The United Nations’ food agency stepped up the pressure on the United States on Friday to change its biofuel policies because of the danger of a world food crisis, arguing the importance of growing crops for food over their use for fuel.
Global alarm over the potential for a food crisis of the kind seen in 2007-08 has escalated as drought in the U.S. Midwest has sent grain prices to record highs, fuelling a six per cent surge in the UN Food and Agriculture Organization’s July food price index.
The FAO’s director-general Jose Graziano Da Silva wrote in the Financial Times on Friday that competition for a U.S. corn crop that has been ravaged by the worst drought in 56 years was only going to intensify.
"Much of the reduced crop will be claimed by biofuel production in line with U.S. federal mandates, leaving even less for food and feed markets," he wrote in an editorial.
"An immediate, temporary suspension of that mandate would give some respite to the market and allow more of the crop to be channelled towards food and feed uses," he said in the high-profile yet indirect message to Washington.
Under the five-year-old Renewable Fuels Standard (RFS), U.S. fuel companies are required to ensure that nine per cent of their gasoline pools are made up of ethanol this year, which means converting some 40 per cent of the corn crop into the biofuel.
The U.S. Department of Agriculture on Friday slashed its estimates for the size of the corn crop by more than expected, sending corn futures prices, already up 60 per cent since June, to a fresh all-time high.
A mix of high oil prices, growing use of biofuels, speculation on commodity markets and export restrictions pushed up prices of food in 2007-08, sparking violent protests in countries including Egypt, Cameroon and Haiti.
David Hallam, director of the FAO’s trade and markets division, told Reuters that biofuels policies needed to become more flexible to help prevent new food crises developing.
"One idea is you have some kind of price trigger so that as maize prices rise then the mandates adjust," he said, adding that the FAO wanted to reopen debate on biofuels policies.
The FAO has joined a growing and diverse chorus calling for an unprecedented waiver or suspension of the RFS.
This week, 25 U.S. senators urged the Environmental Protection Agency (EPA) to adjust the mandate, while the chief executive of grains giant Cargill said the free market should dictate biofuels use.
Livestock producers, who are forced to bid against ethanol producers to secure costlier grain for feed, were first to ask for relief.
However, the EPA must first receive an official petition for a waiver, which can only come from a fuel blender or a state governor, according to the legislation.
To that end, the governors of poultry-producing states Maryland and Delaware on Friday wrote the EPA, requesting relief from corn prices through a whole or partial waiver of the ethanol mandate.
U.S. ethanol production credit prices dropped six per cent this week after trebling since June, with traders taking profits on the fear, though remote, that Washington might relax the mandate.
FAO officials have warned of the potential for a food crisis to develop if countries resort to the kind of export restraints and panic buying that aggravated price surges in 2007-08.
"It is vitally important that any unilateral policy reactions from countries, whether importers or exporters, do not further destabilize the situation," Graziano Da Silva wrote in the newspaper.
Charity Oxfam has warned that rising food prices could drag millions of people around the world into conditions of hunger and malnourishment, in addition to nearly one billion who are already too poor to feed themselves.
While the RFS program faces growing criticism, it also has strong support from Farm Belt politicians in an election year and has been a core part of President Barack Obama’s energy plan. Some say suspending it would do little to relax demand.
Waiving the mandate could have several unintended effects, such as dampening investment in cellulosic and other advanced biofuels that could cut dependence on food crops for making fuel, or damage the market for dried distillers’ grains, an ethanol byproduct sold as a livestock feed.
In 2008, Texas Governor Rick Perry petitioned the EPA to cut the mandate in half for that year. The EPA refused, but in doing so it made clear that future petitions would have to prove that the RFS itself was causing severe economic harm.
— Catherine Hornby is Reuters’ correspondent in Rome.