Policy Wise

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In his column in The Times of India, Swaminathan S. Anklesariya Aiyar makes an interesting observation,

But another potent but under-appreciated reason is the rise of petroleum prices, and the consequent boom in biofuels. In many countries, ethanol made from maize and sugarcane is being mixed with petrol. Also, edible oils made from soyabeans, mustard and sunflower are being mixed with diesel.

Global cultivated land cannot be increased instantly. So, crops once devoted to human consumption are being diverted to fuel production. This necessarily affects food supply and prices.

The European Union has mandated that biofuels should account for 5.75% of transport fuel by 2010. If produced entirely from European crops, this will require the diversion of 17 million hectares, one-fifth of the entire European cropped area, from food to biofuel crops.

President Bush in the US has called for cutting petrol consumption by 20% in ten years, mainly by substituting it with ethanol. Detroit car-makers have agreed that fully half their vehicles will, by 2012, be designed to run on a petrol-ethanol mixture in the ratio 85:15.

In the US, ethanol is made entirely from maize. The area under maize has shot up from 78 million acres last year to 87 million hectares this year. Ethanol is expected to swallow a quarter of this year’s US maize production. Ethanol demand has reduced maize stocks to 25-year lows relative to consumption.

No wonder the price of maize has almost doubled in the last 18 months. This in turn has pushed up the price of chickens and pork, which are typically fed on maize[link]

Of course, it’s not only environemental concern which is fuelling the drive towards biofuels. The prime mover of course is rising fuel prices and the need for energy security. It would be interesting to see how this works out. Perhaps, we would see a further increase in the prices of food items. Upto a certain level, it may not always be a bad thing as it’s essential that farmers get a renumerative price for their produce. Far too many times, farmers are short-changed in the name of fighting inflation.

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