[Sustain] Excellent Economist Article On Biofuels

[Eric Brooks]

Hi all,

Here is a great article to share with our skeptics on the economic, 
agricultural, and land use dangers of biofuels, from the most respected 
journal on economics in the world, The Economist.

See below, or 
http://www.economist.com/finance/displaystory.cfm?story_id=9378875

Agricultural commodities


  Biofuelled

Jun 21st 2007
 From /The Economist/ print edition


    Grain prices go the way of the oil price

EVERY morning millions of Americans confront the latest trend in 
commodities markets at their kitchen table. According to the United 
States Department of Agriculture, rising prices for crops---dubbed 
"agflation"---has begun to drive up the cost of breakfast. The price of 
orange juice has risen by a quarter over the past year, eggs by a fifth 
and milk by roughly 5%. Breakfast-cereal makers, such as Kellogg's and 
General Mills, have also raised their prices. Underpinning these rises 
is a sharp increase in the prices of grains such as corn (maize) and 
wheat, both of which recently hit ten-year highs. Analysts are beginning 
to ask, as they have of oil and metals, whether higher prices are here 
to stay.

On the face of it, that is an odd question. After all, if the world runs 
short of corn or wheat, farmers can simply grow more, weather 
permitting. That is exactly what they have been doing. In the coming 
year, the International Grains Council, an industry group, estimates 
that global production of grains will reach a record of 1,660m tonnes, 
well above last year's figure of 1,569m. But demand for grain is growing 
even faster. The council reckons it will reach 1,680m tonnes this year. 
In three of the past four years, demand has exceeded supply.

The culprit is the growing use of grains to make biofuels, such as 
ethanol. Most grains are used as food either for people or for 
livestock. But the increase in human consumption has been slowing for 
decades as population growth moderates. Demand for animal feed, 
meanwhile, has grown steadily, as more people in booming countries such 
as China grow rich enough to afford meat.

Demand for biofuel feedstocks, by contrast, is soaring. The amount of 
corn used to make ethanol in America has tripled since 2000; ethanol 
distilleries now consume a fifth of the country's corn crop. And America 
is only one of 41 countries where governments are encouraging the use of 
biofuels to reduce oil consumption.

As a result, demand for grains has accelerated. During the 1990s, when 
oil was cheap and biofuels unheard of, demand grew by 1.2% a year, 
according to Goldman Sachs. But in recent years, it has increased by 
1.4%, and over the next decade, Goldman projects, it will rise by 1.9% 
annually.

Farmers are struggling to keep up. The Economist Intelligence Unit, a 
sister company of /The Economist/, projects that demand for corn, at 
least, will continue to exceed supply until at least 2009. Moreover, 
even to produce as much corn as they are now, farmers are growing less 
soya and wheat, and so pushing up the prices of those crops too. With 
all the main grains to feed poultry and livestock becoming more 
expensive, the cost of meat and eggs is rising, and so it goes on.

When demand was growing more slowly, farmers could meet it through 
gradual improvements in their yields. But to cope with today's boom, 
yields will have to rise much faster, or farmers will have to bring more 
land into production.

Both are possible. Greater adoption of genetically modified strains of 
corn and wheat, for example, could improve yields. But they are 
expensive and politically controversial. There is also quite a bit of 
fallow land to be sowed, especially in developing agricultural powers 
such as Brazil and Ukraine. But those countries are far from the biggest 
markets and their idle land tends to be found in areas with poor 
transport links. A strong price signal will be needed to overcome such 
obstacles and induce extra supplies.

But even if new land is planted, argues Jeffrey Currie of Goldman Sachs, 
it will not necessarily reduce the cost of grains. Since high oil prices 
and generous government subsidies ensure that biofuels are profitable, 
any extra grain will be used to make more of the stuff. That will not 
dent the oil price, since the volumes remain tiny compared with global 
oil consumption. Instead, the price of biofuels has risen to that of 
petrol, and the price of corn and crude oil, the main feedstocks for the 
two, have converged (see chart). For grain prices to fall, Mr Currie 
argues, either governments must pull the plug on biofuels programmes, or 
the oil price must fall.

Neither seems very likely in the near future. This week America's 
Congress is debating whether to double its targets for biofuel 
production. At the same time, the oil price rose to its highest level in 
ten months, thanks to a strike and other disruptions in Nigeria. The 
chaos in the Niger delta, it turns out, has a surprising amount to do 
with the price of eggs.


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