July 28, 2008 / 10:49 PM / 12 years ago

Biofuels major driver of food price rise-World Bank

(Adds industry comment)

By Lesley Wroughton

WASHINGTON, July 28 (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 price rise reflected 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 findings by Mitchell, a widely respected agricultural economist, are controversial because they goes beyond most other estimates for the impact of biofuels on rising food prices.

Still, his findings correspond 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.

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

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 were in response 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, which 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."

Mitchell said biofuels policies that encourage subsidized production need to be rethought because they are hurting poor countries.

Bob Dineen, president of the Renewable Fuels Association, said the report showed a bias by the author against biofuels and underestimates the impact of higher energy prices and a weak dollar on higher food costs.

"Such a simplistic approach fails to accurately and honestly account for the myriad of factors driving food costs higher," Dineen said. "I encourage the author and the World Bank to revisit the issue without bias, taking into account the increasingly significant role biofuels are playing in reducing global oil demand."

Mitchell 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 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; it used 25 percent of its production for ethanol in 2007/08.

Mitchell, however, said Brazil’s sugar-based ethanol did not push food prices appreciably higher because Brazilian sugar cane output increased and sugar exports nearly tripled since 2000.

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. (Editing by Leslie Adler)

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