Food or fuel … or both?

The Southern African Biofuels Association has released a briefing paper challenging arguments that bioethanol production would worsen food inflation and reduce food security. Glenneis Erasmus gives a summary.
Issue Date: 12 October 2007

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The Southern African Biofuels Association has released a briefing paper challenging arguments that bioethanol production would worsen food inflation and reduce food security. Glenneis Erasmus gives a summary.

Tito Mboweni, governor of the SA Reserve Bank, recently raised questions about the possible threat the biofuel industry poses to food security. In reply, The Southern African Biofuels Association (Saba) has submitted a paper to Mboweni claiming arguments against biofuel production show little real insight into the challenges or opportunities the sector poses.

The paper was prepared by Andrew Makenete, general manager of large businesses at Absa and president of Saba; Wessel Lemmer, senior economist at Grain SA; and Julia Kupka, an analyst at Absa’s AgriBusiness division. It emphasises the importance of a multifeedstock approach to sustainable biofuel production. This will allow producers to select crops best suited to their production environment, while helping minimise logistic costs, the highest input of an ethanol plant after feedstock and energy costs.

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A biofuel policy prohibiting maize as a feedstock, for example, will result in ethanol being blended only in KZN, as it’s too expensive to truck sugarcane or ethanol inland. To be viable, a plant must therefore be located to minimise the costs of trucking in feedstock and trucking out ethanol. The experts weigh in The paper counters arguments scapegoating biofuel for the huge surge in international and local food prices – especially for maize – with the latest Agricultural Outlook results. The outlook attributes rising commodity prices to lower opening stocks due to EU and US policy changes; increased demand, especially from China and India; drought; and market inefficiencies.
The relative weight of these factors, particularly the demand of maize for ethanol, is as yet unclear. The outlook cautions that it would be premature to attribute a long-term rise in commodity prices to biofuel production.

V arious senior agricultural role-players agree. The paper specifically refers to Carole Brookins, former chairperson of the World Bank, who at last year’s International Food and Agribusiness Management Association conference in Italy warned that current global food inflation rates shouldn’t be mistaken for hyperinflation, but taken as evidence of a structural change in the agricommodity market. The paper also quotes Marianne Fischer-Boel, the EU Agricultural Commissioner, who attributes the current price squeeze on grain supplies to bad weather in the EU and rising demand in East Asia, rather than biofuel production. America swings world markets The paper highlights the impact of US ethanol import protection on the international market. These protections distort the market, preventing US refineries from sourcing ethanol from locations where it can be produced more cheaply. They have no incentive to seek cheaper feedstock or use a range of feedstocks, which would reduce the acute demand for maize.

A study by the Centre for Rural Development in the US proposes that maize-to-ethanol production could therefore lead to a 10% increase in food retail prices in the US, and other countries given US dominance of world agricultural markets. Saba’s paper counters that this market distortion wouldn’t impact so severely on countries, such as SA, where maize can be grown sustainably without protections. The Saba paper acknowledges that maize-to-ethanol production contributes to higher animal feed costs and hence to higher US food prices. But, it proposes that this is mainly because, in the US, distillers dried grains and solubles (DDGS) – a byproduct of the maize-ethanol process – is directly substituted for grain in feed rations, as sunflower meal isn’t freely available and hominy chop is unavailable.

In SA, by contrast, there’s a shortage of quality protein in the feed market. DDGS could be used to supplement imported, expensive soya oilcake and feed components such as hominy chop and maize gluten meal. Here, DDGS will be able to compete with other feed components such as hominy chop, wheat bran, maize gluten feed and sunflower oilcake. Except for sunflower oilcake, these are all below the maize price in SA. According to the paper, every ton of maize used to produce ethanol will yield some 300kg of DDGS, sending about 30% of the maize used to produce ethanol back to the food production process as animal feed. This could lower meat and dairy production costs and help keep food inflation within the national inflation targets. Biofuel and SA: the perfect match?

The paper proposes that ethanol production, implemented correctly, could actually contribute to food price stability. It argues that the limited market for SA maize – local consumption is stagnant at 9 million tons, while production potential is around 12 million tons without undue pressure on natural resources – renders SA maize prices extremely sensitive to supply and demand (see Figure 1). SA production isn’t subsidised, rendering local producers extremely vulnerable to low commodity prices. To reduce vulnerability, producers drop production when prices are low. Thus, planting decisions are often divorced from agroclimatic factors such as rainfall and production potential. Establishing a biofuel market could help address this situation. The paper proposes that if a market for feedstock is established through a “supportive incentive dispensation for ethanol plants”, medium-term local demand for maize will increase to around 12 million tons. This should ease maize price volatility, ensuring that the country’s full maize-growing potential is exploited. This could contribute to food security by stabilising food prices. The paper also addresses claims that SA doesn’t have the potential to increase production. The area under maize has declined by 2 million hectares since 1970, primarily due to the declining profitability of maize production.

Yet SA currently produces far more maize than 30 years ago due to developments in biotechnology and improved crop-protection remedies. The paper refers to a study by the Copernicus Institute which found that Southern Africa has the highest potential for energy-crop production of all major world regions, due to the large areas of suitable cropland and the low productivity of existing farming systems. To unlock this potential, biofuel plants would have to secure their supply to energy crops, perhaps by giving farmers shares in ethanol plants. Farmers will accordingly have two markets on which to sell their maize. Free-market principles will determine the flow of feedstock supply and maize-to-ethanol projects will decrease the volatility of food prices.

Heavily subsidised and protected US projects would also impact less on SA prices. This type of project structuring benefits emerging farmers by opening new market opportunities to them. According to the Copernicus Institute’s study, regions such as the former homelands, which all underuse agricultural production, would be ideally suited for, especially, grain-based ethanol production. Likewise, the Agricultural Research Council estimates that even if only underused arable communal land is used for biofuel production, it may be possible to cultivate 5 million hectares of grain sorghum, 4 million hectares of sunflower, 3 million hectares of maize or 2 million hectares of soya (see Figure 2). According to Saba, the biofuel industry is then not a threat to South African food security, but a potential boost for the SA maize industry. E-mail Saba at [email protected] or visit |fw