Food vs. Fuel

Sugar Cane Field
Ethanol fuel from sugar cane has surely been
an economic benefit to the Brazilians.

Editor’s Note: There are compelling reasons why it is in the national interest of Americans to grow biofuel. It creates a significant disbursed indigeonous source of vehicle and heavy equipment fuel, helping in the market to balance spot prices for imported oil. Not just the USA, but many nations who invest in biofuel achieve, if not energy independence, greater energy security and more diversified energy sources. Biofuel is good business for many good reasons.

Biofuel in the arid regions of the world can take the form of hardy “pioneer” trees, that act as windbreaks and stablize soil. Eventually they become significant sources of water retention and additional less hardy trees and plants can then be sown. The jatropha tree is an example of such a plant. It is drought tolerant and yields perennial oil nuts.

The vast canyons that run in for hundreds of miles off the Caribbean and Atlantic coastlines of South America, whose rivers run northwards to the ocean, could be deforested, their verdant rises filled with massive terraced plantations of genetically engineered super high-yield biofuel plants. Would this fuel the world, or would the rains stop coming in from the sea?

And what of the savanna in Africa, so vast and verdant its extent is almost incomprehensible to a Westerner – savanna that sweeps across a continent nearly as large as Asia, with only one billion people living there? Should they plant biofuel? Won’t this encourage development and prosperity? Author Louis Strydom’s reasoned recommendations in the report to follow are sound.

As for food vs. fuel, if biofuel is truly profitable for a region, then these earnings presumably would invest in the prosperity of the region, in-turn generating increased local investment per capita in food supplies. Any long-term player in a subsidized market should carefully consider the future scenarios, and design sustainability into their business so it can survive subsidy free. Carbon-based payments from the global north should buy the rainforests to preserve them, not to chop them down for fuel. – Ed “Redwood” Ring

China’s Food vs. Fuel – Why this debate is important, and why it is not.
by Louis Strydom, November 5, 2007

Renewable fuel has always been of interest, but has historically not been commercially viable at low fuel prices.

At high fuel prices and due to climate change there has however been an upsurge in the interest in renewable fuel.

The renewable fuel interest can be grouped into the following segments:

1) Governments

a. For fuel security

b. For the environment

2) Social interest groups for the environment

3) Producers of renewable fuel feedstocks

a. Existing farmers of feedstocks that can be used for fuel.

b. New entrants to the market who produce food stocks that can be used for fuel.

c. New entrants to the market who supply feedstocks that can only be used for fue.

4) Producers of Renewable fuel

If we look at the impact of each of these segments and list the main costs and benefits that the actions of each group provides we can summarise as follows:

1) Governments

Switchgrass for Biofuel
Switchgrass, which is a fuel-only crop,
requires cellulosic extraction of its ethanol
in order to produce high yields.

a. Fuel Security

We need to distinguish here between the intention of the government and realistic ability to secure fuel security. First, if we say a government seeks fuel security that clearly implies that the fuel from crop to market would be under control of the government. It therefore would justify the motive to try and produce all the fuel under the government’s control, which would imply the fuel, would have to be produced in country. However, the question then falls back to whether that country has the ability to produce such renewable fuel in country given the local agricultural system dynamics.

As we now live in a global village, the impact of any significant shift in agricultural output use would affect other parties and countries in the world. Without going into details this is exactly what happens if you try and subsidise local production of biofuel from corn which drives up local demand for corn and consequently the effect spills over into the rest of the world which leads to the fact that corn prices skyrocket. Similar effects are visible throughout renewable feedstocks that can be used either for food or fuel once you create a synthetic demand by way of subsidies or legislation you impact market demand and prices. The net result here is that this is in no way whatsoever a food versus fuel debate but simply a debate on what the effects of legislation, subsidies and government intervention has on markets; this is why we have noble prize winners in economics who try and explain why governments should not directly intervene in markets.

b. Environment

As is the case of fuel security, the intention of environmental security or environment improvement is pure in nature, however, to institute policies that directly affect markets simply lead to market demand increasing, resulting in market price pressure and thus market insecurity which is synthetically created by such interventionist policies. Again, this makes a strong case for disinterventionist policies by government when it comes to fuel production targets for green fuel which consequently affects feedstock prices (such as the rise and rise of palm oil prices). Again this is not a matter of food versus fuel but synthetic impact on market prices by government interventionist policies.

