Singapore (Platts)--22Apr2008

Western nations should review their policy of providing biofuel subsidies
as they "distort [resource] allocation decisions" and have contributed to the
inflation of food prices globally, the managing director general of the Asian
Development Bank, Rajat Nag, said Tuesday.
"We believe biofuels are not as green as hoped. If we take the entire
carbon balance into account [...] land taken off corn for ethanol might
produce more carbon," Nag told reporters at a briefing on rising food prices.
Asia's current predicament with high food prices was not solely because
of supply issues, he said. Even though rice inventories were at its lowest in
decades, they were still sufficient to meet demand, he added.
Nag identified the biofuels boom, and more importantly, Western
government subsidies for their use, as one of the key reasons for global
inflation in food prices, as that has led to an increase in the planting of
crops for fuel rather than for food.
In the US, for example, where tax incentives are given for the production
of ethanol and biodiesel, about 30% of the corn yield goes into making
ethanol, he noted.
Subsidized biofuels in the US is also known as "splash and dash B99",
which relates to biodiesel imported or manufactured, which has 1% or less
fossil diesel added before being exported. This practice attracts a tax credit
of nearly 30 cents/liter.
The price of edible oil in Asia had also risen seven- to eight-fold in
the past few years because more palm oil had been diverted to biodiesel
production, Nag said.
Other key causes for high food prices were the increased cost of
production because of higher oil prices, stronger demand due to a growth in
the income of Asian populations, the cyclical effects of weather changes on
crop yield and the allocation of less land for agricultural use in developing
countries, he said.
Though Nag conceded that food prices could fall due to cyclical reasons
like good harvests, he believes that high prices are here to stay. "We have to
accept that the era of cheap food is over, just like the era of cheap oil is
over," he said.
--Keith Tan, keith_tan@platts.com