The consensus seems to be that the demand for biofuels will lead to higher commodity prices, although some commodities will be affected more than others. Higher commodity prices will affect farmers and consumers even in countries without biofuels production to the extent that these countries are linked to international markets. For example, higher maize prices driven by the increased demand for ethanol in the USA spill over into international markets, and, depending on domestic policies, often lead to higher domestic prices in both exporting and importing countries.
Higher commodity prices from biofuels development will help many farmers, and there is some potential for biofuels to create more jobs and employment. Despite the high hopes that some have for these developments to revitalize rural areas, biofuels are not likely to be the same engine for poverty alleviation as was the green revolution from the 1960s to the 1990s.
The fundamental impact of the green revolution was to improve farmer productivity: output grew at a faster rate than input use, despite the increased use of water, fertilizers and pesticides. This lowered production costs per tonne of grain, leading to an outward shift of the supply curve. The outward shift of the supply curve helped to lower food prices, benefiting many poor people in both urban and rural areas (the rural landless) who were net consumers of food. At the same time, because farmers now had lower production costs per tonne, their profits increased. Many farmers used these increased profits to invest in education for their children, leading to benefits for future generations (Foster and Rosenzweig, 1996). Furthermore, the greater harvests led to increased labour demand, benefiting many landless labourers (often the poorest of the poor) throughout Asia by helping to increase wages. To summarize, the green revolution allowed society to gain on balance, because it entailed an increase in productivity. It also allowed many different groups of the poor to share in the benefits: farmers, agricultural labourers and poor urban consumers.12
The rush to biofuels is fundamentally different from the green revolution because it is being driven, not by increased productivity, but by an increase in oil prices, which in turn has led to higher agricultural commodity prices. Simply raising the price of a key commodity (oil) does not generate gains for the world economy; indeed, it shifts the economy's aggregate supply curve and raises costs of production throughout the economy, not just in the farm sector. It is true that some countries or groups (e.g. farmers with a surplus to sell) will gain from higher fuel and food prices, but these gains are merely transfers from consumers; they do not constitute new wealth for society. In fact, even the gains to farmers from higher commodity prices are to some extent offset by higher costs of production as a result of higher fertilizer and fuel prices. Livestock producers who must bear higher feed costs are another example of how agricultural producers can be harmed by higher commodity prices.
Prices in food markets, despite many government interventions, are still influenced substantially by changes in market supply and demand. Furthermore, the market supply curve for food is strongly influenced by the prices and availability of various inputs: land, labour, water and fertilizer. If biofuels production does not compete for these resources with food crop producers, then the supply curve for food production will not be affected, and this should serve to mitigate food price increases. For example, if biofuel crops are grown on previously unused land, exploiting previously unused water supplies, without using any fertilizer and using previously idle labour, then there should be no effects on the marginal cost of food production. In some cases, these circumstances may be close to the truth; however, in many others, production of biofuels will seriously compete for these resources and affect the cost of food production.
To illustrate, despite the fact that jatropha can grow well in marginal environments, it generates larger quantities of oil (and thus more biodiesel) if it is grown with more water. Thus, biodiesel production from jatropha grown on marginal, previously unused land without any fertilizer may still have adverse impacts on food security if it competes for scarce water resources that are currently used by agriculture. Of course, it may be possible to grow jatropha without any irrigation water, but then it will be important to understand if it is possible to produce substantial quantities of biodiesel at competitive prices under these conditions.
In many other situations, biofuels production will compete seriously for key agricultural inputs. At present, most of the world's agricultural biofuels come from sugarcane in Brazil and corn in the USA, and both of these crops are grown with heavy use of inputs, including prime agricultural land, fertilizer and water. To summarize, an assessment of the impact of biofuels production on food security will need to consider in detail the inputs used in the biofuels production process, and how this use of inputs affects market supply curves for food production.
Transmission of international prices to domestic prices
It is also important to note that biofuels will affect food security even in countries that do not produce biofuel. All countries participate in international agricultural trade, and depending on the trade policy pursued, changes in international prices will often affect the domestic prices paid by consumers and received by farmers.
