Biofuels and food prices: Running the numbers

Clean-energy research firm New Energy Finance has waded into the "food versus fuel" debate and finds that oil is a bigger factor in rising food prices than biofuels.

New Energy Finance, which will release its report Tuesday, also finds that changing food patterns around the world, growing population, and rising input costs, such as fertilizers, are contributing to upward pressure on food prices.

Biofuels production, too, is contributing to food price inflation, but New Energy Finance said that is "far from the dominant factor." It found that areas where biofuel productions have had a significant impact were due primarily to "overly rapid application of support schemes and protectionism."

Rising food prices have led to a sharp change in tone in the biofuels industry. In the U.S., a number of senators, including presidential candidate John McCain, have called for relaxing or suspending the ethanol mandates and subsidies that are fueling an industry boom.

There have been calls to review biofuels policies in Europe as well. In a report last month, the International Monetary Fund said biofuels, among other factors, are contributing to a food crisis.

It's clear that there are a number of factors affecting food prices. New Energy Finance, which tracks investments in clean tech, sought to quantify the relative impact of the various factors. From the report:

"In grains, during the period from 2004 to April 2008, global dollar prices increased by an average of 168 percent. The rising price of oil accounts for an increase of 32.5 percent and other inputs--such as land and labor costs--contributed 7.4 percent. Dollar depreciation accounts for a further 17.9 percent. Supply and demand imbalances account for the remaining 57.7 percent, with biofuels responsible for up to an 8.1 percent increase in global average grain prices (the impact on U.S. corn was clearly above average). The biggest issues were the failure to improve yields to compensate for global population growth, along with the failure of the Australian harvest."

In food oils, such as palm and soy, the higher price of oil contributed to 18 percent of the run-up in soy prices.

Just the beginning
Rising costs of grain have hurt biofuels producers as well. Profits in corn ethanol have shrunk, while some biodiesel plants that rely on soy have been mothballed because of the sharp uptick in soy costs.

Meanwhile, a farm bill in the U.S., already passed by Congress and vetoed by President Bush, would give a boost to biofuels makers if Congress can muster enough votes for an override. The bill would result in about $1 billion worth of research and development and subsidies for renewable liquid fuels, according to an analysis by United Press International.

Corn-based ethanol has come under fire because it does not significantly reduce carbon emissions when compared with gasoline.

Ethanol advocates, meanwhile, say that cellulosic ethanol, made from wood and agricultural wastes or even municipal garbage, is a better solution.

That technology, still experimental, will benefit from the infrastructure established by corn ethanol, they say. In a piece published earlier this week, high-profile investor Vinod Khosla struck back at a Wall Street Journal editorial on ethanol.

Given what's at stake--food and energy--the biofuels debate, hopefully informed by good analysis, is not likely to quiet down.