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A. Abbassian Secretary of the Intergovernmental Group on Grains

Food Security with Biofuels? An FAO Perspective Fourth Biomass-Asia Workshop 20-22 November 2007 Malaysia. A. Abbassian Secretary of the Intergovernmental Group on Grains Food and Agriculture Organization of the United Nations - FAO. Presentation Overview. Why biofuels? Why now?

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A. Abbassian Secretary of the Intergovernmental Group on Grains

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  1. Food Security with Biofuels?An FAO Perspective Fourth Biomass-Asia Workshop20-22 November 2007 Malaysia A. Abbassian Secretary of the Intergovernmental Group on Grains Food and Agriculture Organization of the United Nations - FAO

  2. Presentation Overview • Why biofuels? Why now? • Bio-energy and biofuels: now and after • Do biofuels reduce consumption of fossil fuels and lower CO2 emissions? • At what cost? • High food prices and biofuels, are they related? • A threat to food security? • Bioenergy activities in FAO: work in progress • Concluding remarks

  3. I. Why Biofuels? • Growing scientific evidence is confirming climate change and therefore the need to reduce greenhouse gas (GHG) emissions (carbon emissions) • Plant biomass is energy neutral in that it takes carbon from the air and return it when generating energy (e.g. when used in a car engine) • Reduce dependency (imports) on fossil fuels (oil, coal) – energy security • Fast rise in world demand (driven by Asia) for energy will result in a supply crunch unless OPEC double production by 2030 to 60.6m* b/d (from now 36m b/d). This will require at least $600 billion* investment • A way to reduce farm support policies (subsidies) in rich countries (at least in theory) and to revitalize the agricultural production and rural development in low income countries • Unlike fossil fuel, most countries can produce some form of bioenergy. Producing domestic energy reduces the oil import bill *Source: International Energy Agency, IEA (November 2007)

  4. Why Now? • The steady rise in the cost of oil since 2003 and expectation of high long term prices • At the current oil price, production of liquid biofuels from nearly any form of energy feedstock (sugar, maize, rapeseed, etc..) becomes profitable: • Ethanol from sugar cane is economic at oil prices of $30-35 /barrel (Brazil)* • Ethanol from maize is economic at $55 (USA)* • Bio-diesel from oilseeds is economic at $80 (EU)* *Source: International Food Policy Research Institute, IFPRI (December 2006)

  5. Competitiveness by feedstock Parity prices: Petrol–Crude oil–Biofuels Various feedstocks and farming/production systems 120 100 80 Crude, US$/bbl 60 40 20 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 Petrol, US$/l Gasoline-Crude US$ Cane Brazil, top producers Cane, Brazil, average Cassava, Thai oil, 2 mio l/d Maize, US Cassava, Thailand, OTC joint venture Palmoil, MPOB project Mixed feedstock Europe BTL: Synfuel/Sunfuel Source: J. Schmidhuber, FAO ( 2005)

  6. II. Bio-energy Today • Bio-energy already accounts for 14% of total world energy use; 33% in developing countries (70% in Africa) but only 2-3% in industrial countries • Small scale burning of biomass accounts for most household source of energy for cooking and heating in poor countries (2-3 billion people!) • Liquid biofuels used for transport still small: 40% of transport fuel in Brazil but only 3-5% in USA and EU and even less elsewhere Source: P. Hazell and R.K. Pachauri (IFPRI, 2007)

  7. How big is the market for biofuels? Energy production and potential, biofuels and land use 1.) Potential based on Schrattenholzer and Fischer, IIASA, 2000 2.) Based on IEA: Key energy statistics, 2006 3.) Derived from http://www.earth-policy.org/Updates/2005/Update49.htm, Earth Policy Institute

  8. Biofuels Tomorrow • By 2010 the EU plans to double the share of renewable energy in its primary energy consumption to 12%. Biofuels will increase to 5.75% of total transport fuels • The USA also plans to more than double its current 2% share for biofuels by 2016 but this may accelerate • Brazil plans to increase biofuels share from 37% to about 60% by 2020 • China and India have launched new bio-energy industries Source: P. Hazell (2007)

