July 28, 2008 / 5:55 PM / 9 years ago

Biofuels major driver of food price rise: World Bank

<p>A customer looks at fruit and vegetables on sale at a supermarket in central Beijing June 20, 2008.David Gray</p>

WASHINGTON (Reuters) - Large increases in biofuels production in the United States and Europe are the main reason behind the steep rise in global food prices, a top World Bank economist said in research published on Monday.

World Bank economist, Don Mitchell, concluded that biofuels and related low grain inventories, speculative activity, and food export bans pushed prices up by 70 percent to 75 percent.

The remaining 25 percent to 30 percent was due to a weaker U.S. dollar, higher energy costs and related rises in fertilizer and transport costs, he wrote.

An unfinished version of the research that surfaced in news stories sparked a heated debate earlier in July, with trade groups for the ethanol industry calling the 75 percent figure "a stretch" and others saying it confirmed the dangers of current biofuels policies.

The outcome of Mitchell's research is controversial because it goes beyond most other estimates for the impact of biofuels on rising food prices.

Still, its research corresponds somewhat with the International Monetary Fund, which estimated in May that biofuels accounted for 70 percent of the increase in maize prices and 40 percent in soybean prices.

Meanwhile, the Bush Administration has estimated that biofuel production pushed food prices higher by 2 to 3 percent. Hoping to wean the country off foreign oil, Washington has boosted incentives and mandates for alternative fuels made from food crop.

But Mitchell said without the increase in biofuels production, global wheat and maize stocks would not have declined, oilseed prices would not tripled and price increases due to other factors, such as drought, would have been more moderate.

Also, food export bans by countries trying to preserve food supplies and speculative activities would not have occurred because they were responding to rising prices.

"The large increases in biofuels production in the U.S. and EU were supported by subsidies, mandates, and tariffs on imports," Mitchell said in the research that looks at rapid rises in food prices since 2002. "Without these policies, biofuels production would have been lower and food commodity price increases would have been smaller," he added.

A widely respected agricultural economist, Mitchell said biofuels policies that encourage subsidized production need to be re-thought because they're hurting poor countries.

He said the increase in grain consumption in developing countries was moderate and did not lead to the large price increases.

Growth in global grain consumption, excluding biofuels, was only 1.7 percent a year from 2000 to 2007, while yields grew by 1.3 percent and area grew by 0.4 percent, which would have kept global demand and supply roughly in balance, he said.

The United States is the largest producer of ethanol from maize and is expected to use about 81 million tons for ethanol in the 2007/08 crop year. Meanwhile, Canada, China and the European Union used roughly 5 million tons of maize, which was about 11 percent of the global maize crop.

The use of maize for ethanol in the United States has global implications because the U.S. produces about one-third of the world's maize and two-thirds of global exports, and used 25 percent of its production for ethanol in 2007/08.

Brazil's ethanol production did not push food prices appreciably higher because Brazilian sugar cane output has increased rapidly and sugar exports have nearly tripled since 2000, Mitchell said.

The increase in cane production has been large enough to allow sugar output to rise from 17.1 million tons in 2000 to 32.1 million tons in 2007 and exports to increase from 7.7 million tons to 20.6 million tons.

Reporting by Lesley Wroughton

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