A biofuel food-price bombshell

The U.K. Guardian reports some astonishing numbers from a "confidential" World Bank study on energy crops and grain prices.

Published July 4, 2008 10:30AM (EDT)

The Bush administration states that corn-based ethanol only accounts for 3 percent of global food price inflation. The USDA's chief economist disagrees -- he says biofuels add up to 10 percent of food price hikes. Other estimates have gone much higher -- but until today, the most How the World Works had seen anyone claim was 40 percent.

But now the U.K.'s the Guardian is reporting that it has laid its hot hands on a confidential World Bank report that makes the astonishing claim that 75 percent of the surge in global food prices can be attributed to biofuels.

The figure emphatically contradicts the U.S. government's claims that plant-derived fuels contribute less than 3 percent to food-price rises. It will add to pressure on governments in Washington and across Europe, which have turned to plant-derived fuels to reduce emissions of greenhouse gases and reduce their dependence on imported oil.

Senior development sources believe the report, completed in April, has not been published to avoid embarrassing President George Bush. "It would put the World Bank in a political hot-spot with the White House," said one yesterday.

If true, biofuel mandates are without a doubt a "crime against humanity." We can only hold our breath and wait for the inevitable leakage of the full report and the ensuing feeding frenzy as the world feasts upon the data. But in the meantime, here's one clue as to how the World Bank came up with such huge numbers.

It argues that production of biofuels has distorted food markets in three main ways. First, it has diverted grain away from food for fuel, with over a third of US corn now used to produce ethanol and about half of vegetable oils in the EU going towards the production of biodiesel. Second, farmers have been encouraged to set land aside for biofuel production. Third, it has sparked financial speculation in grains, driving prices up higher.

I'd be curious to know whether other biofuel/food price number crunchers include "financial speculation" as part of the equation. Speculators, in theory, are pumping money into commodities because they believe prices are going to go up, but not necessarily because of biofuel expansion. The unreleased World Bank report apparently completely dismisses changing diets in China, India and elsewhere as an explanation for rising food prices, but I'd lay odds that for commodity traders, the perception of such a phenomenon is one big reason why they're making their own bets.

So are biofuels responsible for speculation? Or is it a misunderstanding of what is actually going on commodity markets that is encouraging traders to invest in grain futures?

Again, I look forward to reading the paper, and I look forward to reading the ensuing dissection of the paper. Because 75 percent is a big, big number.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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