  9. III. Do biofuels reduce consumption of fossil fuels and lower CO2 emissions? • Fossil fuels are used in the production and distribution of biofuels, hence the need to look at energy ratios. This is the ratio of available energy delivered per liter of biofuel to the total fossil fuel energy used in its production – calculated over the full production cycle • What is the net carbon savings over fossil fuels measured per mile of transport -- again calculated over the full production cycle? Source: P. Hazell (2007)

  10. Methods vary for calculating energy ratios • What energy inputs to include? Should, for example, the energy used in making agricultural machines or sustaining farm workers be included or just the energy content of direct inputs like diesel and fertilizer? • What energy credit should be given to co-products like cattle feed? Source: P. Hazell (2007)

  11. Energy balance for ethanol from maize • In 2002, the USDA estimated that for ethanol from maize, the energy ratio was 1.25 - 1.5** • Without co-products, the ratio falls to around 1.05 - 1.1 • Controversy remains ** For every unit of energy that goes into growing maize and manufacturing ethanol, we get back 25-50% more energy.

  12. Energy balance for one gallon of ethanol produced from maize in the United States(David Pimental, Cornell University) Source: P. Hazell (2007)

  13. Different views on energy ratios: wide variations in farming practices, farming conditions (e.g. nitrogen fertilizer could represent about 40 percent of all energy used in maize planting.). Also state and type of ethanol facilities (e.g. wet or dry mills, etc...) Source: D. Morris (Institute for Local self-Reliance), 2005

  14. Net carbon savings • Energy crops have the potential to reduce GHG emissions by more than 100% (relative to petroleum fuels) because such crops can also restore carbon in the soil as they grow • When blended with petrol or diesel, most biofuels from grains can reduce carbon emissions by 10-30% per mile travelled, and the savings are greater the higher the fuel blend • Biodiesel from vegetable oils (rapeseed, sunflower seed, soybeans) can save 45-75% • Ethanol from sugar cane can save up to 90% Source: World Watch Institute (2006)

  15. IV. Biofuels at What Cost? Net Production Cost (US $ per liter of fuel) Source: FAO

  16. Biofuels at What Cost? USA* • Support for biofuels were between USD$5.5 billion and USD$7.3 billion in 2006 • Biofuels are an extremely high-cost means of reducing greenhouse-gas emissions. Under optimistic projections, it costs some $500 in federal and state subsidies to reduce one metric ton of CO2-equivalent through the production and use of maize-based ethanol, enough to purchase more than 30 metric tons of CO2-equivalent offsets on the European Climate Exchange, or nearly 140 metric tons on the Chicago Climate Exchange • Because the bulk of the subsidies — per-gallon payments, tax exemptions and tax credits — are tied to sales or output and output is increasing at double-digit rates of growth, the rate of subsidy growth is extremely high *Source: International Institute for Sustainable Development (IISD), Global Subsidy Initiative program (GSI) -October 2006

  17. Biofuels at What Cost? EU* • Support for biofuels in the EU amounted to around 3.7 billion Euros in 2006 • Reduced tax rates for biofuels are the primary source of support in the European Union. Excise tax exemptions are estimated to have cost around Euro 3 billion in 2006, up from Euro 1.8 billion in 2005 • Biofuels are an extremely high-cost means for reducing greenhouse-gas emissions. Transfers per tonne of CO2-equivalent removed are estimated to be between 575 and 800 euros for ethanol made from sugarbeat, around 215 euros for biodiesel made from recycled cooking oil, and over 600 euros for biodiesel made from rapeseed. Purchasing CO2-equivalent offsets on the European Climate Exchange would be much cheaper *Source: International Institute for Sustainable Development (iisd), Global Subsidy Initiative program (GSI) -October 2007

  18. Applied tariffs on undenatured ethyl alcohol(HS 2207.10) in several representative countries, as of January 2007* “The EU does not have specific tariff lines for fuel ethanol or biodiesel. Most of the ethanol imports enter the EU under the 2207 10 classification (undenatured alcohol with an alcohol content of >80%). Biodisel is imported under classification 3824 90 98 (other chemicals). This provides the opportunity for biofuels to be imported under alternative tariff lines with lower duties “* *Source: International Institute for Sustainable Development (IISD), Global Subsidy Initiative program (GSI) –September 2007

