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28 April 2017
 

 

For well-considered comment and analysis on the issues and trends shaping the South African business landscape, read Real Economy. From macro- and micro-economic developments through to black economic empowerment and trade negotiations, Real Economy offers a weekly insight into the challenges associated with growth and transformation.

 

 
 
   
 
 
Article by: Terence Creamer - Creamer Media Editor
 
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" It takes 240 kg of maize to produce the 100 8467 of ethanol required to fill the tank of a sports utility vehicle "
The World Bank's latest Word Development Report (WDR), released last month, urges developing countries considering expansionary biofuels strategies to proceed with circumspection, warning that the potential conflict between food and fuel is real. Moreover, it cautions that the costs associated with subsidising the development of the sector could, in many instances, outweigh the social, environmental and economic benefits.

The WDR 2008, entitled 'Agriculture for Development', is instructive for South Africa, given that it has been released at a time when the country's authorities are reportedly putting the final touches to a national biofuels strategy, which will most likely be underpinned by some form of subsidy.

The strategy itself is informed by the fact that government has identified biofuels, along with tourism and business process outsourcing, as a key focus area for development under the Accelerated and Shared Growth Initiative of South Africa, or Asgisa, which seeks to created the platform for economic growth of 6% or higher as from 2010.

Further, a number of African countries have similar biofuels aspirations, given the sector's apparent potential to create primary-sector, low-skilled employment opportunities, while offering the added energy-security incentive.

Actually, only days before the release of the 353-page report, the world's leading biofuels manufacturer, Brazil, signed two agreements with the Congo Republic, promising training, technology and financing for the production of fuel from sugar cane and palm oil. The South American country currently produces about 90% of total global biofuel production, estimated at 40-billion litres in 2006.

FOOD SECURITY UNDER THREAT

The main thrust of the document is to call for greater investment by developing countries into the agriculture sector, given its potential in supporting the goals of halving extreme poverty and hunger by 2015.

It advocates a ‘new agriculture agenda' alive to the fact that, for the poorest people, gross domestic product (GDP) growth originating in agriculture is about four times more effective in reducing poverty than GDP growth originating outside of the sector. It is estimated that some 900-million rural people, currently surviving on less than $1 a day, could benefit from a renewed focus, which embeds reforms such as subsidy cuts and market liberalisation.

However, the report also warns that global food supplies are under increasing pressure from expanding demand for food, feed, and biofuels; rising energy prices; increasing land and water scarcity; and the effects of climate change.

Its authors are, thus, also uncertain that current moves to divert agricultural feedstocks towards the production of transport fuels will be supportive of development in all instances. What is more certain, though, is that energy costs are likely to be higher for the next 20 years than they have been for the past 20, which is going to place upward pressure on farm costs and food prices. And, if more of that potential food is diverted for use in energy, it is also likely to sustain the high food prices.

ONE SUV TANK VS ONE PERSON

Of real concern is the fact that, using current technologies, it takes 240 kg of maize to produce the 100 8467 of ethanol required to fill the tank of a sports utility vehicle (SUV) - the same amount of grain needed to feed just one person for a year.

In addition, analysis of the fast-expanding US maize-to-fuels programme also shows that, while in 2006/7 about a fifth of the US maize harvest was deployed for use as ethanol, it only succeeded in displacing 3% of petrol consumption. It also notes that, while some 30% of the US maize harvest is likely to be diverted toward ethanol by 2010, it would still account for less than 5% of US petrol consumption - it does add, though, that ‘second-generation' technologies could potentially make a higher contribution to energy security.

The net effect thus far has been a surge in maize prices, which have risen by about 60% in the past two years. Now this is not all bad, as it creates the conditions necessary for new planting. But it is forecast that cereal supply is likely to remain constrained for some time, particularly as stocks run down.

In this context, net importers of food are particularly vulnerable and there is also some anxiety that the high prices, even if transient, could mean significant welfare losses for the poor, given that poor countries are often net buyers of staple crops. This said, net exporters could well be benefiting from the higher prices.

The report is not, however, entirely negative about the potential developmental benefits of large-scale biofuels industries in developing regions. It stresses, though, that the financial costs have to be seriously assessed against the potential economic, social and environmental benefits.

It stresses, too, that there is not necessarily a linear relationship between energy security and the creation of a biofuels sector, adding that current technologies can only marginally enhance security of supply. The environmental benefits of lower- carbon biofuels might also be offset by the emissions generated in growing, manufacturing and transporting these fuels. Further, a change in land use, for example by cutting down forests or draining peat land, could more than cancel out the greenhouse-gas emissions savings at the tailpipe.

But the report also notes that emerging technologies could help ease some of these apprehensions.

For instance, biofuels production might, in future, rely on dedicated energy crops or waste products instead of food. Further, many oil-importing landlocked countries could well benefit significantly from biofuels, particularly where fuel-importation is costly. The report also does not dispute that a successfully deployed policy could well justify the subsidies that will be required to develop the industry in developing countries.

For policymakers, though, the message is fairly unequivocal: "The challenge . . . is to avoid supporting biofuels through distortionary incentives that might displace alternative activities with higher returns. Governments need to carefully assess economic, environmental, and social benefits and the potential to enhance energy security. Other often more cost-effective ways of delivering environmental and social benefits need to be considered, especially through improvement to fuel efficiency."

Edited by: Creamer Media Reporter
 
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