The increasing use of U.S. grain as a feedstock for ethanol rather than its traditional use as a feedstuff is expected to have a worldwide ripple effect on trade, commodity prices and hunger relief, according to USDA's Economic Research Service.
ERS economist Ron Trostle presented his study of the global impacts of the booming biofuel industry during the Farm Foundation's Biofuels, Food and Feed Tradeoffs conference in St. Louis in April. The study is based on USDA's 10-year baseline projections for biofuel expansion.
Trostle projects that increasing demand for feedstocks “will raise global agricultural prices and will also change the relative price relationship among the various agricultural commodities. Soybean prices rise because vegetable oil prices rise in general and because of acreage shifts in the United States to corn. Prices for other grains, such as wheat, also rise, primarily buoyed by their feed value as a replacement for corn.
“The soybean/corn price ratio is expected to decline significantly as corn prices are higher. In some areas of the world, rapeseed, which contains 40 percent oil, becomes more profitable than soybeans, which have only 18 percent oil.
Trade will also be impacted, according to Trostle. While the United States dominates world trade in corn, the increasing use of U.S. corn for ethanol is expected to limit U.S. export growth during the next few years. “During the next half decade, some countries are projected to respond to higher corn prices by increasing their corn production and exports, most notably Argentina, Brazil, Ukraine, Republic of South Africa and some countries in Eastern Europe.
Still, U.S. corn exports are expected to grow after the rapid ramp up in domestic ethanol production slows down in 2009. The U.S. share of world corn trade declines in the projection from the historical range of 60 percent to 70 percent to about 55 percent to 60 percent.
In Brazil, soybean exports are expected to double despite strong domestic demand for soybean meal for feed and oil for biodiesel production. Brazil's growth rate of area planted to soybeans is projected to average more than 4 percent per year in response to global increases in demand. “That is a huge growth rate over a long period of time.”
Supplying the projected growth in feedstocks for biofuel will require a global increase in the area planted to crops, according to Trostle. “During the last 30 years, the growth rate in the world's total area planted to 10 major field crops has averaged less than 0.2 percent per year. However, USDA now projects that the total area harvested will grow at nearly 0.4 percent per year. That's double the rate of the last 30 years.
“Some of the increased area comes from Brazil, where new lands will be brought into production, and Argentina, where some pastureland is converted to cropland. The former Soviet Union has land farmed in an earlier era that can be brought back into production.”
A secondary impact is that as the prices of food crops rise, the amount of food aid shipped to low-income countries may decline. “If countries shipping the aid do not increase the amount they budget for food aid, and food prices rise, then the budgeted food aid buys less food.”
An indirect consequence is the impact of the biofuel boom on consumers, according to Trostle. “Consumers all over the world will spend a larger portion of their budget on food. The Food and Agricultural Policy Research Institute has indicated that this may not be a very significant increase, but low-income consumers, regardless of what country they live in, will have to budget significantly more for food, or eat less.”
To supply the growth in production and acreage will not only require more resources such as land and fertilizer, “but the biofuel manufacturing industry will need to become more efficient.”
Trostle said some countries will increase production and become exporters of feedstocks and perhaps biofuel. These countries include the Ukraine, Russia, Romania, Bulgaria, Indonesia, Malaysia, Brazil and Argentina. Other countries, such as the EU and Korea, will become importers of feed stocks and/or biofuels.
Here's more on biofuel production in six countries:
United States — USDA first called attention to increasing importance of biofuel in the United States four years ago. At that time, USDA projected that the amount of U.S. corn used for ethanol production would be about 1 billion bushels by 2012. USDA raised those projections in 2004 and 2005. In 2006, the projections rose sharply because of the impact of the energy policy of 2005. Then USDA again raised projections in 2007.
Brazil — Brazil has long been a major ethanol producer, with most of its production coming from sugarcane rather than grains. Brazil's biodiesel production is small compared to ethanol. However production is expected to nearly double in the next few years with much of the new capacity occurring in the central west soybean production area. The biodiesel produced here will substitute for regular diesel fuel that has to be trucked in long distances from the coast to the interior.
In Brazil, sugarcane for ethanol and soybeans for biodiesel do not compete with cropland because they are generally planted in different areas of the country.
European Union — USDA assumes in its study that the EU will not achieve its target to derive 5.75 percent of its fuel from biodiesel by 2010. “In fact, we don't believe it will have achieved that target by 2016 because of the increase in total diesel fuel use.”
Rapeseed oil makes up 80 percent of feedstock for biodiesel in the EU. The area planted to rapeseed and production capacity both are expected to increase sharply. In addition, the EU is projected to increase rapeseed oil imports. It also will increase palm oil imports from Southeast Asia and some biodiesel made from palm oil in Southeast Asia.
Argentina — Argentina's biodiesel production is expected to nearly triple over the next several years. Some of the new biodiesel capacity is being produced specifically for the export market. Argentina is expected to import some soybeans from other South American countries to maintain its crushing capacity.
Argentina has mandated that biofuel make up 5 percent of all fuel by 2010. But the funding for initiatives to increase biofuel production is limited. Some provinces have production goals and do provide some production incentives. Trostle does not expect Argentina to achieve the 5 percent goal.
Canada — Biodiesel plants using rapeseed oil as a feedstock are being built in western Canada. In the projections, land is shifted to rapeseed from some wheat and barley. In the east, vegetable oil and animal fats are feedstocks for biodiesel. Ethanol is produced from corn and wheat.
China — The third largest ethanol producer in the world is expected to nearly triple its ethanol production. However, because of China's food security policy, it is assumed that subsidies for producing fuel ethanol from corn will be eliminated, and in the future China will focus its ethanol production on using non-grain feedstocks such as sweet potatoes.