March 29, 2013
It is no surprise that a majority of EU government appear to be opposed to the European Commission’s proposal to limit the amount of food grains that may be used in biofuel production. Significantly, it was the central European member states that the recent Environment Ministers meeting demonstrated are most opposed to the Commission’s new policy line. These countries have the greatest scope for expansion of cereal production.
In what is becoming an EU grain market strongly linked to the world market, any additional source of internal market demand provides longer term guarantee of firm prices for growers. Seen from Brussels however, the EU does not want to be seen to be boosting food prices in global lean years by fostering the conversion of bread grain into petrol. There is however a further policy modification that would increase the internal market demand for grain while at the same time damping the effect of biofuel use on food prices. This could be done by using biofuel production as a flexible market buffer linked to world grain market prices.
Despite arguments to the contrary, there is little danger that pursuit of the current mandated levels of grain use in biofuels would result in indirect land use change (ILUC,) either inside the EU or in third countries. There is sufficient underutilised production capacity in existing arable land in central and eastern Europe to deal with any increased demand. If the current average yield gap between east and west were to be only half closed, EU grain production could be increased by around 10 per cent of current output. There is no technical barrier to this achievement.
Now however, some agricultural market experts are suggesting that the operation of flexible biofuels policies could operate like a buffer stock – but without the political and managerial problems which a pure buffer stock policy based on state financed storage would inevitably involve. ‘Surpluses’ would be taken out of the market by a quasi-commercial use and returned by suspension of that use. Economists at the UK agriculture ministry Defra have suggested that establishing what they call flexible biofuel mandates could provide a buffer against harvest shortfalls. In years when harvests are below ‘safe’ levels mandates would be reduced; in good years they would be increased.
Reduction in biofuel requirement could be triggered when grain price increases exceed a certain threshold . The proportion of crops that would in ‘normal’ years go into biofuel production would perform the function of a reserve stock, or ‘virtual grain stock’ as the Defra economists put it. Computer modelling suggests that abolishing EU blending requirements in the presence of a harvest shortfall of 25% could reduce a coarse grain price spike by up to 15% and a wheat price spike by between 10 and 35 %. <29/03/2013>