January 19, 2008
Biofuels Use Pushes Up Vegetable Oil Costs

A New York Times article by Keith Bradsher entitled "A New, Global Oil Quandary: Costly Fuel Means Costly Calories" draws attention to the growing direct competition between using land to create food and to create energy. This is not new news for regular FuturePundit readers. But you can now discuss this as a legitimate mainstream topic, which is nice. Biodiesel causes food riots.

This is the other oil shock. From India to Indiana, shortages and soaring prices for palm oil, soybean oil and many other types of vegetable oils are the latest, most striking example of a developing global problem: costly food.

The food price index of the Food and Agriculture Organization of the United Nations, based on export prices for 60 internationally traded foodstuffs, climbed 37 percent last year. That was on top of a 14 percent increase in 2006, and the trend has accelerated this winter.

In some poor countries, desperation is taking hold. Just in the last week, protests have erupted in Pakistan over wheat shortages, and in Indonesia over soybean shortages. Egypt has banned rice exports to keep food at home, and China has put price controls on cooking oil, grain, meat, milk and eggs.

According to the F.A.O., food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen.

China's industrialization is putting the demand for more food by the Chinese middle class into direct competition with the demand for biomass for energy and for food for people in much poorer countries.

Half the demand growth for vegetable oils comes from use for biofuels.

Biofuels accounted for almost half the increase in worldwide demand for vegetable oils last year, and represented 7 percent of total consumption of the oils, according to Oil World, a forecasting service in Hamburg, Germany.

Also see Stuart Staniford's posts on The Oil Drum entitled Fermenting the Food Supply which I covered in my own post Will Biofuels Demand Cause Mass Starvation? aand his follow-up post Death Rates and Food Prices. Staniford reports that rural poor in undeveloped countries grow a lot of unexportable crops and are pretty isolated from the world food market. But the much more rapidly growing ranks of urban poor appear to be far more vulnerable to world food price rises. My reaction: We need a massive international effort to lower fertility rates in the very poor high fertility rate countries. We also need massive build-ups of nuclear and wind power to reduce the demand for agricultural products to create energy.

So how much can this demand growth push up prices? Quite a lot it turns out.

Palm oil commodity prices now sit above $1,000 per tonne on the strength of rising demand from increasingly prosperous Asian consumers. A year ago the price was $600.

Back in the good old days of 2001 when the world seemed so ripe with possibility palm oil leaped from $220 per tonne to $290 per tonne in just 3 weeks. But now it is almost 5 times more expensive with a recent price of $1040 per tonne.

Currently, the indicative price for refined palmolein is $320 a tonne and for crude palm oil $290 a tonne, both free-on-board Malaysia (and both up $70 a tonne in last three weeks)

What happens when oil production peaks (it might have already) and starts declining? The higher the price of petroleum oil goes up the higher vegetable will go up along with. Rises in fossil fuels diesel prices cause rises in the price that companies will pay for vegetable oil to use to create biodiesel. It is as simple as that.

Malaysia has seen a lot of panic buying of palm oil. But is this really panic buying or a rational response to expected future price rises? Buy sooner when it is cheaper.

The Malaysian Government has been forced to make an emergency palm oil injection into supermarkets and food stores across the nation to break a wave of panic-buying after prices of cooking oil soared.

The crisis, which has emptied shops completely of cooking oil, has already prompted palm-oil rationing in a country that is one of the world’s largest producers of the highly sought-after commodity.

I am expecting food exports to follow a pattern similar to oil exports. As big exporting countries start to find internal demand is growing rapidly the internal pressures will build to stop exports. Bans on exports will create the conditions for market prices for food and oil which are lower in many producers than on the world market.

Share |      Randall Parker, 2008 January 19 06:00 PM  Trends Resource Depletion


Comments
odograph said at January 19, 2008 7:32 PM:

I think we agree on this one, that it is population and food consumption first, with energy (so far) providing ony secondary pressure,

(Obligatory article on rising Chinese obesity. Not that it is only them of course. We all face weight gain in our affluence.)

vanderleun said at January 19, 2008 10:41 PM:

Just yesterday in Seattle I saw a brand new car of some sort proudly bearing the bumperstip, "Runs on Biofuel. No War Required."

Ah, give it time. Give it time.

Wolf-Dog said at January 20, 2008 11:17 AM:

Some of the biofuel rage is certainly due to lobbying by the special interest groups such as farmers. This was also convenient for both automobile companies and even for oil companies, who prefer seeing biofuels blended with gasoline, rather than seeing pure electric cars in the streets.

