The Energy Transition has a Nutritional Problem – Irina Slav on Energy

“We are witnessing the beginning of one of the great tragedies of history. The United States, in a misguided effort to reduce its oil insecurity by converting grain into fuel for cars, is generating global food insecurity on a scale never seen before.”

This stark warning was delivered in 2008 by Lester R. Brown, head of the Earth Policy Institute, the environmental think-tank that functioned until 2015 and closed doors with Brown’s retirement.

For now, luckily for all, the warning has not materialised in its full grimness but things may be about to change, driven by factors that no one could have predicted in full back in 2008.

Biofuels are great. They burn more efficiently than fossil fuels, they emit a lot less greenhouse gases, and they are, in a sense, renewable, in that they are produced from crops that can be planted again and again, year after year. Yet this last part is also what makes biofuels a questionable choice for alternative fuel, especially now.

The most common feedstocks for biofuels are corn and sugarcane for bioethanol and vegetable oils for biodiesel. Incidentally, corn is also the feedstock for a lot of human foods and animal feeds, and vegetable oils — and the plants they are made from, such as rapeseed and soybeans — are also quite widely used in human food.

Biofuel mandates have been a boon for farmers in some parts of the world such as the United States and Europe, especially since they have been coupled with special incentives for them to expand their production of feedstock plants. Unfortunately, this has put biofuels in direct competition with the food industry and the pandemic has not made things easier.

Agriculture is a weather-dependent, fertiliser-intensive industry. What this means is that bad weather can ruin crops in one fell swoop, raising the price of the products made from these crops for end consumers. Fertiliser shortages, for various reasons, can also do that by raising production costs for farmers who invariably pass these on to end consumers. In the pandemic era, we’ve had the bad luck to see a combination of bad weather and fertiliser shortages. All that at a time when demand both for food and for biofuels is on the rise.

In June this year, the Wall Street Journal reported that soybean prices had soared to a record because of growing demand from the biofuels industry. The report cited data from StoneX Group, a financial services company, which had calculated that soybean oil production capacity was set to almost double this year from 2020 to 935 million gallons. By 2023, StoneX Group said, this could further grow to over 2 billion gallons annually.

Naturally, with the increase in demand for biofuels and the consequent increase in production capacity, there will be higher demand for feedstock. In fact, Platts Analytics has forecast that the soybean harvested area in the 2022-23 marketing year, which lasts from September 2022 to August 2023, will rise by 1.2 million hectares.

So far, so good. More biofuels need more biofuel feedstock. The problem is that soybean oil, like corn, is not only used for biofuel production, as mentioned already. It is also used for food. And supply is tightening, pushing prices higher at a time when inflation is already a considerable problem for most of the world.

Bloomberg reported in May this year that the price of soybean oil, along with corn and palm oil has risen more than twofold over a period of 12 months. And while soybean oil prices are now off their May peak, they are much higher than they were in December 2020.

In September, the Financial Times reported that the food industry in the U.S. was feeling the pinch hard, especially after the oil refining industry rushed to join the biofuel party in a bid to clean up its reputation and stake a claim in the energy transition.

“We support renewable fuels and the green agenda, but soybean oil [prices] have tripled. Our members are worried that they may not be able to buy any oil,” the chief executive of the American Bakers Association told the FT at the time.

If we are to believe the futures price chart for soybean oil, it’s not that bad — prices are set to decline next year, although not by a whole lot. Whether futures prices are a reliable indicator of supply and demand is open to debate but facts are that demand for soybean oil is on a steady rise, especially after the EPA released its proposed biofuel requirements for 2022: they are, unsurprisingly, higher than in previous years.

So, soybean oil prices are higher, which means the prices of the end products that have soybean oil among their ingredients — and there are plenty of these —will also be higher. This is already bad news for any country fighting inflation. What’s even worse news is that the next crop may be lower.

The fertiliser problem of the agricultural industry came into the spotlight earlier this year as a loud member of the Commodity Price Rally choir. A lot of the performance of this choir has been blamed on the pandemic: supply chain disruptions resulting from lockdowns were followed by a fast rebound in demand —that same pent-up demand bankers enjoyed so much — that supply couldn’t keep up with in a timely fashion because of the aforementioned supply chain disruptions.

Yet another aspect of the post-pandemic, or more accurately mid-pandemic, recovery in the consumption of everything was much higher energy prices. And fertiliser production is an energy-intensive industry. Two large fertiliser plants closed in the UK earlier this year because of soaring gas prices. Another one closed in Romania. The closures are temporary but they would still affect global ammonia supply. Sadly, the price trend is not limited to either Europe or ammonia.

The WSJ reported earlier this month global fertiliser prices had doubled over the past 12 months forcing U.S. farmers to reconsider their planting plans. Some, the report said, were moving from corn, which requires a lot of fertiliser, to soybeans, which require less. Others, however, planned to simply use less fertiliser across their crops. Lower fertiliser inputs mean a high likelihood of lower crops and those in turn, would mean higher prices for the crops. Again, all this is happening at a time of rising demand for biofuels while demand for food, if anything, cannot really decline.

The race for crops between the biofuel industry and the food industry is tightening. In the U.S. alone, biodiesel capacity is seen swelling to 4.9 billion gallons by the end of 2024 from 827 million gallons now, according to JP Morgan. Bioethanol capacity will not be swelling at the moment because of the fertiliser problem. This would also mean lower corn output overall and a higher risk of higher prices for everything corn is used in. The refrain of the Commodity Price Rally choir, then, is “And higher prices for all”.

As if finding the balance between biofuels, food, and the affordability of both is not enough of a conundrum, there is one more aspect of the biofuel-food war to consider. More biofuel crops mean more land is needed for food crops. And this land is not exactly sitting empty and waiting. It has to be created by forest-clearing, for example, as John M. DeCicco, an environmental research professor emeritus from the University of Michigan, wrote in a recent overview of biofuels and their pros and cons.

There appear to be quite a few cons, according to DeCicco. Land-clearing for new fields is one. In itself, deforestation is a problem that became one of the priorities of the COP26 agreement to which the U.S. is party. But forest-clearing and using prairie land for soybean and corn fields also leads to the direct release of carbon dioxide into the atmosphere.

Not only that, the expansion of farmland also hurts biodiversity, not that anyone cares much about it these days when it’s all about emissions. Yet biodiversity is essential: as we have all hopefully learned in elementary school, ecosystems are interconnected and interdependent, and damaging one part of an ecosystem could eventually hurt the whole thing.

The problem with biofuel land and fertiliser use appears to be particularly topical in the United States. In Europe, plans are to phase out biofuels along with internal combustion engine cars, of course, so the electrification of transport should take care of the biofuel issues in the future, as long as it happens as planned.

In the U.S., it’s a small mercy that the best place for utility-scale solar installations is the desert and not arable land in the Corn Belt. But this, too, may be about to change if the Biden administration gets the chance to implement its ambitious solar capacity plans. Then things will get really interesting with solar, biofuels, and food fighting for limited land.