MARKET DEVELOPMENT
Food Before Fuel, Chinese Officials Insist
Food Before Fuel, Chinese Officials Insist
7/5/07 (EIU ) - The biofuel industry is becoming the problem child of Chinese economic minders. Having nurtured it for years, they now fear that the sector has grown too much and too fast, eating into the country’s stockpiles of surplus corn and pushing up grain prices. Now, government leaders face the uncomfortable dilemma of having to choose between the country’s green agenda and its national food security.
China has been encouraging the production of biofuels from renewable resources, such as ethanol and biodiesel, to satisfy the country’s voracious appetite for energy and reduce its dependence on imported oil. Once an exporter, China now imports more than 40% of its oil supplies. Biofuels are also perceived as an environment-friendly substitute for polluting oil. Chinese planners have made the development of green energy a priority in the country’s 11th Five-Year Plan (FYP, 2006-10). By 2020 they want renewable energy to supply 15% of the country’s total energy needs.
Heeding the call
The problem is, domestic producers have heeded the government’s call for such energy too well. Although it is a relative newcomer to the biofuel market, China in the past two years has emerged as the world’s third-largest producer after Brazil and the United States. The National Development and Reform Commission (NDRC) reported in December that the current production capacity of China’s ethanol mills has reached 10m tonnes, or ten times the approved amount for the four government facilities in Jilin, Heilongjiang, Anhui and Henan provinces. The capacity is also way above the NDRC’s projections for China’s ethanol output of 6m tonnes by the end of the current FYP. Excess output has come from a cluster of small, unlicensed producers. They are apparently selling processed raw materials to officially approved mills or oil refineries, which are clamouring for an extra supply of the inputs. Industry insiders say that Jilin, one of the nine designated provinces where ethanol is sold, has more than 400 ethanol mills, each producing biofuel from corn.
While this may seem like great news for China’s biofuel market, government officials are vexed. Prices of corn—the most common feedstock for ethanol—have risen by up to 15% since the second half of 2006 according to the agriculture ministry. What is more, producers have ignored a government limit on converting only about 3m tonnes of corn into ethanol a year and have used up to 16m tonnes of the crop in 2006, the ministry said in April. The NDRC has warned that if ethanol production continues to be corn-based, China will be forced to import the crop as early as next year. Chinese stockpiles of surplus corn now stand at only about 30m tonnes, down from more than 100m tonnes in 1998, when the country began to produce biofuel.
Relying on crop imports is a sensitive issue in China, as government policy calls for food self-sufficiency in the name of national security. “The excessive growth of corn processing has resulted in scarce feed for livestock and affected the development of animal husbandry,” said the NDRC in a circular released in December. As a counter-measure, the central government stopped approving new corn-based ethanol plants the same month. It also allowed the auction of some state wheat reserves to halt the rise in crop prices and prevent public panic.
Of course, China is not the only country pursuing alternative energies where food and fuel producers are competing for grains. But the rivalry is particularly sensitive here because of the country’s vast population and low per-capita arable land. Despite three straight years of bumper harvests, Chinese planners are still worried that fast-shrinking farmland could affect grain supply in the near future. Arable land is said to have shrunk by 8m ha between 1999 and 2005.
Some top agricultural officials argue that national food security should take precedence over the development of green fuels. Resurrecting the rhetoric from the years when China strived for total self-sufficiency in grain, Yang Jian, director of the development planning department under the agriculture ministry, told the People’s Daily newspaper in December: “We have a principle with biofuel—it should neither impact the people’s grain consumption nor should it compete with grain crops for cultivated land.”
No green panacea?
China’s dilemma is compounded by a critical lobby in the developed world, which has recently tried to discredit biofuels as a green panacea against global warming. Pointing out their immodest use of energy, land and fertilisers, Robert Niven, an Australian researcher, estimates that using ethanol in petrol reduces greenhouses gases “by no more than 5%”. With rising global food prices also being blamed on the biofuel industry’s increased demand for corn, some have even begun to predict the demise of corn-based fuels in China.
Indeed, since the government instituted the ban on new ethanol mills in December, officials have piloted a series of projects that aim to produce biofuels from non-food raw materials, such as straw, chaff and sorghum. There is also new impetus to produce biodiesel, which does not endanger food security because it is derived from vegetable oil. The State Forestry Administration is planning a 13m-ha forest in southern China, to grow jatropha trees, which could be used for the extraction of non-edible oil and its conversion into biodiesel. In addition, China National Petroleum Corp, the country’s largest oil and natural gas producer, is developing farms in Yunnan and Sichuan provinces to grow oil-producing plants with plans to produce 60,000 tonnes of biodiesel per year from them.
