The Hindu Business Line : Cultivating controversy

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Cultivating controversy

G. Chandrashekhar

While technology and subsidy together have heightened agricultural crop production prospects in the last 10 years, the ongoing biofuels revolution — traditional food crops diverted for fuel purposes — has catapulted global markets onto a new trajectory in terms of commodity utilisation and prices.

The fortunes of the biofuels industry are intertwined with crude oil prices and government policies to support what is called green fuel or clean fuel.

The general consensus is that there is unlikely to be substantial relief from high food prices anytime soon.

It is axiomatic that supplies invariably respond to prices, sooner or later. Current high prices would, in course of time, result in higher food output.

But given the healthy rate of global economic growth, and driven especially by consumption growth in large developing countries, there is unlikely to be any marked let-up in food demand in the coming years. Therefore, the world will have to produce more agricultural crops to meet growing demand from the food, feed and fuel sectors.

Meanwhile, poor countries that are net food importers are likely to be hit hard by high food prices. No wonder, the debate whether food should be diverted for fuel when millions in the world are hungry has taken an ethical dimension.

However, ethical considerations are most unlikely to override strong commercial considerations.

Environment sustainability

Another issue raised in the context of biofuels promotion is environmental sustainability.

If larger volumes of food crops are burnt as fuel, the world will have to bring more and more land under commercial cultivation.

This, in turn, may result in deforestation and loss of habitat, something that goes contrary to the very objective of promoting biofuels — environment sustainability.

Government support is critical to the growth of the biofuels sector. In a number of countries, government policies have spurred growth in production and utilisation. Private investment has readily identified the growth opportunity provided by favourable policies. In other words, government’s engagement is a pre-requisite.

The biofuel market drivers vary from country to country and region to region. However, some elements of the common theme include:

Energy security: Countries are desirous of gradually moving away from crude oil so as to retain energy autonomy. The uncertain geopolitical situation in West Asia (major region for mineral oil supplies) exacerbates supply and price risks which governments want to overcome.

Environment concerns: As global warming and climate change become more pronounced, countries desire to gradually move away from polluting and finite fossil fuels to cleaner biofuels from renewable sources;

Support to agriculture: Biofuels demand considerably improves the marketability of crops and brings more remunerative returns to growers. Higher rural incomes would result in enhanced demand for a wide variety of goods and services as also lead to rural development and prosperity.

There is sufficient empirical evidence to show that often the world’s poor are in rural areas and engaged in agriculture and related activities. Biofuel sector development can lift some of them out of poverty.

Pressure on farm support front

Another reason for developed economies to pursue biofuels promotion through supportive government policies is the pressure on them in the ongoing World Trade Organisation negotiations relating to agricultural subsidies.

Developing countries are pressing developed nations to substantially reduce farm support (over $370 billion in 2006).

By allowing farm prices to rise by encouraging biofuels, the developed countries can show lower subsidy payment. This will strengthen their bargaining position vis-À-vis developing countries at the WTO talks.

Importantly, so long as the crude market stays strong — prices at over $75-80 a barrel — the support for biofuels will continue.

On current reckoning and taking into account factors such as global growth prospects, huge growth potential in Asia and continuing large-scale dependence on fossil fuels for energy supplies, the mineral oil market is unlikely to witness any substantial correction anytime soon.

In other words, at least for the foreseeable future, biofuels are here to stay. This will have implications for global agribusinesses.

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