Food and fuel compete for land

Historically, the world's farmers produced food, feed, and fibre. Today they are starting to produce fuel as well. On any given day there are now two groups of buyers in world commodity markets: one representing food processors and another representing biofuel producers.

First triggered by the oil shocks of the 1970s, production of biofuels - principally ethanol from sugarcane in Brazil and corn in the United States - grew rapidly for some years but then stagnated during the 1990s. After 2000, as oil prices edged upward, it began to again gain
momentum. Europe, meanwhile, led by Germany and France, was starting to extract biodiesel from oilseeds.

Production of biofuels in 2005 equalled nearly 2 per cent of world gasoline use. From 2000 to 2005, ethanol production worldwide nearly tripled, from 4.6 billion to 12.2 billion gallons. Biodiesel, starting from a small base of 251 million gallons in 2000, climbed to an estimated 790 million gallons in 2005.

Reducing carbon

Governments support biofuels production because of concerns about climate change and a possible shrinkage in the flow of imported oil. Since
substituting biofuels for gasoline reduces carbon emissions, governments see this as a way to meet their carbon reduction goals. Biofuels also have a domestic economic appeal partly because locally produced fuel creates jobs and keeps money within the country.

Brazil, using sugarcane as the feedstock for ethanol, is producing some 4 billion gallons a year, satisfying 40 per cent of its automotive fuel needs. The United States, using corn as the feedstock, produced 3.4 billion gallons of ethanol in 2004, supplying just under 2 per cent of the fuel used by its vast automotive fleet. Forecasts for 2005 show US ethanol output overtaking that of Brazil, at least temporarily. Europe ranks third in fuel ethanol output, the lion's share from France, the United Kingdom, and Spain. Europe's distillers use mostly sugar beets, wheat, and barley.

Interest in biofuels has escalated sharply since oil prices reached $40 per barrel in mid-2004. Brazil, the world's largest sugarcane producer, is emerging as the world leader in farm fuel production. In 2004, half of its sugarcane crop was used for sugar and half for ethanol. Expanding the sugarcane area from 5.3 million hectares in 2005 to some 8 million hectares would enable it to become self-sufficient in automotive fuel within a matter of years while maintaining its sugar production and exports.

Huge investment

Even though Brazil has phased out ethanol subsidies, by mid-2005 the private sector had committed $5.1 billion to investment in sugar mills and distilleries over the next five years. Thinking beyond its currently modest exports of ethanol, Brazil is discussing ethanol supply contracts with Japan and China. Producing ethanol at 60� per gallon, Brazil is in a
strong competitive position in a world with $60-a-barrel oil.

US ethanol production, almost entirely from corn, benefits from a government subsidy of 51� per gallon. Ethanol produced from $3-a-bushel
corn in the United States costs roughly $1.40 per gallon, more than twice the cost of Brazil's cane-based ethanol. Although it took roughly a decade to develop the first billion gallons of US distilling capacity and another decade for the second billion, the third billion was added in two years. The fourth billion is likely to be added in even less time. In addition to corporations, US farm groups are also investing heavily in ethanol distilleries.

India, the world's second largest producer of sugarcane, has 10 ethanol plants in operation and expects to have 20 additional plants up and
running by the end of 2005. China is projected to bring on-line four plants producing up to 360 million gallons of additional fuel ethanol by
the end of 2005, mostly from corn and wheat.

Colombia and the Central American countries represent the other biofuel hot spot. Colombia is off to a fast start, opening one new ethanol
distillery each month from August 2005 until the end of the year.

Cooking oil

For biofuels used in diesel engines, Europe is the leader. Germany, producing 326 million gallons of biodiesel in 2004, is now covering 3
per cent of its diesel fuel needs. Relying almost entirely on rapeseed (the principal source of cooking oil in Europe), it plans to expand output by half within the next few years.

France, where biodiesel production totaled 150 million gallons in 2004, plans to double its output by 2007. Like Germany, it uses rapeseed as its feedstock. In both countries the impetus for biodiesel production comes from the European Union's goal of meeting 5.75 per cent of automotive fuel needs with biofuels by 2010. Biofuels in Europe are exempted from the hefty taxes levied on gasoline and diesel.

