How biofuels push up food prices

Critics accuse the government of surrendering to food inflation instead of combating it. The government has raised the effective procurement price (including bonus) of wheat by a whopping 21%, from Rs 700/quintal last year to Rs 850/quintal this year.

I think it is utterly wrong to pay Indian farmers less than the world price, even if it hurts urban consumers. In Chicago, the world’s biggest grain exchange, wheat costs Rs 850/quintal. Inclusive of shipping costs, the landed price of imported wheat exceeds Rs 1000/quintal. The Indian farmer deserves as much as the Chicago price.

Why is wheat so costly today? First, the whole world suffered bad harvests in 2006, so world wheat stocks fell from 148m tonnes to 121m tonnes.

Second, a weak El Nino warming of Pacific currents threatens poor global harvests again this year. Third, the world economy has been booming four years in a row, especially in Asia and Africa, boosting food demand.

But another potent but under-appreciated reason is the rise of petroleum prices, and the consequent boom in biofuels. In many countries, ethanol made from maize and sugarcane is being mixed with petrol. Also, edible oils made from soyabeans, mustard and sunflower are being mixed with diesel.

Global cultivated land cannot be increased instantly. So, crops once devoted to human consumption are being diverted to fuel production. This necessarily affects food supply and prices.

The European Union has mandated that biofuels should account for 5.75% of transport fuel by 2010. If produced entirely from European crops, this will require the diversion of 17 million hectares, one-fifth of the entire European cropped area, from food to biofuel crops.

President Bush in the US has called for cutting petrol consumption by 20% in ten years, mainly by substituting it with ethanol. Detroit car-makers have agreed that fully half their vehicles will, by 2012, be designed to run on a petrol-ethanol mixture in the ratio 85:15.

In the US, ethanol is made entirely from maize. The area under maize has shot up from 78 million acres last year to 87 million hectares this year. Ethanol is expected to swallow a quarter of this year’s US maize production. Ethanol demand has reduced maize stocks to 25-year lows relative to consumption.

No wonder the price of maize has almost doubled in the last 18 months. This in turn has pushed up the price of chickens and pork, which are typically fed on maize.

The total cultivated area in the US is rising. Even so, some land is being diverted to maize, mainly from soyabeans. The price of soyabeans has skyrocketed, not merely because of diverted acreage but also because edible oils are being mixed with diesel in many European countries, above all in Germany.

One thought on “How biofuels push up food prices

  • 2010.Nov.27 at 15:23

    This is an article i read and read and read.
    it just amazes me, how you are able to grasp, various events and factors over several time horizons and present it in such simple language and in such few words.
    Truly fantastic.
    For me this is poetry.


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