This shift in emphasis, however, is not likely to stop China’s ethanol boom. Domestic firms processing corn are aware that their facilities can easily be converted to ethanol production, should the government relax its stance.
China has been encouraging the production of biofuels from renewable resources, such as ethanol and biodiesel, to satisfy the country’s voracious appetite for energy and reduce its dependence on imported oil. Once an exporter, China now imports more than 40% of its oil supplies. Biofuels are also perceived as an environment-friendly substitute for polluting oil. Chinese planners have made the development of green energy a priority in the country’s 11th Five-Year Plan (FYP, 2006-10). By 2020 they want renewable energy to supply 15% of the country’s total energy needs.
Heeding the call
The problem is, domestic producers have heeded the government’s call for such energy too well. Although it is a relative newcomer to the biofuel market, China in the past two years has emerged as the world’s third-largest producer after Brazil and the United States. The National Development and Reform Commission (NDRC) reported in December that the current production capacity of China’s ethanol mills has reached 10m tonnes, or ten times the approved amount for the four government facilities in Jilin, Heilongjiang, Anhui and Henan provinces. The capacity is also way above the NDRC’s projections for China’s ethanol output of 6m tonnes by the end of the current FYP. Excess output has come from a cluster of small, unlicensed producers. They are apparently selling processed raw materials to officially approved mills or oil refineries, which are clamouring for an extra supply of the inputs. Industry insiders say that Jilin, one of the nine designated provinces where ethanol is sold, has more than 400 ethanol mills, each producing biofuel from corn.
While this may seem like great news for China’s biofuel market, government officials are vexed. Prices of corn—the most common feedstock for ethanol—have risen by up to 15% since the second half of 2006 according to the agriculture ministry. What is more, producers have ignored a government limit on converting only about 3m tonnes of corn into ethanol a year and have used up to 16m tonnes of the crop in 2006, the ministry said in April. The NDRC has warned that if ethanol production continues to be corn-based, China will be forced to import the crop as early as next year. Chinese stockpiles of surplus corn now stand at only about 30m tonnes, down from more than 100m tonnes in 1998, when the country began to produce biofuel.
Relying on crop imports is a sensitive issue in China, as government policy calls for food self-sufficiency in the name of national security. “The excessive growth of corn processing has resulted in scarce feed for livestock and affected the development of animal husbandry,” said the NDRC in a circular released in December. As a counter-measure, the central government stopped approving new corn-based ethanol plants the same month. It also allowed the auction of some state wheat reserves to halt the rise in crop prices and prevent public panic.
Of course, China is not the only country pursuing alternative energies where food and fuel producers are competing for grains. But the rivalry is particularly sensitive here because of the country’s vast population and low per-capita arable land. Despite three straight years of bumper harvests, Chinese planners are still worried that fast-shrinking farmland could affect grain supply in the near future. Arable land is said to have shrunk by 8m ha between 1999 and 2005.
Some top agricultural officials argue that national food security should take precedence over the development of green fuels. Resurrecting the rhetoric from the years when China strived for total self-sufficiency in grain, Yang Jian, director of the development planning department under the agriculture ministry, told the People’s Daily newspaper in December: “We have a principle with biofuel—it should neither impact the people’s grain consumption nor should it compete with grain crops for cultivated land.”
No green panacea?
China’s dilemma is compounded by a critical lobby in the developed world, which has recently tried to discredit biofuels as a green panacea against global warming. Pointing out their immodest use of energy, land and fertilisers, Robert Niven, an Australian researcher, estimates that using ethanol in petrol reduces greenhouses gases “by no more than 5%”. With rising global food prices also being blamed on the biofuel industry’s increased demand for corn, some have even begun to predict the demise of corn-based fuels in China.
Indeed, since the government instituted the ban on new ethanol mills in December, officials have piloted a series of projects that aim to produce biofuels from non-food raw materials, such as straw, chaff and sorghum. There is also new impetus to produce biodiesel, which does not endanger food security because it is derived from vegetable oil. The State Forestry Administration is planning a 13m-ha forest in southern China, to grow jatropha trees, which could be used for the extraction of non-edible oil and its conversion into biodiesel. In addition, China National Petroleum Corp, the country’s largest oil and natural gas producer, is developing farms in Yunnan and Sichuan provinces to grow oil-producing plants with plans to produce 60,000 tonnes of biodiesel per year from them.
This shift in emphasis, however, is not likely to stop China’s ethanol boom. Domestic firms processing corn are aware that their facilities can easily be converted to ethanol production, should the government relax its stance.