In the United States, a latecomer to biodiesel production, output is growing rapidly since the 2003 adoption of a $1-per-gallon subsidy that
took effect in January 2005. Iowa, a leading soybean producer and an epicentre of soy-fuel enthusiasm, now has three biodiesel plants in
operation, another under construction, and five more in the planning stages. State officials estimate that biodiesel plants will be extracting
oil from 200 million bushels of the state's 500-million-bushel annual harvest within a few years, producing 280 million gallons of biodiesel. The four fifths of the soybean left after the oil is extracted is a protein-rich livestock feed supplement, which is even more valuable than the oil itself.

Other countries either producing biodiesel or planning to do so include Malaysia, Indonesia, and Brazil. Malaysia and Indonesia, the major
producers of palm oil, would likely use highly productive oil palm plantations as their feedstock source. Brazil, which has ambitious plans to ramp up biodiesel production, will also likely turn to palm oil.

High yield

There are two key indicators in evaluating crops for biofuel production: the fuel yield per acre and the net energy yield of the biofuels, after
subtracting the energy used in both production and refining. For ethanol, the top yields per acre are 714 gallons from sugar beets in France and 662 gallons per acre for sugarcane in Brazil. U.S. corn comes in at 354 gallons per acre, or roughly half the beet and cane yields.

With biodiesel production, oil palm plantations are a strong first, with a yield of 508 gallons per acre. Next comes coconut oil, with 230 gallons per acre, and rapeseed, at 102 gallons per acre. Soybeans, grown primarily for their protein content, yield only 56 gallons per acre.)

For net energy yield, ethanol from sugarcane in Brazil is in a class all by itself, yielding over 8 units of energy for each unit invested in cane production and ethanol distillation. Once the sugary syrup is removed from the cane, the fibrous remainder, bagasse, is burned to provide the heat needed for distillation, eliminating the need for an additional external energy source. This helps explain why Brazil can produce cane-based ethanol for 60� per gallon.

Ethanol from sugar beets in France comes in at 1.9 energy units for each unit of invested energy. Among the three principal feedstocks now used for ethanol production, US corn-based ethanol, which relies largely on natural gas for distillation energy, comes in a distant third in net energy efficiency, yielding only 1.5 units of energy for each energy unit used.

Current and planned ethanol-producing operations use food crops such as sugarcane, sugar beets, corn, wheat, and barley. The United States, for
example, in 2004 used 32 million tons of corn to produce 3.4 billion gallons of ethanol. Although this is scarcely 12 per cent of the huge US corn crop, it is enough to feed 100 million people at average world grain consumption levels.

Clearing land

In an oil-short world, what will be the economic and environmental effects of agriculture's emergence as a producer of transport fuels? Agriculture's role in the global economy clearly will be strengthened as it faces a vast, virtually unlimited market for automotive fuel. Tropical and subtropical countries that can produce sugarcane or palm oil will be able to fully exploit their year-round growing conditions, giving them a strong comparative advantage in the world market.

With biofuel production spreading, the world price for oil will, in effect, become a support price for farm products. If food and feed crop
prices are weak and oil prices are high, commodities will go to fuel producers. For example, vegetable oils trading on European markets on any given day may end up in either supermarkets or service stations.

The risk is that economic pressures to clear land for expanding sugarcane production in the Brazilian cerrado and Amazon basin and for palm oil plantations in countries such as Indonesia and Malaysia will pose a major new threat to plant and animal diversity. In the absence of governmental constraints, the rising price of oil could quickly become the leading threat to biodiversity, ensuring that the wave of extinctions now under way does indeed become the sixth great extinction.

With oil prices now high enough to stimulate potentially massive investments in fuel crop production, the world farm economy - already
struggling to feed 6.5 billion people - will face far greater demands. How the world manages this new incredibly complex situation will tell us a great deal about the prospect for our energy-hungry twenty-first century civilization.

This article is excerpted, with permission, from Chapter 2, Beyond the Oil Peak, in Lester R. Brown�s forthcoming new book, Plan B 2.0: Rescuing a Planet Under Stress and a Civilization in Trouble to be published by W.W. Norton, New York, in January 2006.

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