The Hindu : National : Growing bio-fuel demand may raise farm commodity prices

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Thursday, Jul 05, 2007
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Growing bio-fuel demand may raise farm commodity prices

Gargi Parsai

In the U.S., maize-based ethanol output to double
Importing countries concerned over higher prices

NEW DELHI: Increased demand for bio-fuels is causing fundamental changes to agricultural markets that could drive up world prices for many farm products, according to a new report published jointly by the Organisation for Economic Cooperation and Development and the Food and Agriculture Organisation of the United Nations.

The OECD-FAO Agricultural Outlook 2007-2016 says temporary factors such as droughts in wheat-growing regions and low stocks explain, to a large extent, the recent increases in farm commodity prices.

But on the longer term, structural changes were under way which could well maintain relatively high nominal prices for many agricultural products over the coming decade. Reduced crop surpluses and a decline in export subsidies are also contributing to these long-term changes in markets.

However, more important is the growing use of cereals, sugar, oilseed and vegetable oils to produce fossil fuel substitutes, ethanol and bio-diesel.

This is underpinning crop prices and, indirectly through higher animal feed costs, also the prices for livestock products. In the United States, annual maize-based ethanol output is expected to double between 2006 and 2016.

In the European Union the amount of oilseeds (mainly rapeseed) used for bio-fuels is set to grow from just over 10 million tonnes to 21 million tonnes over the same period.

In Brazil, annual ethanol production is projected to reach some 44 billion litres by 2016 from around 21 billion litres at present. Chinese ethanol output is expected to rise to an annual 3.8 billion litres, a 2 billion litres increase from current levels.

The report points out that the higher commodity prices are a particular concern for net food importing countries as well as the urban poor.

And while higher feedstock prices caused by increased bio-fuel production benefits feedstock producers, it means extra costs and lower incomes for farmers who need the feedstock for animal feed.

The Outlook also says trade patterns were changing. Production and consumption of agricultural products in general will grow faster in the developing countries than in the developed economies — especially for beef, pork, butter, skimmed milk powder and sugar.

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