World Bank report could undermine biofuel support

from Reuters

By Lesley Wroughton - Analysis

WASHINGTON - A leading World Bank economist's claims that biofuels are a major cause of soaring world food prices could further undermine support for the alternative fuel worldwide and cause tensions with the White House, which fervently supports the new industry.

The draft report by the World Bank's top agricultural economist, Don Mitchell, estimates that the growing use of food for fuel, combined with low grain stocks, market speculation and export food bans, contributed as much as 75 percent of the 140 percent rise in prices between January 2002 and February 2008.

The remainder of the increase is due to a weakening U.S. dollar, higher energy prices and related increases in fertilizer costs, he said.

"Increased biofuel production has increased the demand for food crops and been the major cause of the increase in food prices," said Mitchell, who is widely respected for his work on agricultural policies and production.

Mitchell's preliminary finding of 75 percent has sparked a heated debate because it goes beyond most other estimates.

So far, estimates have ranged between 2-3 percent, by the Bush administration, and up to 30 percent by the U.N. Food and Agriculture Organization.

There is growing concern the U.S. ethanol industry is a big part of food inflation, with the sector on tap to buy up to one-third of the U.S. corn crop -- a grain normally used for food and livestock feed.

According to Mitchell, growing biofuels production is the main reason for the rise in food prices.

He said export bans and speculative activity increased as a result of rising prices and would not have occurred without higher costs. Also, higher energy and fertilizer prices would have increased crop output costs by about 15 percent in the United States and by less in other countries with less-intensive production practices.

Moreover, successive droughts that ravaged wheat crops last year in Australia would not have had a large impact because they reduced global grain exports by just 4 percent and other exporters would have been able to offset those losses.

"Without the increase in biofuels, global wheat and maize stocks would not have declined appreciably and price increases due to other factors would have been moderate," he said.

Still, Mitchell's thinking is not far off that of colleagues at the International Monetary Fund, who recently concluded that a "significant part of the latest jump in food prices can be traced directly to biofuels policy."

Concerned that rising food prices have increased poverty and hunger, the report is part of a effort at the World Bank to find a more accurate picture of the role biofuels are playing in the rise of food prices.

It has also thrust the development agency, which considers itself a neutral voice on global issues, into an intensely political debate.

FUEL OR FOOD

The Renewable Fuels Association, a trade group for the ethanol industry, argues that it is a stretch to put 75 percent of the blame for rising food prices on biofuels.

National Biodiesel Board Chief Executive Joe Jobe said the addition of biofuels to U.S. energy supply is the only thing keeping prices from rising even more quickly.

"Credible fact-based research has demonstrated repeatedly that soaring petroleum costs are the main culprit behind higher food prices," Jobe said.

Kimberly Elliott, a senior fellow at the Washington-based Center for Global Development, said the debate around biofuels should not be about numbers but should focus on the broader issue of whether current biofuels policies work or not.

"It doesn't really matter if biofuels' contribution to the food price crisis is large or small because promotion of the current generation of biofuels doesn't make any sense anyway," Elliot said.

"It is premised on energy security and mitigating global warming, and it's not achieving either of those things. Also, new scientific research on the global warming front suggests it is actually making things worse because of the land use changes," she added.

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