  19. V. High food prices and biofuels, are they related? Explaining the nature of price linkages... • As energy prices rise, costs of agricultural inputs (fertilizers, pesticides and diesel) increase, putting pressure on agricultural prices • Also biofuels derived from different feedstocks become competitive with fossil fuels at different levels (so-called parity price), putting pressure on the prices of feedstocks • The link weakens as rising feedstock prices make them too expensive as a source of fuel

  20. Preliminary FAO work on assessing the importance of different factor in price formation* A priori, we may assume that recent grain price hikes are determined, inter alia, by the price of petroleum, stocks in the major grain exporting countries, the US$ exchange rate relative to its major trading partners and in the case of maize, by the quantity of industrial demand – a proxy for biofuel. That is, Ptwt = f(Ptoil,STt wt.mj.ex,XRtUS) Ptmz = f(Ptoil,STtmz.mj.ex,XRtUS,QDtind), VAR models for the above were estimated over the period 1978 to 2007 using annual data. Notes: VAR Unrestricted Model - Based on data for Major Exporters only – All Data Logged - Prices in Real Terms -Oil in Brent *Source: A. Prakash, FAO (2007) Adam.Prakash@fao.org

  21. Factors driving higher grain prices - Can their influences be measured?* Main results** • The specified variables, together, capture around 90% of the variation in grain prices • Statistically, grain prices are strongly influenced by the specified variables • Causality tests (Granger) showed that variations in prices are both caused by past variations in these variables, jointly and individually Relative influences Changes in maize and wheat prices were decomposed by the relative contribution of each variable. Changes in stocks have the greatest influence on prices proportion of change (∆) in maize price explained by changes in: ∆Ptmz ∆STtmz.mj.ex ∆QDtind.∆XRtUS∆Ptoil 0.27 0.35 0.12 0.11 0.15 proportion of change (∆) in wheat price explained by changes in: ∆Ptwt ∆STtwt.mj.ex ∆XRtUS ∆Ptoil 0.44 0.25 0.15 0.16 **Results based on forecast error variance decomposition *Source: A. Prakash, FAO (2007) Adam.Prakash@fao.org

  22. FAO food price index and CRBcommodity and energy indices(1998-2000=100) FAO price indicesfor selected commodities(1998-2000=100) Source: FAO (Food Outlook, November 2007)

  23. Biofuel production in the OECD countries relative to world production (million liters)* *Source: International Institute for Sustainable Development (iisd), Global Subsidy Initiative program (GSI) –September 2007

  24. Wheat stocks and price Maize stocks and price Source: FAO

  25. Coarse Grains exporters Coarse Grains stocksand ratios Source: FAO (Food Outlook, November 2007)

  26. Soybeans/Maize nearby futures ratio Maize utilization and exports in the USA Source: FAO (Food Outlook, November 2007)

  27. Expansion of US ethanol productionand corresponding use of maize Maize: 110 MT or 32% of production Ethanol: 7.5 bln gallons or 28.4 bln liters by 2012 (4.6% of gasoline demand). • Bio-diesel production to remain limited due to lower profitability caused by high feedstock costs • Soya-oil use to stay flat under 2.3MT Billion liters (Ethanol) Million tonnes (Maize) Source: USDA/ERS in OECD-FAO Agricultural Outlook 2007-2016

  28. Ethanol and bio-diesel use in the EU will increase (based on wheat, rapeseed and imports) Share of biofuel use in total transport fuel consumption assumed not to exceed 3.3% in energy terms (below the EU 5.75% target by 2010). Note: Ethanol and bio-diesel data before 2006 refer to production, from 2006 to 2016 to consumption. By 2020, under Energy Policy for Europe (for EU-27), the EU is committed to increase renewable energy to 20% of primary energy supply, raise energy efficiency by 20% and biofuel in transport fuels in sustainable ways to 10%. Source: OECD-FAO Agricultural Outlook 2007-2016

  29. Projected grain utilization in OECDand non-OECD countries Wheat Coarse Grains Source: OECD-FAO Agricultural Outlook 2007-2016

