The Role of Biofuels in the Transformation of Agriculture

1. The Role of Biofuels in the Transformation of Agriculture Daniel G. De La Torre Ugarte and Chad M. Hellwinckel The Economics of Alternative Energy Sources and Globalization: The Road Ahead Orlando, Florida - November 15–17, 2009

2. Agriculture and Poverty • Developing world • 5.5 billion people • 2.5 billion are in households involve in Ag • 1.5 billion are smallholder households • 800 million people food insecure • 80% of food insecure people are in rural areas • In many developing countries: • >50% of employment • >25% of GDP • Increase in GDP from Ag is twice more efficient for poverty reduction than any sector

3. Long term trend in agricultural commodity prices 30+ years of declining and or flat prices Source: International Financial Statistics Online, IMF February 10,2008. Except for real price in 2007, which is estimated by author.

4. Public Spending in Agriculture has stagnated and it is the least where is needed the most

5. Biofuels Expansion took-off when world inventories were declining Source: USDA

6. 0.26%Searchinger, et al. Source: Fourth Assessment Report, IPCC (2007) (a) Global annual emissions of anthropogenic GHGs from 1970 to 2004. (b) Share of different anthropogenic GHGs in total emissions in 2004 in terms of CO2-eq. (c) Share of different sectors in total anthropogenic GHG emissions in 2004 in terms of C02-eq (Forestry includes deforestation.) Global Anthropogenic GHG Emissions GHG for ag and forestry is to address the 31% of annual emissions coming. If we take care of this we take care of

7. The story thus far: • Agricultural commodity prices went from depressed to walking on a “razor’s edge” • Biofuels are “the straw that broke the camel’s back • Current industrial agricultural system is not sustainable; biofuels sustainability largely depend on the way feedstock are produced • Today’s agricultural economic, environmental, and social problems are not caused but exacerbated by biofuels.

8. The Question is • Under which conditions biofuels can be an opportunity for: • Poverty reduction • Climate change / environmental benefit • Energy crisis / energy independence • Increased Ag prices could drive new investment into agriculture • Type on investment matters. A LOT !

9. Trade off Between Agricultural Prices and Food Security Ag Prices Increase in agricultural prices is not necessarily a bad for food security, specially if coming from long trend of low prices P1 B A P0 % Food Security

10. Expand the Impact of Higher Prices in Food Security Investments directed to improve share of high prices capture by farmers would improve food security Ag Prices P1 B C A P0 % Food Security

11. Trade-off Between Agricultural Prices and Environmental Cost Ag Prices Under current agricultural practices and food consumption patterns, an increase in ag prices could accelerate environmental costs P1 B P0 A Environmental Cost

12. Higher Ag Prices Create Conditions to Invest in reducing Environmental Cost Investment in agricultural technologies less intensive in fossil inputs, and in tune with local soil and food habits would reduce environmental cost of agriculture Ag Prices P1 B C D P0 A Environmental Cost

13. An IllustrationEISA and Cap & Trade • EISA: expansion of biofuels demand • Cap & Trade: • Improve environmental performance • Offsets: tillage, afforestation, grasses, methane capture, energy dedicated crops. • Carbon price up to US$ 27 /MTCe (EPA)

14. Land Use Changes corn soybean wheat cotton

15. Crop Net Returns

16. Carbon Net Flux

17. Strategy for Food Security • Increase farmers ability to capture larger share of higher prices: • Invest in farmers’ access to markets, improving marketing & distribution systems • Increase access to land, water and productive resources • Invest in research and extension to improve productivity of local crops to supply the now profitable local market • Implement programs to ensure access to food for vulnerable population

18. Strategy for Climate Change • Drastically change diet composition towards more efficient sources of protein and food from local origin • Invest in Research & Extension oriented to: • Reduce use of fossil based inputs in agriculture • Improve management practices which increase the environmental performance of production agriculture • Ensure the best use of soils and landscape • Recuperate the complementarity of crop and livestock activities in the farm • Integrate GHG emissions and other environmental impacts into food system economic balance sheet

19. Institutional Investment • Strengthen land property rights and enforcing mechanisms to protect small holders • Re-develop domestic and global institutionality to support transformation of agriculture • Prioritize poverty reduction and environmental performance above trade liberalization

20. Concluding Remarks • If nothing is done, missed opportunity for poverty reduction, agriculture, and climate change • Biofuels could result in a massive transfer of resources to the ag sector. • Biofules could provide the profitability to invest in agriculture. • A new framework for agriculture is needed to radically change what, how, and where we produce • Countries could benefit from biofuels without producing them

21. Agricultural Policy Analysis Center http://agpolicy.org/ Thanks ! Department of Agricultural Economics, Institute of Agriculture University of Tennessee http://www.agriculture.utk.edu/