K said at January 20, 2008 6:07 PM:

Biofuels are presently raising the price of grains and vegetable oils. But that is not the entire story. Meat and dairy production consume a lot of grain. And people buy more meat and dairy products when their income allows. And the rising world population requires more food.

In general the world demand for most commodities be they animal, vegetable, and mineral, is rising.

There is a fundamental error when biofuels v. food is discussed. Growers and the associated commodity markets do not operate to feed peoople. They operate to make money. When a crop is most valuable as food it is consumed as food. Else not.

But politicans and many others do not care to express that unpopular fact. They try various contortions such as demonizing, price controls, import/export duties and bans, and expropriations to avoid the consequences of the markets. These seldom work at all and never work well.

The way to avoid or remedy this situation is to obtain fuel from non-plant sources. Yet today the industrialized nations of the world are subsidizing and encouraging that fuel be made from plant material. Growers and commodity traders are applauding. No one should be surprised at the results.

Eventually celluosic chemistries may alleviate the competition for grains and vegetable oils. But they don't work yet and we shouldn't pretend they do.

Wolf-Dog said at January 21, 2008 4:35 AM:

It turns out that non-food biomass such as switchgrass can be burned in power plants instead of coal, and this would be a very efficient fuel, because it does not steal our food. The problem is that we are addicted to thinking in terms of liquid fuels for internal combustion cars. Once the battery problem is resolved in a few years, then pure electric cars will be mass-produced, and this will totally change the picture.

Lorne McClinton said at January 22, 2008 6:31 PM:

Grains and oilseeds contain calories. Two years ago we were having a discussion on this blog about how it was cheaper to burn corn in specially modified wood burning than it was to heat homes with either heating oil or in most places electricity. How quickly the debate has changed. Any form of biofuel requires land. It doesn't matter if land is in cellulosic ethanol crops or grains. The bottomline is farmers are business people first. Unless they are subsidized to grow crops beyond the capacity that the markets can utilize and don't need (ie: US/ European corn subsidies for the past 20 years) farmers will quickly shift production to wherever they can make the most money.

Current high food prices are more likely related to the massive increase in transportation costs than anything to do with the price of grain. If the price of wheat goes up 400% the increased cost of a loaf of bread would be far less than the price difference between a comparable loaf at 7/11 and Safeway. Still biofuel likely has reset the base price of grains. They might not be profitable for biofuel at current prices but if inventories start to rise and the price drops again they would be. I expect any iofuel refinery will quickly be on a low cost feedstock system like cattle feedlots are now. Whatever is cheapest goes into the mix. If wood chips are cheaper woodchips are used. If grain is cheaper grain is used

Randall Parker said at January 22, 2008 7:09 PM:

Lorne,

Corn is still cheaper than heating oil as a home heating energy source. Heating oil has gone up as corn has gone up.

Lorne McClinton said at January 23, 2008 6:03 AM:

Kevin Hursh, a friend of mine, had an interesting radio commentary on the price of grain versus food. Here is a portion of it with a few additional comments from me.

A bushel of top quality Canadian wheat makes approximately 67 loaves of bread. Those are 16 oz loaves. Assuming a wheat price to producers of $8.00 a bushel, there‚s about 12 cents worth of wheat in a loaf of bread.
{if wheat is $20/bushel that would work out to about 30 cents per loaf - LM}

The value of durum to farmers is roughly 30 per cent of the total cost of pasta.
{One bushel of durum (60 lbs) makes 42 lbs of pasta. Last year durum was selling for $5/bu. That translates to 12 cents per pound of pasta. This year durum is selling for about $20/bu or about 48 cents per pound of pasta. -LM }

On beer, the value of the malting barley is a tiny percentage of what consumers pay, but you hear varying reports on just how many pennies worth of barley are in a bottle of beer.

{A bushel of barley yields a bushel of malt, many beers use about a bushel of malt per barrel of beer, (333 bottles). Currently the Canadian Wheat Board (world's largest exporter) is selling barley at $8.50/bu that works out to 2.55 cents per bottle of beer.} - LM

When Canadian shoppers go to the supermarket, they‚re more likely to take note of the price of beef and pork. The prices being received by cattle and hog farmers are terrible ˆ well below the prices a year ago. Are pork chops and beef steaks cheaper than a year ago? The price producers receive is just one of many factors involved in retail food pricing.

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