However, households need not always be affected by price changes on international markets. First of all, much of the increase in commodity prices in US dollar terms has been neutralized by the weak US dollar, which in fact is one of the causes of the recent increases in commodity prices. For example, world rice prices increased by 48 percent in real (inflation adjusted) US dollar terms from 2003 to 2007. From the perspective of India, however, because of the rupee's appreciation the increase was just 21 percent during the same period in inflation-adjusted rupee terms. Trade policy may also dampen the transmission of international price movements to domestic prices, a case in point being Indonesia's variable export tax on palm oil.
Lack of infrastructure can have a similar effect on poor households living in remote rural areas, as it may be too costly in such circumstances to move food in or out of some villages because of high transportation costs. But the magnitude of this effect may be less than is commonly supposed. For example, Chabot and Dorosh (2007) show that wheat prices in much of Afghanistan tracked movements in other markets such as Pakistan, despite the rudimentary infrastructure connecting the different parts of these countries. Furthermore, infrastructure continues to improve throughout Asia and the Pacific region.
How will higher food prices redistribute income?
To summarize, biofuels demand can lead to higher food prices either through increased competition for inputs such as land, water, fertilizer and labour, or through international trade. In order to understand the importance of these higher food prices for food security, it is first important to distinguish between net food producers and net food consumers. A net food producer is someone for whom total sales of food to the market exceed total purchases of food from the market, whereas for a net food consumer the reverse is true. This distinction is also usefully made at the level of individual commodities, as opposed to food in general.
Although nearly all urban dwellers are net food consumers, not all rural dwellers are net food producers. In fact, very small farmers and agricultural labourers are often net consumers of food, as they do not own enough land to produce enough food for their families.13 These landless rural households are often the poorest of the poor. The importance of the rural landless varies greatly from country to country. In some countries, such as Bangladesh, India and Indonesia, among many others, the landless constitute a significant portion of the rural population. In others, such as land-abundant Thailand, they are much less important.
Generally speaking, with the exception noted in footnote 12, higher food prices can substantially hurt net food consumers. In order to appreciate this effect, one must realize that for the poor a very large share of expenditures goes to food. Indeed, in many countries food can account for 70 to 80 percent of expenditures by the poorest quarter of the population. In such circumstances, food price increases can have large effects on effective purchasing power, even if they do not directly affect nominal income per se. For example, Block et al. (2004) found that when rice prices increased in Indonesia in the late 1990s, mothers in poor families responded by reducing their caloric intake in order to feed their children better, leading to an increase in maternal wasting. Furthermore, purchases of more nutritious foods were reduced in order to afford the more expensive rice. This led to a measurable decline in blood haemoglobin levels in young children (and in their mothers), increasing the probability of developmental damage. A negative correlation between rice prices and nutritional status has also been observed in Bangladesh (Torlesse et al., 2003).
On the other hand, farmers who are net food producers are likely to benefit from higher prices, which, other things being equal, will tend to increase their incomes. Since many farmers are poor, higher prices could help to alleviate poverty and improve food security. However, it must also be kept in mind that farmers with more surplus production to sell will benefit more from high prices than farmers who have only a small surplus to sell. Furthermore, in many (but not all) contexts, farmers with more land tend to be better off than farmers with only a little land, so it may be that poorer farmers will not receive the bulk of the benefits from higher food prices. But it should be noted that higher agricultural prices can affect domestic labour markets, potentially increasing the demand for hired labour on the farm, which would tend to benefit the poor.14
Taking these considerations into account, the effect of higher food prices on inequality will vary from country to country depending upon socio-economic structures and the national net trade position. In countries like Thailand, where land is relatively abundant, or in China, where land distribution is relatively equal as a result of the country's communist legacy, there are no large classes of poor landless agricultural labourers, and higher food prices may help to reduce poverty to some extent (Thailand is also a large net exporter of many commodities, reinforcing this positive effect of higher food prices). But in many other countries, such as Bangladesh, India, Indonesia and the Philippines, there are many landless agricultural labourers, and those at the bottom of the income distribution buy more food than they produce. In these cases, higher food prices are likely to have negative distributional impacts. Indeed, even in Viet Nam, where land distribution is relatively equal and the country is a substantial net rice exporter, higher rice prices were found to have only a very marginal benefit in terms of poverty reduction (Minot and Goletti, 2000). In importing countries (or in countries that export only a small percentage of production, such as India) where land distribution is much more unequal, the effects of higher food prices might worsen poverty, as appears to have happened in Indonesia when rice prices increased (Warr, 2005).