2) Social Interest Groups

Firstly it is greatly due to the tireless pursuit of these groups that climate change and the correlation of interest in renewable was formed. This has certainly resulted in renewable fuels surging to the forefront of interest. What is however very hard to ascertain if these groups have resulted in the current policies of Governments in which case, the net result is more instability than benefit to the food markets, again their support is well intended, but if correlated with government reactions as described above then more specific lobbying is required to stay aware from the above policies and rather try and refocus on the producers of renewable resources and support to these parties.

3) Producers of renewable fuel feedstocks.

There are actually three subsets of producers and their impact and reactions to the increased interest in renewable fuels differs.

a. Existing farmers of feedstocks that can be used for fuel.

These include existing coconut growers, palm oil plantations, corn growers and so forth. These groups are simply reacting to existing demand and supply forces and therefore when scenarios like government reaction affect demand for their products upward, they simply benefit from increased income. The parties can be seen as neutral parties as they consistently supply their products and simply sell to the highest bidder. In this context these parties certainly do not participate in the food versus fuel debate.

Nigerian Cassava
Nigerian Cassava
A flex crop, good for food or ethanol.

b. New entrants to the market who produce food stocks that can also be used for fuel.

These farmers focus on similar products as the above parties. Their expansion I simply centred around the logic that farming has become profitable in feedstock that can be used either for food or fuel. Again these parties will not act as market makers, but rather market takers. In this regard they will simply sell to the highest bidder, regardless if that is a fuel or food consumer. The focus then turns directly back on to the buyer and their motives for buying, which in turn directly back on to whether subsidies or economics provide incentive for the buyer to consume the crop as a fuel or as a food. Again, the food versus fuel debate can quite easily be removed from the discussion by simply asking as to whether the market is being created by government intervention, as is the current case, or by plain market forces, which does not appear to be the case.

c. New entrants to the market who supply feedstocks that can only be used for biofuel.

These are specialist producers who use crops such as Pongamia or Jatropha often with the interest of either developing own plantation or combining this with an outgrower program or doing a combination of the two. The first question one would need to ask of these parties is how do they affect the local food security. Is the areas of their operation currently food neutral or positive (thus producing more or equal food than being consumed), or is the area food negative (thus consuming more food than being produced. If negative the one should determine if the consumption of the area can be maintained from another area in the world, and if it would not be more important to increase food security to neutral or positive before commencing fuel crop production.

The questions raised by the prospect of biofuel-only crops replacing food crops in food-neutral regions are exceptionally important, because today many very poor parts of the world do not have food insecurity in poor rural areas. Such areas would include certain parts of Africa where the environment is exceptionally fertile for most of the year and the local populace are therefore certainly not starving by way of food from crops this I can affirm from personal experience as I have travelled across a number of areas by road and very rarely see signs of malnutrition in such areas.

Jatropha Plantation
Jatropha is a fuel-only crop, doing well in harsh
arid conditions. Jatropha’s best yields, however,
are where food crops would also thrive.

In cases therefore where food security is neutral or positive and land is not currently under development it would therefore raise the question as regards what to do with the land should we plant food or fuel renewables. Allow me to say that the greatest crime what not be to develop the land at all (this is of course in a sensitive way that takes care of biodiversity and the environment which is a totally separate issue from a strictly food versus fuel debate). Development will bring economic development and prosperity to an undeveloped area and would be to the benefit of all people. So if the question then is what should be developed on the land logic would then dictate that the most economically viable crop should be produced, irrespective of whether it is used for food or fuel for the simple reason that the investment pool for agriculture projects is somewhat smaller than for industries such as mining.

