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CHINA: High on Ethanol Despite Rising Food Prices

Antoaneta Bezlova

BEIJING, Apr 24 2008 (IPS) - Studies debunking the environmental benefits of ethanol have made little impression in this country, which is betting on bio-fuels as the green answer to coal and oil to help clear its increasingly smog-filled skies.

But even as the ethanol dream survives unscathed, economic realities of surging food prices and global inflation are beginning to bite.

Prices for non-grain feedstock as cassava promoted here as a safe alternative to the conversion of precious corn into ethanol fuel are quickly rising.

Producers say they would need more government subsidies to keep their projects going. But given that the Chinese government keeps a tight control on fuel prices, doubts are growing as to whether the expensive production of cleaner fuels can ever be made profitable.

"The government controls all fuel prices – whether oil or ethanol – but with the prices for feedstock going through the roof we are all suffering losses," Li Jiangdong, a salesperson at Jilin Fuel Ethanol Ltd., one of the four largest state-mandated bio-ethanol producers, told the China Times this week.

In Guangxi, an impoverished province in southwestern China, where ethanol is commercially produced with cassava instead of grain, officials announced this month they were replacing traditional petrol and diesel oil with biofuel. The locality plans to phase out fossil fuels entirely by the end of the month, expanding the scope of a pilot scheme currently running in nine other Chinese provinces.

But what should have been a cause for environmental victory got little resonance among a public worried about galloping inflation and surging food prices.

Consumer prices in March increased 8.3 percent while food prices have risen by 21 percent since last year. The rising price of corn – the primary source for ethanol production – has had a knock-on effect on all other staples.

This is consistent with warnings from the International Assessment of Agricultural Science and Technology for Development (IAASTD), released in a report prepared by 400 experts that says diversion of agricultural crops to producing bio-fuel can raise food prices.

Prices of non-grain feedstock like cassava and sorghum have risen too, squeezing producers&#39 already thin profit margins.

"Without more and larger subsidies from the government our projects are doomed," one procurement official at Guangxi Zhongliang Bio-energy Company, said. "Prices of cassava have doubled since last year and one can&#39t say how long the production can be sustained."

Chinese leaders have encouraged the production of biofuels from renewable resources to satisfy the country&#39s voracious appetite for energy and reduce its dependence on imported oil. Biofuels are seen by Beijing as a greener way to sustain the country&#39s robust economic growth in the face of growing international clamour about its pollution.

Under pressure to tackle its worsening smog and acid rain, China has stepped up efforts to develop clean alternative energies and has a target for renewable energy to account for at least 15 percent of consumption by 2020 – up from just 6 percent in 2006.

Yet the promotion of biofuel has presented the leadership with the most difficult choices. Because of the country&#39s vast population and low per-capita arable land, Beijing has had to carefully manage the competition for grains between food and fuel producers. Moreover, new evidence has shaken the earlier belief that biofuels are a silver bullet for climate change.

In the long term, effects on food prices may be reduced, but environmental effects caused by land and water requirements of large-scale increases of first generation biofuels production are likely to persist, the IAASTD report has warned.

Although a relative newcomer to the biofuel market, China in the past three years has emerged as the world&#39s third largest producer after Brazil and the United States. In 2006, the production capacity of China&#39s ethanol mills reached 10 million tonnes, outpacing the government mandated output of six million tonnes for the whole of the 11th Five-Year plan (2006-10).

Amid rising corn prices and food security concerns, Beijing has tried to promote non-grain resources for the production of bio-ethanol, limiting the amount of corn used for conversion into green fuels and restricting investment into corn-based ethanol projects.

But even non-grain feedstock production of bio-ethanol is proving problematic as producers complain about sinking fortunes.

A circular released in 2006 by the nation&#39s top planning body, the National Development and Planning Commission, estimated that the cost of producing one tonne of ethanol from corn was roughly 4,500 yuan (652 US dollars) while the cost of producing it from cassava was lower, at 580 dollars.

The circular&#39s estimates were used as a cost basis for the expansion of non-grain feedstock production but agricultural researchers say these projections have been now rendered meaningless, as prices have risen steeply.

Chinese researchers say the country uses about 3.3 tonnes of corn to produce one tonne of ethanol. It takes though 7 tonnes of cassava, or 15 tonnes of sorghum, to produce the same amount of biofuel. With the current prices of inputs there is no cost advantage of using non-grain feedstock as a substitute to corn.

China&#39s corn-based ethanol production is already heavily subsidised. However, given domestic controls of retail fuel prices and steep corn prices, the subsidies are only sufficient for producers to break even or make tiny profits, according to a study by Deutsche Bank.

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