[This post was first published in the Fairfax NZ Sunday Star Times on 21 September, 2014]
There is an inevitable tension between using crops for biofuel or for food. In working out the capacity of the world to feed itself in the future, the demand for biofuel is an essential part of the equation.
In the last ten years, the global quantity of biofuels has more than doubled. The big question is where will it go in the next ten years? It is widely agreed that biofuels are a key reason why grain prices have been much higher in this current decade than in the previous decade.
The largest producer of biofuels is the US, where 40 percent of the corn crop is now distilled into ethanol. To put that into perspective, corn is by far the most important crop grown in the US. The US produces four times as much corn as wheat, and it is corn that underpins both the animal feed and much of the human food industries.
Corn used for biofuel is not totally lost to agriculture. The biofuel is made from the energy component, and the protein remains available for animal feeds.
This year more than 50 billion litres of ethanol will be produced in the US from corn. Most petrol in the US is now sold as an E10 (10% ethanol) mix.
US Government policy for the last ten years has been implemented through the Renewable Fuels Standard (RFS). It has previously been decreed that ethanol production must more than double again in the next ten years.
Implementation is through a ‘biofuel mandate’ whereby fuel companies have to use an increasing percentage of biofuel in the overall mix of fuels. Otherwise they pay a considerable fine. However, there is a practical problem known as the ‘blend wall’. Consumers are less than enthusiastic about using higher level blends, and most cars are currently not set up to handle higher blends than E10.
It is now looking increasingly likely that the US will pull back from its stated goals, and any further increases in the ethanol mandate will be modest.
The rationale for ethanol production has never been simple economics. The American industry would never have developed if it were not for the tax breaks which existed through to 2011, and now through the biofuel mandate.
The real rationale for the American biofuel industry has always been national security and the perceived need to be independent of events in the Middle East. Ironically, the US is now indeed becoming independent of the Middle East for oil, but it has little to do with biofuels. It is almost totally because of fracking technology, which is leading to the recovery of huge amounts of oil from within the US itself.
American oil production has increased 70 percent in the last six years and further increases are assured. The US is about to overtake Saudi Arabia as the world’s largest oil producer. None of this was foreseen less than ten years ago.
Even if the US does not achieve energy self-sufficiency, it can rely on friendly countries such as Canada and Mexico. Quite simply, the US no longer needs OPEC and the Middle East.
Despite the changing international scene, major reductions in the US biofuel mandate below current levels are unlikely in the near future. This is linked to partisan American political structures, whereby Senate seats in the Midwest are crucial to any federal government. The American Midwest states have grown accustomed to agricultural profitability which is underpinned by the biofuel demand for corn. Corn prices are already at four year lows due to good growing conditions, and the corn states would not react favourably to losing legislative support for biofuels.
The second most important country for biofuels is Brazil. There, the economic case is much stronger than in the US. Brazilian ethanol is produced from sugar cane, and the biological manufacturing processes with sugar cane are much more efficient than with corn.
Brazil has recently mandated that the ethanol production in its fuel must be a minimum of 27 percent. The Brazilian fleet is well set up with hybrid and flexi fuel systems and so there is no equivalent blend wall to that experienced in the US.
The EU is also making increasing use of biofuels, but the biofuel there is bio-diesel from oilseed crops. The economics are questionable, but with the decline in North Sea oil, self-sufficiency has become an increasing driver of policy. Events in Ukraine, together with Europe’s dependence on Russian oil and gas, are further driving policy towards local renewable energy.
Looking forward over the next ten years, there are many uncertainties. However, the combination of fracking, solar and wind technologies looks likely to take some of the pressure off the need for more biofuels. That will mean more crops available for animal feed and human food.