  30. Biofuels: preliminary projection results from a recent FAO Study* • The projected sustained high prices of crude oil provide an additional incentive to expand bio-fuel output – beyond the levels stipulated by policy – as long as retail excise tax relief for bio-fuels remains • Higher crop yields and better technology alleviate the pressure for area expansion • Rising biofuel capacity in the US leads to a more competitive ethanol sector; maize prices therefore bid-up to levels that reflect the price of the energy yield from the crop: maize prices will also begin to correlate with energy prices Global biofuel production could expand 5-fold by 2025 Source: Prakash, Adam. 2007. “Grains for food and fuel – at what price?” *The study (CCP: GR-RI 07/CRS 5) was presented at the joint meeting of the Intergovernmental Group on Grains and Rice in July 2007 in Istanbul, Turkey. It is available at: http://www.fao.org/unfao/bodies/ccp/gr-ri/2007/index_en.htm Source: A. Prakash (2007)

  31. Outlook for selected world crop prices to 2016(Index of nominal prices, 1996=1) Source: OECD-FAO Agricultural Outlook 2007-2016

  32. VI. A threat to food security? How the Low Income Food Deficit Countries are/could be affected? • What is food security?Food security exists when all people, at all times, have physical, social and economic access to sufficient amounts of safe and nutritious food that meets their dietary needs and food preferences for an active and healthy life • Four dimensions of food security:Availability, Access, Stability and Utilization

  33. Food Security: Availability • Availability of food could be threatened by bio-energy production: • currently, about 14 million hectares (1 % of the world’s arable land) used for liquid biofuel production • 2.5-3.8 % arable land could be used for biofuels by 2030 • and 20 % of the world’s arable land by 2050 Source: FAO - CFS 33rd Session-May 2007

  34. Food Security: Access • Access is influenced directly by food prices and incomes • In the longer run, the competition between food and fuel could be alleviated • The expanding market for biofuel feedstock could contribute significantly to higher incomes for farmers and offer employment opportunities in rural areas

  35. Food Security: Stability • Stability can be disrupted by price volatility • Expanded use of agricultural commodities for biofuel production could increase the volatility of food prices • Increased risks for the environment

  36. Food Security: Utilization • Affected by bio-energy, but less directly so than for other aspects • Utilization is closely linked to health status and access to clean water • Bio-energy could make water less readily available for household use • On the other hand, modern bio-energy could make cooking both cheaper and cleaner

  37. Food security effects of rising pricesacross countries • Rising food and fuel prices will likely compromise food security of countries that are net importers of both food and fuel as their current account deficits increase: • two-thirds of 47 low income food deficit countries (LIFDCs) for which data exist are also energy deficit and • include countries like Bangladesh, Ethiopia, Eritrea, Ghana, Haiti, India, Kenya etc. • Countries that are net exporters of both food and fuel will find themselves in a win-win situation • For countries that are net exporters in one and net importers of the other, the situation depends on the relative size of the food or energy exports and imports

  38. Forecast import bills of total foodand major foodstuffs Source: FAO (Food Outlook, November 2007)

  39. Forecast changes in food import bills of selected LIFDCs: 2007 over 2006 (%) Forecast changes in global food import bills by type: 2007 over 2006 (%) Source: FAO (Food Outlook, November 2007)

  40. Countries in Transition25 million Developed Market Economies9 million Sub-Saharan Africa206 million Asia and the Pacific524 million Near East and N. Africa38 million India212 China150 Latin America and the Car.52 million Who are the hungry? World: 860 million Developing countries: 830 million Source: FAO

  41. World Development Report 2008: • 75% of the world’s poor live in rural areas and most work in agriculture • Majority of the world’s poor will still be in rural areas in 2040 • Agricultural growth is the main engine for poverty reduction • For the two-thirds poorest, income growth originating in agriculture has more impact than income from non-agricultural sectors Source: World Bank (2007)

  42. Which biofuels? Jatropha factor! • Is it economic at current (rising) oil price? • Does it have favorable energy and carbon balances? • Will it conflict with food production? • Can biofuel production be made pro-poor? Scale matters! • Should countries invest in it now or wait for next generation technologies?

