The World Targets Biofuels

Garry White - Tue 22 Apr, 2008

The rush to biofuels is a global phenomenon and contributing to food inflation

For a moment this morning, I thought I was back living in Africa again…

As I walked out of Blackfriars train station the street was full of ear-piercingly loud monkey noises. This struck me as unusual in the City of London at 7.30am on a Monday morning.

There were about 15 people dressed up in orange orang-utan suits. They were scaling the front of the Unilever HQ on the North bank of the Thames in a protest organised by Greenpeace.

The demonstration was all about the company's use of palm oil in Dove soap and the negative effects this has on the environment. Apparently, there are orang-utans climbing all over Port Sunlight in Liverpool too.

Palm oil is indeed destroying the habitat of the orang-utan, but it is the use of palm oil for biofuels and its impact on food prices which I think are more pressing concerns.

In the US, the Commodity Futures Trading Commission (CFTC) is scheduled to meet farmers and traders today to discuss the jump in agricultural commodities prices. It will say that speculation from hedge funds and pension funds is NOT responsible for driving agricultural commodities' prices to record highs. It will argue that fundamentals are the main driver of recent price rises.

The regulators will say that prices have been driven by robust demand, weather-related supply disruptions, the lowest inventories in 30 years, government trade restrictions and the impact of the weaker US dollar.

CFTC commissioner Bart Chilton said: "At this time there is not a correlation between excessive speculative activity and prices… market fundamentals appear to be functioning appropriately."

It's almost trendy to slam hedge funds – and the blame for soaring food prices has been placed firmly at their door. The regulator's data appears to suggest otherwise, however, which means there are more gains ahead in food.

I believe that this is the case even though there may actually be signs that the EU will retreat somewhat from its biofuels target.

A report in the Guardian last Saturday suggested that The European Commission was backing away from its insistence on imposing a compulsory 10% quota of biofuels in all petrol and diesel by 2020 – but an EU spokesman has denied the story.

I believe targets won't be scrapped in the US because there are so many vested interests in the ethanol industry – and powerful figures are involved. Do not underestimate the power of the US ethanol lobby.

The rush to biofuels is a global phenomenon; numerous countries have set standards or targets. The EU has set a goal of 5.75% of motor fuel use from biofuels by 2010. The US has mandated the use of 28.4 billion litres of biofuels for transportation by 2012.

Brazil will require that all diesel oil contain 2% biodiesel this year and 5% by 2013, and Thailand required 10% ethanol in all gasoline starting in 2007. India mandates a 5% ethanol blend in nine states, and China is requiring a 10% ethanol blend in five provinces.

The World Bank recently put the blame for food inflation firmly at the door of biofuels. Despite the possibility that the EU may not blindly focus their attention on a silly target, I do not think that biofuel blending will be scrapped here either.

There will be a lot of money to be made in foodstuffs in the next few years. Not only is land that was previously used to grow food being used to grow fuel, but there are 75 million new mouths to feed every single year.

Regards,

Garry White
for The Daily Reckoning