A high yielding project would greatly assist to bring development to an area and this would lead to a socially and economically responsible investment not focusing on what the crop is used for, but what benefits the projects (and hopefully if a socially acceptable project then what benefits the people of the area most. In this regard it is the writers opinion that a blend of pure fuel and ‘flex’ crops (used for fuel or food) would be the most justifiable long-term investment. This would mean that a balanced output can be provided and the output can be switched between the two uses to provide a more stable income.

There is another reason why it is safer to spread the project between pure fuel and ‘flex’ crops, and this reason is agricultural subsidies. Put very simply, it very often does not pay to produce pure food crops in the third world as very often you have to compete against highly subsidised markets, that is ultimately the reason why the World Trade Organisation is consistently struggling to bridge this exact problem in the various trade rounds held to address the problem. This problem cannot be expected to disappear for a very long time still, and in this regard it therefore provides a far sounder project profile with reduced risk by at least planting partially flex crops and partially pure fuel crops which are not affected by agricultural subsidies. That way if food prices synthetically skyrocket then the project benefits, and if they drop you can still sell your crop for fuel, thus providing a balanced investment.

4. Producers & Refiners of Renewable Fuel

This group simply provides a conversion function dependent on one hand on feedstock supply and on the other hand for a viable market. Often however the risk is that the feedstock price is driven by support for the off-take segment to which the fuel producers deliver, and if this is affected as described in the government impact section, then they directly need to drive up the feedstock prices which means they needs further government support to remain at viable levels of off-take prices. The greatest danger here is that these producers along with government support can fall into a negatively reinforcing loop by consistently requiring more and more government support as the feedstock prices consistently get driven up, which can potentially bring food from fuel production to a total market collapse if subsidies are withdrawn for these producers. The contra argument would be that if the fuel producers seek lowest cost advantage and structure their investments on that basis (which would mean that they would need to be as close from crop to market as possible) and therefore possibly relocate given that they then produce an international commodity fuel and not biofuel anymore they might find a more stable, reliable and cost effective market.

Oil Palms
Burgeoning plantations of oil palms are an
example of how subsidized biodiesel is
generating massive rainforest destruction.

Whether for food security or for environmentalism, intervening or creating synthetic prices in the market for food securities is creating food instability.

Certainly seeking optimal areas where the optimal crop yields can be sought and seeking a blended strategy of pure fuel and flex feedstocks provides as safe strategy against such risks, as the investors will be able to capitalise on their dual position.

Synthetic prices also create a dangerous position for pure fuel refiners if they do not focus on low cost production strategy and stick to as short as possible a cycle from crop to market as it means your political risk to the project is immense as if the government withdraws support for market prices your project viability is significantly eroded.

Further, if fertile areas can be accessed and developed this provides benefit for the local area and therefore social upliftment flexible crop strategies can greatly impact the viability of these investments. And if return on investment both for the community and investor is the prime objective, why then could it be possibly justifiable to launch the main centre of a commercial investment into marginal land. Yes of course, if there is some economic return it could be considered to develop such marginal land, but surely any investor would primarily be interested in good economic return.

It is unlikely that marginal land would cater for such rate of return requirements, more likely these projects would be social, and if they are social, then there is a real case for government intervention to address social development and not to affect markets. Food versus fuel is not the issue then, the issue is renewable policy for fuel and flex feedstocks from governments both in the first and the third world.

Louis Strydom Portrait

About the Author: Louis Strydom is an expert in new venture creation and project finance with wide experience on projects in the developing world. One of Strydom’s main projects for the last year has been conducting a pre-feasibility study and promotion of a 230,000 acre site for a Jatropha plantation and biodiesel refinery in Kenya. Previously he was Senior Vice President of Project Finance at Decillion – a company listed on the Johannesburg Stock Exchange. Other positions included Senior Economist managing the Credit Policy and Risk Management division of the Export Credit Insurance Corporation of South Africa. Prior to that he was a Director with Triumvirate responsible for Marketing and Consulting on Crisis Management. Strydom also has extensive experience in short term insurance with American International Group on fire/casualty risks, niche products and political risks in Africa, Europe, the Middle East, UK and USA.

Read & Post to Biofuel Forum
Email the Editor about this Article
EcoWorld - Nature and Technology in Harmony

Leave a Reply

You must be logged in to post a comment.