Making Our Food Fuel Isn't the Answer

Let's stipulate right now that we are not going to divert 100% of the world's corn, sugar and vegetable oil crops to fuel production. As much as drivers everywhere want cheap fuel, most want to eat on occasion, too.

While commodity optimists such as myself point out that few endeavors are more suited to technological -- read "genetic" -- efficiency gains than the conversion of existing organic matter into either food or fuel, we are facing a situation in which the energy business is exerting an increasing claim on certain of the world's foodstuffs. Even this year, U.S. ethanol production could grow to a point at which it claims nearly all of our corn exports.

I might point out as an aside some major transatlantic attitudinal differences. The Europeans at this particular conference, including a very well-versed representative of the International Energy Agency, kept returning to carbon dioxide and the global-warming issue; the Americans generally shrugged.

The Europeans have different attitudes on the genetic modification key to increased corn and sugar production as well: They fear it palpably while the Americans accept it. In sum, Europeans want all of the "green" benefits of biofuels and are not willing to accept at least one cost, genetic modification. In reality, we no doubt need to both increase the use of genetic modification and reduce carbon emissions.

Filling the Gap

If, as the presenter calculated, the world is going to need an additional 30 MMT of vegetable oil for biodiesel production by 2010, from whence will it come? In addition to soybean oil, palm oil from Malaysia and Indonesia, canola from Canada and Australia and sunseed oil from Argentina are likely sources. Each has a limited capacity, and in the case of palm oil, up to five years is required for the trees to become productive. Soybean oil will remain the marginal supply source, and this will inject far greater price volatility into the soybean market than seen in the past. A similar analysis for ethanol indicates U.S. corn will be the marginal source of supply, with consequence for prices.

Where does that leave us? The combination of high conventional energy prices and government mandates are going to put fuel claims on what had been the sole province of food claims. This means energy prices will drive agricultural prices, and the energy market's impact on agricultural prices will be far stronger and more immediate than will the food market's impact. And as seen before, any downturn in the conventional fuel market will render biofuels uneconomic very quickly.

The prospect is unsatisfying. If high prices strengthen energy's claim on food supplies, governments everywhere will intervene on behalf of their hungry citizens. If low prices torpedo biofuels' economics, governments everywhere will respond with subsidies for these industries. Only an elimination of current mandates and subsidies today will avoid these problems tomorrow, but the likelihood of this happening is near zero. Somehow I believe we will rue the day when we decided to make food and fuel substitutes at the margin.