- Biofuels in the US, is it a necessity?
- Why crude oil imports to total crude oil consumption declined from 58 to 25%?
- Why cultivation of wheat and other food crops declined by ~14%?
Traditionally, agriculture has been practised to cultivate crops and for animal husbandry to meet the food requirement. However, with technological advancements crops are also being used to fulfil the burgeoning energy demand. Harvests such as corn, sugar cane, soybean, rapeseed, etc. are nowadays used as feedstock to develop biofuels. However, with the development of the biofuel industry the world is facing ‘the food vs. fuel debate’, which poses a vital question, whether the diversion of restricted agricultural resources towards production of biofuel impacting the availability of food and prices?
The United States is the world’s largest producer of biofuels and account for more than half of the global production. This is followed by Brazil, which records around one fourth of the international biofuel production. The United States and Brazil are also the largest biofuel consumers and together make for more than 3/4th of the global consumption. The lobby against fuel crops is primarily concerned about the increasing use of agricultural land for fuel crops farming, this leads to the destruction of natural habitat, diversion of resources, shortage of acreage under food crops and impact food availability and prices.
In the present blog, the analysis is based on the United States crop production pattern and examines the aforementioned issues with the largest producer and consumer of biofuels in the world. Moreover, the country’s thrust on biofuels or the industry should be studied in retrospect to it being the largest consumer of crude oil globally. It is the biggest consumer due to factors like increasing industrialisation, expanding automobile density, growing demand from aviation and defence sectors, etc. Although, the domestic crude oil production in the United States is insufficient to meet the national demand. The net crude oil imports were more than 50% of the total domestic crude demand at the beginning of the millennium.
Thus, replacement with fossil fuels from home grown biofuels became imperative to meet the energy demands owing to rising fuel imports bill and reduce the burden on the economy. There was a preference for the biofuel industry owing to concerns of pollution.
In 2005, the United States government introduced Renewable Fuel Standard (RFS), which mandated that the transportation fuel in the nation is to be blended with a minimum volume of renewable fuels. It mandated the use of 4 billion gallons of biofuels in 2006, this was to gradually increase to 7.5 billion gallons by 2012. The fuel ethanol consumption (made from corn) grew at a CAGR of 13% between 2005-16.
In 2007, the Federal Government introduced Renewable Fuel Standard 2 (RFS2) wherein the mandated renewable fuel consumption volume was doubled to 8 billion gallons (2008) and was to gradually rise to 36 billion gallons by 2022. Furthermore, the corn starch ethanol was mandated to increase 15 billion gallons from 2008-15 and was to remain constant thereafter. The focus was laid on developing markets for alternative cleaner fuels such as vegetable oil-based biodiesel. Hence, the biodiesel consumption grew at CAGR of 20.5% between 2007-15.
Subsequently, as the demand for fuel ethanol and biodiesel grew, this raised the requirement for corn and soybean (prime feedstocks for fuel ethanol and biodiesel respectively) and these grew at a healthy rate. Thus, supported by increasing demand for biofuels, the corn and soybean production in the US soared at a CAGR of 10.5 % (2005-16) and 15.4% (2007-16). The increase led to a rise in crop prices, thereby, turning cultivation of corn and soybean more profitable as compared to wheat farming. The gap between operating profit per planted acre for corn and soybeans with respect to wheat grew after 2005 as shown in the below graph. The operating returns mellowed down from 2013 onwards in line with softening of the crude oil prices. However, the gap was still high in order to make corn or soybean farming more lucrative in comparison to wheat.
In addition, as the demand for corn and soybean grew the acreage under corn and soybean also rose. The area under corn plantation increased by 15.5% (2005-16). Likewise, the farming under soybean crop expanded by 16.1% during the same period. The rise in fuel crops acreage came at the cost of food crops acreage. The cultivation of wheat and other food crops declined by ~14% (2005-16). The total agricultural tract remained range-bound in the past decade. Thus, the biofuel production did not substantially affect the natural habitat in the United States. An augmentation in acreage for fuel crops was not at the expense of food crops (Televisory evaluated the data for wheat, which is the largest food crop in the United States after corn and analysed the impact of a decline in acreage on production and prices).
The wheat production in the United States remained range-bound over the years, a loss in an area was compensated by an increase in the yield. The wheat production remained unaffected due to lower acreage over the years. The occasional peaks and troughs in wheat production were driven by the yield in a particular year.
Similarly, corn which is a primary feedstock for corn fuel is also a major food staple. Thereupon, the data of the past decade shows that an increase in production of corn for the fuel ethanol was not at the cost of corn for food purposes. The corn used for fuel purposes was equally not at the cost of corn used for food purposes.
On the price front, the movement in the past decade was more in line with the change in the input prices rather than production levels. The crude oil products such as fuel, fertilizer and electricity contributed nearly 60-70% to the total input costs for wheat. Consequently, as the crude oil prices surged, the input prices also increased resulting in higher prices. There was a peak in the wheat prices in 2008 and 2011-12 due to the diversion of funds to commodity markets as the equity markets moderated in the period.
Therefore, Televisory was unable to find a material evidence of increase in fuel crops production on food crop production and price levels. In the medium term, a significant change in the fuel crop pattern is not expected as the United States has already achieved utmost gasoline-ethanol blend in 2015. The fuel crop-food crop production balance may get impacted if the government increases the gasoline-ethanol blend. In the long run, as the need for developing resources for a cleaner biofuel further develops, there will be an exploration of several options such as other crops, crop and animal waste, etc. Further, if there is a scenario in which a new technology becomes viable, its impact on food crops will be studied as and when this becomes accessible. Hence, Televisory believe that in long term the food vs. fuel debate will continue.
Also Read:- Benchmarking operating structure for Brazil and the US ethanol manufacturers