09/12/2007 (The Hindu) - It is common knowledge that farm subsidies and technology infusion combined to boost global agricultural production in recent years. Rapidly increasing output unmatched by demand growth resulted in farm goods prices staying depressed for a large part of the period between 1995 and 2005. Inventories of major commodities expanded. Existing high consumption levels and issues such as obesity resulted in consumption growth stagnating in developed countries, even as the Asian economic crisis and frequent outbreak of diseases added to demand-side problems.

In rebound mode
A major transformation has taken place in the world agricultural markets in the last two years — 2006 and 2007. Global growth has rebounded. Asia is contributing to this growth substantially. Buoyed by strong GDP growth and demographic pressure, China, and more recently India, are now major consumer markets for a range of commodities including energy, metals and agriculture.

Corn, soyabean, wheat and vegetable oil markets have registered extraordinary performance, prices having reached multi-year highs in recent months.

Minor Alternative
Why did the market suddenly shift gear and begin to move northward? One dominant reason is the sudden emergence of biofuels as a minor alternative or addition to fossil fuel. Stung by the sharp rise in crude oil prices, major economies such as the US and European Union have announced policies to support production and use of biofuels, which are renewable sources of energy (unlike fossil fuel) and largely eco-friendly.

Technology to convert cane, corn and wheat into ethanol is available. Ethanol is blended with gasoline (petrol). Similarly, biodiesel is produced out of vegetable oil (rapeseed oil, soyabean oil, palm oil) through a process known as trans-esterification. Biodiesel is blended with fossil diesel.

In fact, production of ethanol from cane and mixing with gasoline has been going on in Brazil for over 30 years now.

Gasoline is blended with ethanol to the extent of 20-24 per cent.Similarly, Europe has been using biodiesel in notable quantities since the beginning of the current decade. In the last four years, demand for biodiesel has been growing by 30-40 per cent a year in the EU.

The announcement of a major policy initiative by the US to promote biofuels and mandatory blending has converted what was once a non-conventional source of energy into ‘green fuel’ to fight carbon emission and global warming.

Since 2005, huge investments have flowed into setting up humungous capacities for production of biofuels — ethanol and biodiesel. While Brazil produces ethanol from cane, the US produces it from corn (maize).

Wheat is also used as feedstock. Rapeseed oil is the major feedstock for biodiesel in Europe and soyabean oil in the US. Of late, Malaysia and Indonesia have also pitched in. A considerable quantity of palm oil is now diverted for biodiesel purposes.

Boost to prices
Buoyed by the sudden emergence of a new use for traditional food/feed products, prices of corn, wheat and vegetable oils have doubled in the last 12-15 months.

Among crops, there is now competition for acreage, especially in the US, the world’s largest producer of corn and soyabean. For instance, in 2006, a major expansion of acreage for corn resulted in soyabean acreage reduction, which, in turn, led to a sharp decline in the US soyabean output, with adverse impact on world oilseed and oil prices.

Policymakers across the world have advanced all the classical arguments in favour of biofuels. These include energy security through self-reliance, lower dependence on overseas energy products, encouragement to environment-friendly renewable fuels, support to growers through more remunerative prices and employment generation in rural areas.