Although recognizing that outcomes will vary from country to country, on balance, for Asia and the Pacific region, the net effect of higher food prices on food security is likely to be negative, even for relatively small changes in prices. For example, Senauer and Sur (2001) estimated that if there is a 20 percent increase in food prices in 2025 relative to the baseline, the number of undernourished people in Asia would increase by 158 million.
Higher food prices and multiplier effects
It is possible that higher food prices will lead to multiplier effects and growth in the rural economy as farmers' higher incomes as a result of higher food prices create demand for other goods and services, much of it presumably produced locally. However, it must be kept in mind that if farmers' additional income is simply a transfer from the rural landless and urban poor, these new multiplier effects will come at the expense of the previous multiplier effects generated by the spending patterns of the poor, who will now have less money to spend on non-food items as their food bills increase. The point is that a change in relative prices because of changes in external market conditions (or, for that matter, government policy) does not create multiplier effects in the same manner as does a new technology that increases productivity, such as new seed varieties. The only way to assess the potential for net positive multiplier effects is to carefully measure the change in income distribution and compare the spending patterns of the winners and losers from the new set of relative prices. Although it is true that the (marginal) propensity to consume domestic products as opposed to imports decreases from the bottom to the top of the income distribution, it is also true that net food consumers often dominate both the bottom and the top of the income distribution. Thus, it is not clear that the propensity to consume domestic products is higher for net food producers than it is for net food consumers. In practice, it seems that higher food prices are probably not likely to generate large net multiplier effects in either direction.
In the longer term, the potential for multiplier effects may be larger, but such a positive outcome will occur only if higher prices motivate governments and donors to increase public investment in rural areas. Such investment can spur gains in productivity that benefit both rural and urban areas. There are precedents for such an outcome; for example, the world food crisis in the 1970s motivated many Asian governments to increase investments in irrigation (Hayami and Kikuchi, 1978). But such an outcome is not a foregone conclusion.
Employment generation
The production of biofuels will generate employment at both farm and factory levels, and this increase in employment will help to improve food security if it is targeted at the poor. But alternative uses of the land and capital necessary for biofuels production would have generated employment as well, and this alternative employment needs to be considered in assessing the impact of biofuels production on employment and food security. In other words, a critical issue in measuring the impact of biofuels production on employment and food security is the relative labour intensity of biofuels production.
Much of the employment that is likely to come with increased biofuels production, at least in developing countries, will be because of potentially increased labour use at the farm level to grow the feedstock. Here, it is crucial to understand the labour requirements of the biofuel feedstock per unit of area-time (e.g. per hectare per year) compared to the labour requirements of alternative land uses. If the land was previously unused, then clearly the planting of biofuel feedstock will create new employment. However, if the biofuel feedstock is less labour-intensive than the crops planted previously, then biofuels production will reduce employment on net at the farm level. The ultimate outcome will vary depending on what crop is used as feedstock and what crops were grown previously. Any increased employment in feedstock production will likely be biased toward unskilled labour, which will benefit the poorest of the poor.
In terms of fuel production from feedstock, small-scale bio-energy production seems likely to generate more employment for the poor than large-scale bio-energy production, which will probably be more capital intensive and less labour intensive. Indeed, current bioethanol and biodiesel factories in Brazil and the USA require huge investments of capital, often in the range of 100 to 200 million US dollars. Furthermore, the labour employed in these factories may favour relatively skilled workers (who are usually food secure).
