Perhaps George W. Bush was indulging in his favourite pastime — of putting his foot in his mouth — when he suggested that the rising incomes and hence demand for food in India and China were mainly responsible for the increase in global foodgrain prices. Indeed, incomes in China, India and sub-Saharan Africa have been rising. Moreover, very basic economic theory suggests that the poor spend large fractions of any increase in incomes on food. So, world demand for food from developing countries has increased.

Despite the increase in demand for food, recent studies by more than one organization indicate that the single most important factor contributing to the surge in global foodgrain prices has been the diversion of food grains into the production of biofuels. An analysis conducted by a World Bank economist concludes that biofuels have been responsible for 75 per cent of the increase in food prices between 2002 and February 2007. Other reports attribute a lower share of the “blame” to biofuels.

Perhaps the most reliable independent estimate comes from the International Food Policy Research Institute. The IFPRI maintains a very detailed account of world food production and patterns of utilization. IFPRI’s own estimate suggests that biofuel production is responsible for as much as 30 per cent of the increase in food prices, and over 40 per cent of the increase in prices of maize.

Given Bush’s statement, it is ironic that his own country has pursued the production of biofuel most enthusiastically, with a third of its entire corn output going into the production of ethanol. Bush’s own policy is to substitute
75 per cent of his country’s oil imports by biofuels. The European Union has also been very pro-active in encouraging biofuel production, and would like a tenth of the entire output of petrol and diesel to come from biofuels by 2020. These countries have come up with absurdly low estimates of the effect of biofuels on food prices. The American government claims that it is as low as 3 per cent.

The wheel has turned full circle. The diesel engine, when it was first invented towards the fag end of the 19th century, was designed to run on peanut oil. But biofuels have never been very efficient. Once plentiful supplies of Middle Eastern oil ushered in an era of relatively cheap crude-oil prices, much of the interest in biofuels disappeared. The oil shocks of the Seventies and events such as the use of the Arab oil embargo against Americans and west European countries (to protest against their support of Israel) induced these countries to search for non-conventional sources of energy.

Now that the evidence against biofuels is so strong, there will be efforts to force the developed countries to change their policies. This promises to be another contentious issue between the North and the South. The North or the developed countries, consume relatively little foodgrain. On the other hand, their per capita consumption of oil is very high. Their citizens would much rather pay significantly higher prices for foodgrains than import oil at $150 a barrel. The South too is hurt by rising crude prices. But it would prefer to ensure that all its population be able to afford at least one square meal a day. Very few of them drive cars anyway.

Narrow nationalist interests indicate that the North should continue with its current encouragement of biofuels. Humanitarian considerations dictate at least some cutback in biofuel production based on foodstocks. Given the record of the North, particularly the United States of America, on issues such as climate change, the South should not be too hopeful. It is also important to keep in mind that all biofuels should not be painted with the same brush. Since crude-oil prices show no signs of coming down from the current stratospheric levels, all oil-importing countries need to explore ways of promoting non-conventional sources of energy that do not use up scarce food stocks. In particular, biofuels which use non-food stocks and inputs grown on non-arable land hold a lot of promise.

Interestingly, both China and India are actively pursuing this route. In India, states like Karnataka, Kerala, Tamil Nadu and Chhattisgarh have embarked on the cultivation of Jatropha, which is a plant that can grow in wastelands. The seeds of this plant yield Jatropha oil, which can then be converted to bio-diesel. The Central government hopes that by 2011, these initiatives will be able to replace 20 per cent of the country’s diesel consumption with Jatroha oil. Chattisgarh plans to earn Rs 40 billion every year from 2010 by selling Jatropha seeds. These targets may be too ambitious. But the policy is clearly a step in the right direction.

The developing countries must also realize that cutbacks in biofuel production by the North can only be a short-run solution to the food crisis. If present trends continue, the prospects of any appreciable fall in foodgrain prices in the long run are quite bleak. A number of factors are responsible for this gloomy scenario. First, current trends in production and demand suggest that food supply will soon fall far short of demand — even without diversion of foodgrains to biofuel production. Aggregate productivity in agriculture has increased by just 1.3 per cent per year during 2000-06. Rising incomes and, equally important, growing populations — virtually all of the latter taking place in the South — must mean that foodgrain demand will far exceed this paltry figure.

Second, the rapidly changing pattern of consumption in China also poses a threat. Along with the phenomenal growth in per capita incomes, there has been a concomitant increase in the demand for meat in China. So, vastly more chicken, cows and pigs are required to sustain the Chinese appetite for animal protein. Unfortunately, the production of animals is much more resource-intensive than the production of foodgrains. Animals “consume” sizeable areas of land for grazing, In addition, there is a diversion of foodgrains into animal feed. Some estimates indicate that animal feed will be the main component of demand for cereals in China in a couple of decades.

In the long run, the only way to ensure that food prices do not go through the roof is to increase food production. Moreover, the increase in food production has to come through higher productivity because the supply of arable land is limited. This requires improvements in technology, and the only way to achieve this is to ensure massive infusion of funds into research for discovering new high-yielding varieties of seeds. The priorities of the developed countries lie elsewhere. Why should they care about improved agricultural productivity when their consumption of basic staples is a relatively small fraction of their household budgets? Clearly, the richer developing countries have to take the initiative by increasing their investment in agriculture.