IMF calls for US/EU to lift tariffs on biofuels from the South

Economists, development thinkers, energy experts, and environmentalists alike have all been calling for the US and the EU to lift their tariffs on biofuels produced in the Global South. Likewise, many are demanding these wealthy countries abandon their subsidies for unsustainable and inefficient biofuels like corn ethanol and rapeseed biodiesel - these subsidies benefit large wealthy farmers, at the expense of millions of small peasants and the environment.

Now the International Monetary Fund, in its Spring 2007 World Economic Forecast, repeats this call. In the report 's segment on "Recent Developments in Commodity Markets" there is a sub-section titled "Food and Biofuels."

It notes that food prices (as measured by its own food price index) rose by 10% in 2006, driven partly by a poor wheat crop in certain countries and high energy prices (see below), but also by (mandated) demand for heavily subsidised and tariff protected biofuels in the US and Europe.

The forecast states that prices of crops like corn and soybeans, which are the main feedstocks for ethanol (US) and biodiesel (Europe), respectively, should: (1) continue to rise and (2) begin moving in line with the price of crude oil, which is currently the case with sugar because of its role in the Brazilian ethanol industry.

But it is the sub-section's final paragraph that best captures IMF's view of current US and European biofuels policy. It reads as follows:

Many energy market analysts also question the rationality of large subsidies that benefit farmers more than the environment. While new technology is being developed, a more efficient solution from a global perspective would be to reduce tariffs on imports from developing countries (for example, Brazil) where biofuels production is cheaper and more energy efficient.

This way, the IMF joins the ranks of the most senior energy analysts of the International Energy Agency - whose General Chief and Chief Economist both came to the same conclusion - , of the researchers at International Food Policy Research Institute, of the Global Subsidies Initiative and of the World Bank's bank chief, who have all noticed the detrimental effects of US/EU subsidies and tariffs, and who understand the opportunity for the Global South to produce biofuels that make more sense because they are far more efficient (up to 8 times more efficient than corn ethanol), beneficial to the environment, can fuel local economies and effectively contribute to the fight against climate change.

In this context it is time to repeat some basics:

• The way the US and the EU are proceeding with their approach to ethanol and biodiesel will inevitably place inflationary pressures on domestic and global food prices, which will result in tensions at home and abroad.
• The main reasons for pursuing ethanol in the manner that it is being pursued in the US/EU right now are: (1) to placate the farming lobbies and earn valuable political support; (2) to placate the wean-America-off-foreign-oil lobby; (3) to placate the soft domestic environmentalist lobby which doesn't look further than its own backyard
  
• Not letting emerging markets export ethanol tariff-free to the US/EU is bad economically for a lot of people, from poor Brazilians, Africans and Asians to poor and middle-class Americans and Europeans for who mobility and cheap fuels are very important socially and economically
  

High energy costs push food prices up
To add complexity, the IMF report also points at the effects of rising crude oil and natural gas prices on agricultural production as such. It shows (table, click to enlarge) that, in the US, energy costs make up between 9.0 and 23.1% of total production costs of grains like wheat, corn and soybeans. Corn is most energy intensive (because it requires vast amounts of nitrogen fertiliser) and if used as a biofuel feedstock, the costs of this inefficient fuel will likewise rise with crude oil/natural gas prices. Importantly, this aspect also shows why biofuel production in developing countries, where green fuels can be made from crops that require far lower energy inputs (like sugarcane, cassava, jatropha or palm oil), can play a great role in lowering food production costs.

If farmers in the Global South, where food insecurity is rampant, were to produce biofuels en masse that would be used in agriculture itself (in tractors, harvesters, trucks, irrigation engines...), they could partially offset the effects of high energy prices on food production. This logic is a bit of a taboo amongst some, who refuse to see that agriculture and food production require many energy related inputs. Without low-cost energy, there is no low-cost food. In short, it makes sense to consider biofuel production in the South in light of boosting food production:
bioenergy :: biofuels :: energy :: sustainability :: ethanol :: biodiesel :: subsidies :: tariffs :: EU :: US :: developing world ::

But back to corn ethanol. About the recent news that US farmers are planning to plant more corn acreage next year, the IMF has this to say:

For 2007, the United States Department of Agriculture is estimating a record corn crop, as planting areas increase by 10 percent from 2006 at the expense of soybeans and cotton. Still, demand fueled by the increase in domestic ethanol production capacity is expected to outpace the production rise.

IMF economists also point out that the price of "partial substitutes" such as wheat and rice, as well as the price of meat and poultry, should trend upwards as a result of higher corn and soybean prices.

Conclusion
It is time for all of us - consumers, producers, investors and analysts - to be more open about the truly global effects of rising energy costs on food prices, and about the way biofuel production is currently organised. It makes no sense to subsidize and protect a small group of farmers at the detriment of not only millions of poor people in the South but of ordinary middle class consumers in the North.

Biofuels should be produced there where they can be produced in an efficient way, that is in sub-Saharan Africa, South America and South East Asia. We need to kickstart an industry there, because these fuels can help mitigate climate change, relieve poverty and - as indicated by the effects of energy prices on food production - increase the food security of poor people by lowering agriculture's dependence on costly fossil fuels.

In the South, biofuels production should start on two fronts simultaneously with two aims that do not contradict each other: (1) locally, in order to offset high energy costs in food production and to make basic mobility more affordable to the poor, and (2) with the aim of exporting to markets in the North, as a way to mitigate climate change and energy insecurity. These two simultaneous initiatives are synergetic and result in a win win situation for consumers in the West, and for the millions of people who face food shortages and poverty in the South. For this reason, biofuels investors should dare to think of their global responsibilities and dare to venture into Africa, Latin America and South East Asia, instead of digging themselves in behind the subsidy and tariff walls of fortress America and Europe.

More information:
The still highly relevant FAO publication on the energy costs of agriculture in Africa: Future energy requirements for Africa's agriculture - Rome, 1995.

IEA: World Energy Outlook 2004 Edition [*.pdf] - see Chapter 9 on "Energy and Development" for an overview of how biofuels could offset some of the impacts of high fossil fuel prices that are detrimental to the economies of developing countries.

IMF: World Economic Outlook - Spillovers and Cycles in the Global Economy [*.pdf] - April 2007.