'Biofuel key reason for high food prices'

UNITED NATION - Rising investment in grain-consuming biofuels is a key reason food prices will stay high for at least a decade, an influential study released Thursday says.

But the report by two leading international bodies also warns that claims biofuels will resolve an array of concerns - from rendering the air cleaner by replacing fossil fuels, to reducing individual countries' reliance on fuel imports - may be deceptive.

"Analysis to date suggests that the energy-security, environmental and economic benefits of biofuels production based on agricultural commodity feedstocks are at best modest, and sometimes even negative," says the 73-page study from the UN's food & Agriculture Organization and the 30-member Organization for Economic Cooperation and Development.

It suggests pursuing policies that would reduce competition for crop land, highlight energy conservation, roll back biofuel subsidies, and develop other energy sources.

"Alternative approaches may... offer potentially greater benefits with less of the unintended market impact, such as policies that encourage reduced energy demand and greenhouse gas emissions, provide for freer trade in biofuels, and accelerate the introduction of 'second generation' production technologies that do not rely upon current commodity feedstocks," the report says.

The report's release in Paris Thursday came a day after Conservative and Liberal members of the House of Commons ensured passage of a bill that will require all gasoline sold in Canada to contain five per cent ethanol by 2010, and diesel to contain two per cent renewable fuels by 2012.

Opposition parties have voiced concern that food production is being diverted to fuel, but the main parties have argued that only a small proportion of crops such as corn will be used to make ethanol.

The Liberal-dominated Senate also is expected to approve the bill as it moves towards becoming law.

Snippets of the OECD/FAO Agricultural Outlook for 2008-2017 have been emerging for more than a week, with earlier reports emphasizing the finding that high food prices are here to stay, and that people in the developing world will suffer the most from the elevated costs because they spend proportionately more of their income on food.

But the study also includes, for the first time, an analysis of biofuel markets for bio-ethanol and bio-diesel, complete with price projections.

Ethanol production in Canada is forecast to double over the next decade, to 2.73 billion litres by 2017 - an amount that translates into almost 2.2 per cent of the projected world production of 125 billion litres. In the United States, ethanol production will rise to 52.4 billion litres by 2017, up from 38.4 billion this year.

Public dissatisfaction with the price of gas and its faith in biofuels as a mitigating response are behind the rise, says the report.

But in detailing the economics of ethanol production, it says the rush to produce biofuels makes only limited sense for most countries.

The study found that, in the short term at least, various subsidies are necessary to make it economically viable - something free-market purists would generally oppose.

"Near-record prices for maize, wheat and vegetable oils at the start of the outlook have reduced the economic viability of biofuel production in many countries, despite strong public support and increasing fossil fuel prices," it says.

"Public support in the form of tax concessions and tax credits, blending obligations and regulations, and import tariffs are widely applied to offset production costs of biofuels compared to fossil fuels."

The one exception is Brazil's bio-ethanol production from sugarcane, whose cost as an input is low because of a global sugar surplus, the report says. It adds the final product is competitive with gasoline even when crude oil is priced at as little as $35 a barrel.

Canadian bio-diesel production is projected to increase from 207 million litres this year to 660 million by 2017. The shift mirrors a worldwide trend, but is the opposite to that of the United States, where production is expected to fall from a little more than two billion litres annually to 1.73 billion over the same period.

According to the study, bio-diesel production will necessitate proportionately more in the way of subsidies. "Global bio-diesel production is set to grow at slightly higher rates than for bio-ethanol... to reach 24 billion litres by 2017," the report says. "This growth in output occurs despite the fact that the world bio-diesel prices are expected to remain well above production costs of fossil diesel... for most of the projection period."