  43. Constraints to investment The way forward • Who are the poor and most food insecure relative to bioenergy development? • Identify and respect national priorities about food security and self-sufficiency (maize) • Land and legislation could be serious hurdles to bioenergy investment • Resolve potential conflict over access and control of natural resources • Source of income and energy • Create incentives for reinvestment • Stimulate domestic economy and rural development • Source of export earnings –even as a feedstock? Legislation • No legislation in place for Bioenergy • National Bioenergy Task Force Land Tenure • All land owned by state • Released to villages, state, individuals Infrastructure • Scale matters and the technology is highly capital intensive • Very limited number of roads • Bioenergy proposals always close to existing infrastructure (road or railroad)

  44. VII. Bioenergy activities in FAO: work in Progress... Examples (i) Technical assistance to member countries • Project formulation and technical advisory services • Support the design and implementation of bioenergy policy and programmes • Country studies/projects: Argentina, Belarus, Chile, China, Costa Rica, Croatia, Dominican Republic, Myanmar, Peru and Slovenia • Respond to requests for investment, feasibility and technical support Examples (ii) Cooperation with national, regional and international partners • Secretariat of the Global Bioenergy Partnership (GBEP) at FAO • FAO currently Vice-Chair of UN-Energy, with bioenergy as one of the main programme elements of this interagency mechanism • Increased requests and activity on bioenergy from FAO Reg Offices • FAO partners with numerous intergovernmental organizations

  45. Global Bioenergy Partnership (GBEP) SCOPE, PARTNERS, PILLARS

  46. Bioenergy and Food Security (BEFS) Project • Three-year - USD 3.7 million – 11 January 2007 • Guidance on potential effects of bioenergy on food security in developing countries • Started country selection process and development of analytical framework • Capacity-building, policy formulation and technical guidance • National Bioenergy Teams and replicable project models • Legislative Framework Report

  47. VIII. Concluding remarks... • high oil prices and the need to reduce greenhouse gas emissions are among the important drivers in this fast expanding sector. • grains/oil plant-based biofuels are becoming a major source of demand but they are expensive to produce and currently rely on high subsidies and market protection • debates on their net energy balance and on their effectiveness in reducing carbon emissions continue • in the meantime, food prices are affected (increasing) although other factors such as low food inventories have had even more significant impacts • there are good reasons to caution against too much reliance on biofuels as a way forward in getting away from using “risky” fossil fuels • but biofuels can empower rural poor farmers in developing countries, to embark on faster income growth and development • assuming access to technology and land tenure as well as availability of adequate infrastructure, capital, legislations, etc. • a carefully planned, tailored, sustainable, bioenergy strategy is needed

  48. Relevant International Meetings/Reports • World Development Report 2008: Agriculture for Development (World Bank, October 2007) • Food Outlook (FAO, November 2007) • World Energy Outlook – 2007 from International Energy Agency (IEA)- provides medium to long-term energy market projections and analysis with China and India as its special foci in this year’s report (7 November 2007) • The Intergovernmental Panel on Climate Change (IPCC) - Synthesis of IPCC Fourth Assessment of the state of knowledge on climate change (17 November 2007) • United Nations Framework Convention on Climate Change (UNFCCC) - Bali, 3 - 14 December 2007 • Food Outlook (FAO, June 2008) • FAO High-Level Conference on World Food Security and the Challenges of Bioenergy and Climate Change 2-5 June 2008 • OECD-FAO Agricultural Outlook 2008-2017 (July 2008)

  49. Key FAO contacts on bioenergy Chairman of the Interdepartmental Working Group Jeff.Tschirley@fao.org SOFA 2008 Bioenergy Terri.Raney@fao.org Global Bioenergy Partnership GBEP-Secretariat@fao.org International Bioenergy Platform (IBEP) Website: http://www.fao.org/sd/en2_en.htm

  50. Grains Team in FAO Trade and Markets Division A. Abbassian (Analyst and the Secretary of the Intergovernmental group for Grains) Abdolreza.Abbassian@fao.org Tel: (++39) 0657053264 C. Cerquiglini (Database Management and World Outlook Reports) Claudio.Cerquiglini@fao.org J. Heine (Database Management and Monthly News Report) John.Heine@fao.org S. Ripani (Administrative Assistant) Silvia.Ripani@fao.org FAO Grains Website: http://www.fao.org/es/esc/en/15/53/index.html

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