 5.75 percent quota settled at that time, applying only to the EU-15 (pre-enlargement).

The contribution from biofuels needed to meet that lower quota was estimated then to be around 17.5 Mtoe (Million tonnes oil equivalent) on which basis the 10 percent quota, calculated on the same basis, equates to 30.4 Mtoe. The 30.4 figure equates to not 21.5 but 38.5 billion litres of ethanol.

In fact, the EU anticipates that the quota will be met by a mixture of ethanol (blended with petrol) and biodiesel, but such is the lack of data that, to develop the argument, it is easier – for the time being – to work with a notional 100 percent ethanol production as a basis of calculations.

Identifying an annual requirement of nearly 40 billion litres of ethanol (or equivalent) truly points up the enormity of the task the EU has set its member states. If wheat were used as the feedstock, 120 million tons would be needed. That would absorb well over 90 percent of the entire EU wheat production and use 15.6 million hectares of prime agricultural land – or more than a quarter of the total cereal area in the EU. (Currently, the usable agricultural area of the EU-27 amounts to 183 million hectares. About 108 million is arable land, of which the cereal growing area is 59 million.)

Herein lies the huge disconnect. In its 2001 report, when the EU was considering only a 5.75 percent biofuels quota, it drew attention to the amount of set-aside available. At that time, with voluntary set-aside of 1.6 million hectares, the total stood at 5.6 million hectares.

"Given this surface of set-aside and considering only primary biomass as a function of the crop grown," said the commission, "between 4 and 15 Mtoe of biofuels would be supplied for transport uses, making for between 1.2 and 5 percent of total European petroleum products consumption."

From this, two points emerge. Firstly, the commission was effectively relying on turning the whole of the set-aside allocation to biofuel production. But, even then, much of it was already being used for a variety of industrial purposes, ranging from animal feed to hemp and even lavender and linseed production. Secondly, after the "food crisis" had taken hold last year, the commission suspended set-aside to allow the land to be used for food production.

Given the much of the land was already in use, the commission was indulging in what amounted to Enron-style triple-counting, allocating the same land to general industrial use, then to biofuel production and finally to food production.

Furthermore, the range of figures offered by the commission, on the amount of land needed, is extraordinarily wide. At its most pessimistic, we see that to produce 1.2 percent of biofuel would need 5.6 million hectares. On that basis, the ten percent quota would use up to 46 million hectares, nearly all of the total EU cereal and four times our estimate. Even at the most optimistic, the commission figures put the land requirement at over 11 million hectares.

If by now, the impression is of a confusion of figures, that is an accurate reflection of the state of play. Furthermore, the various estimates must be seen against the recent performance of the commission, in forecasting cereal yields and prices.

Having seen relatively high commodity prices in 2006, it actually forecast a record harvest for 2007 and declining prices. In fact, we saw the price of milling wheat in Rouen rise from €179 to almost €300 per ton while market prices for feed barley increased in the wake of rising wheat prices. In France barley prices have doubled since the summer of 2006, reaching €270 per ton in Rouen at the end of September 2007.

At the same time, its forecast of a total cereal production of 270.9 million tons for the year actually turned out at 255, while consumption hit 267 tons against a forecast of 268.

The commission having sold off much of its intervention stocks, this turned the EU - which has traditionally been a net exporter - into a net importer (eventually having to import 18.9 million tons), forcing the commission to take emergency action in December 2007, suspending import duties on all cereals except oats, buckwheat and millet.

What this basically amounts to is that the commission was comprehensively caught out, displaying a lack of competence that is quite staggering. And it is this same commission which is offering what amount to back-of-the-envelope calculations and indulging in triple-counting of land availability, all in an effort to assure us that its biofuel policy will have little or no impact on the price or availability of food.

If the EU was the only player in the game, this could be the case but, with biofuel having become a global obsession, the 27 member states are at the centre of an epidemic of insanity. They will be competing in a cut-throat market where the total demand will outstrip supply. The net effect can only be shortages and price hikes, with developing countries the main losers.

But, as we have seen in recent months, even marginal shortages of some commodities can have a dramatic effect on prices even in developed countries, adding significant amounts to food bills.

Despite this, the commission rejects criticsm of its policy. The huge tragedy of that is, without the insane rush to biofuels, the world agricultural system is well capable of meeting current food needs and the increases in demand for the foreseeable future. The crisis that has yet to come will be artificial, unnecessary and devastating in its effects.