Although small-scale bio-energy production may be better at creating employment, it is important to consider the ability of small-scale bio-energy production to compete with large-scale bio-energy production. Smaller plants may in general not be very competitive, and if they are not, then any increased employment is likely to be short-lived. However, if the bio-energy production is used to enhance access to energy in small villages with poor infrastructure, then competition with large-scale factories is probably not an important issue. Employment created at such small-scale processing plants is likely to have a positive impact on food security at the local level.
Access to land for the poor
Many are concerned that biofuel production may adversely impact the access of the poor to land. The production of biofuels from feedstock is often quite capital intensive and has economies of scale, thus favouring large firms. These large firms may prefer to vertically integrate their operations for many reasons, including quality control of feedstock production. Such large firms can provide useful employment and other social benefits if they use the land more intensively, and this is an important benefit not to be overlooked. Yet it will also be important to insure that any previous users of the land are fairly compensated. For example, governments may reclassify some land as wasteland to facilitate its use for large-scale biofuel production even though it was serving productive functions for poor people.
In general, the effect of the demand for biofuels will be to raise food prices, which will hurt the food security of many poor people in both rural and urban areas. However, the discussion above highlights the extent to which food production and consumption is heterogeneous across different countries, production environments and socio-economic structures. Biofuel production will increase employment in some cases, but reduce it in others. Higher food prices will benefit some poor households (if they are net sellers), but will harm many others (net buyers). On balance, across Asia, higher food prices will worsen food insecurity and poverty, because those in the poorest strata of society are net consumers of food.
One possibility for government intervention that can reduce the negative impacts on food security while still allowing the production of biofuels is to encourage the use of feedstock crops whose production is labour intensive. This might increase wage income in countries where there is a large class of poor landless labourers. Another possibility is to encourage the production of feedstock crops with land or water resources that were not previously utilized, but this option will often create strong tradeoffs with the land rights of the poor or environmental objectives. Blending mandates may make sense when energy security is the dominant objective, but it must be recognized that improved energy security will come at the cost of more food insecurity in countries where the poorest members of society are net food buyers. In countries such as Thailand, where the poorest are net food sellers, the tradeoff between household food security and national energy security will be less acute. In most other Asian countries, however, the tradeoff will be a matter for serious consideration.
In many cases, the best option may be to do nothing for the time being, i.e. offer no special incentives for first-generation biofuels production, and maintain the option to leapfrog to second-generation biofuels when and if that technology becomes commercially viable. In the absence of subsidies, much of the world's current biofuels production might not be competitive, given the high level of commodity prices that serve to increase biofuels production costs. In cases where biofuel production is competitive even without any government support, governments may want to intervene by regulating land use in order to reduce environmental impacts or improve the food security of the poor. Thus, for example, China has banned the use of grains for ethanol production.
Even if a country decides not to encourage the domestic development of biofuels, governments will be faced with higher and more variable prices on world food markets. Thus, consideration should be given to cost-effective trade policies that serve to stabilize domestic prices in the face of large international price movements, as Indonesia has done with its variable export tax on palm oil and as Bangladesh does with variable tariffs on rice (Timmer and Dawe, 2007).
Most important is that governments renew their efforts to develop well-functioning markets and improve rural education, health services, infrastructure and agricultural research. These public goods are necessary to realize the full potential for higher productivity that can lead to sustainable poverty alleviation and counteract the negative effects of higher food prices on food security. If the current surge in international food prices serves to mobilize public investment in agriculture and rural areas, then historians will likely view the increase in the demand for biofuels in the early 21st century as a positive development. If, however, the increased prices do not lead to a renewal of rural development efforts, the demand for biofuels will be another obstacle to achieving food security for the poor.
12 Farmers with less favourable land may have lost as a result of the green revolution as these farmers were not able to increase their productivity. At the same time, increased productivity on other farms led to lower farm prices, which adversely affected farmers with poor quality land who were selling a surplus to markets (subsistence farmers not participating in markets would not be hurt by lower prices). All new technologies in human history have harmed at least some people.
13 It is also true that whether a given household is a net food producer or consumer depends on market prices. Higher prices will discourage consumption, encourage more production, and possibly convert some households from net consumers to net producers. Lower prices could do the opposite.
14 See "Trade liberalization, poverty and food security" in FAO (2006e).
