Search for Oil Alternatives Pushes Food Prices Higher

Stephen DeAngelis

January 28, 2008

In several posts I’ve written about bio-diesel, I’ve mentioned the fact that diverting food crops into sources of bio-diesel has been causing food prices to rise. Keith Bradsher, writing in the New York Times, provides a good overview of the problem [“A New, Global Oil Quandary: Costly Fuel Means Costly Calories,” 19 January 2008].

“Rising prices for cooking oil are forcing residents of Asia’s largest slum, in Mumbai, India, to ration every drop. Bakeries in the United States are fretting over higher shortening costs. And here in Malaysia, brand-new factories built to convert vegetable oil into diesel sit idle, their owners unable to afford the raw material. This is the other oil shock. From India to Indiana, shortages and soaring prices for palm oil, soybean oil and many other types of vegetable oils are the latest, most striking example of a developing global problem: costly food.”

How fast are prices rising? Pretty fast it turns out.

“The food price index of the Food and Agriculture Organization of the United Nations, based on export prices for 60 internationally traded foodstuffs, climbed 37 percent last year. That was on top of a 14 percent increase in 2006, and the trend has accelerated this winter.”

Those kinds of price increases affect both rich and poor, but the poor are much less capable of coping.

“In some poor countries, desperation is taking hold. Just in the last week, protests have erupted in Pakistan over wheat shortages, and in Indonesia over soybean shortages. Egypt has banned rice exports to keep food at home, and China has put price controls on cooking oil, grain, meat, milk and eggs. According to the F.A.O., food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen.”

The rise in food prices comes at a time when more and more people have been moving up the economic ladder. Bradsher notes that as income increases so does the demand for a better and more varied diet.

“A startling change is unfolding in the world’s food markets. Soaring fuel prices have altered the equation for growing food and transporting it across the globe. Huge demand for biofuels has created tension between using land to produce fuel and using it for food. A growing middle class in the developing world is demanding more protein, from pork and hamburgers to chicken and ice cream. And all this is happening even as global climate may be starting to make it harder to grow food in some of the places best equipped to do so, like Australia. In the last few years, world demand for crops and meat has been rising sharply. It remains an open question how and when the supply will catch up. For the foreseeable future, that probably means higher prices at the grocery store and fatter paychecks for farmers of major crops like corn, wheat and soybeans.”

Another big concern at the moment is that the global economy may face inflationary prices and a recession at the same time, brought on by the credit crisis in America and high oil and food prices.

“There may be worse inflation to come. Food experts say steep increases in commodity prices have not fully made their way to street stalls in the developing world or supermarkets in the West. Governments in many poor countries have tried to respond by stepping up food subsidies, imposing or tightening price controls, restricting exports and cutting food import duties. These temporary measures are already breaking down. Across Southeast Asia, for example, families have been hoarding palm oil. Smugglers have been bidding up prices as they move the oil from more subsidized markets, like Malaysia’s, to less subsidized markets, like Singapore’s.”

Much of the focus of Bradsher’s article is on cooking oil. When American’s think of cooking oil, their biggest concern is whether or not it contains transfats. The concern is much more basic in the developing world.

“No category of food prices has risen as quickly this winter as so-called edible oils — with sometimes tragic results. When a Carrefour store in Chongqing, China, announced a limited-time cooking oil promotion in November, a stampede of would-be buyers left 3 people dead and 31 injured. Cooking oil may seem a trifling expense in the West. But in the developing world, cooking oil is an important source of calories and represents one of the biggest cash outlays for poor families, which grow much of their own food but have to buy oil in which to cook it.”

Bradsher, reporting from Malaysia, uses palm oil to illustrate his point.

“Few crops illustrate the emerging problems in the global food chain as well as palm oil, a vital commodity in much of the world and particularly Asia. From jungles and street markets in Southeast Asia to food companies in the United States and biodiesel factories in Europe, soaring prices for the oil are drawing environmentalists, energy companies, consumers, indigenous peoples and governments into acrimonious disputes. The oil palm is a stout-trunked tree with a spray of frilly fronds at the top that make it look like an enormous sea anemone. The trees, with their distinctive, star-like patterns of leaves, cover an eighth of the entire land area of Malaysia and even greater acreage in nearby Indonesia. The palm is a highly efficient producer of vegetable oil, squeezed from the tree’s thick bunches of plum-size bright red fruit. An acre of oil palms yields as much oil as eight acres of soybeans, the main rival for oil palms; rapeseed, used to make canola oil, is a distant third. Among major crops, only sugar cane comes close to rivaling oil palms in calories of human food per acre. Palm oil prices have jumped nearly 70 percent in the last year because supply has grown slowly while demand has soared.”

One can’t fault the growers of oil palms for this crisis. They see the enormous profits being made by oil producing countries and by large oil companies and they want their piece of the pie. Commodity markets are notorious for their volatility and producers want to cash in while the market’s hot. The problem with oil palms is that you can’t plant them in the spring and harvest them in the fall.

“Farmers and plantation companies are responding to the higher prices, clearing hundreds of thousands of acres of tropical forest to replant with rows of oil palms. But an oil palm takes eight years to reach full production. A drought last year in Indonesia and flooding in Peninsular Malaysia helped constrain supply. Worldwide palm oil output climbed just 2.7 percent last year, to 42.1 million tons. At the same time, palm oil demand is growing steeply for a variety of reasons around the globe. They include shifting decisions among farmers about what to plant, rising consumer demand in China and India for edible oils, and Western subsidies for biofuel production.”

The same inflationary pressure is affecting other crops as well.

“American farmers have been planting more corn and less soy because demand for corn-based ethanol has pushed up corn prices. American soybean acreage plunged 19 percent last year, producing a drop in soybean oil output and inventories. Chinese farmers also cut back soybean acreage last year, as urban sprawl covered prime farmland and the Chinese government provided more incentives for grain. Yet people in China are also consuming more oils. China not only was the world’s biggest palm oil importer last year, holding steady at 5.2 million tons in the first 11 months of the year, but it also doubled its soybean oil imports to 2.9 million tons, forcing buyers elsewhere to switch to palm oil.”

The rise in palm oil demand caught a lot of people by surprise. The reason was primarily because palm oil was considered an unhealthy cooking oil by the health conscious West.

“Concerns about nutrition used to hurt palm oil sales, but they are now starting to help. The oil was long regarded in the West as unhealthy, but it has become an attractive option to replace the chemically altered fats known as trans fats, which have lately come to be seen as the least healthy of all fats.”

One interesting develop created by the growing cost of palm oil is that it is rapidly pricing itself out of the bio-diesel market. Large, new bio-diesel plants in Malaysia are sitting idle because they can’t turn a profit. Environmentalists are also getting involved in the palm oil controversy.

“The growth of biodiesel, which can be mixed with regular diesel, has been controversial, not only because it competes with food uses of oil but also because of environmental concerns. European conservation groups have been warning that tropical forests are being leveled to make way for oil palm plantations, destroying habitat for orangutans and Sumatran rhinoceroses while also releasing greenhouse gases.”

The pricing tension that is built into the system will be interesting to watch. Bio-diesel has come to be viewed as an alternative to high-priced oil, but as increases in demand force commodity prices higher certain crops may price themselves right out of the business. The bottom line is that no good substitute for fossil fuel has yet emerged. Each new suggested alternative brings with it new challenges. I’ll discuss one more of those challenges — waste — in a later post. With more and more bio-diesel refineries scheduled to come on line in the coming years, I suspect that we’ll be reading about food inflation and environmental concerns for a long time.