On full tanks and empty bellies

Fuel for thought: Using water and productive land for biofuels will jeopardise Southern Africa’s food security. (Delwyn Verasamy, M&G)

Fuel for thought: Using water and productive land for biofuels will jeopardise Southern Africa’s food security. (Delwyn Verasamy, M&G)

In the pantheon of great human follies, subsidising food producers and processors to grow food crops only to burn them as fuel in cars certainly ranks high, especially so in Africa, where poverty, food insecurity and hunger still remain real day-to-day issues.

The South African government recently announced that it is finally adopting a new policy of developing biofuels. By October 2015, the government will introduce a requirement that 10% of petrol (E10), up from 2% (E2), must come from ethanol and that 5% of diesel (D5) must come from biodiesel.

The feedstock for the ethanol is generally sorghum; for biodiesel it is edible oils such as canola, sunflower and soybeans.

Although the South African biofuel policy was initiated in 2007 after the Bush administration in the United States and the European Union began moving down this road, the government quite correctly moved with caution to develop the new sector, given its fear that this would affect the price of food. So the government did not provide sufficiently large incentives for biofuel facilities to be established.

Even over the years, incentives such as a 50% rebate on the general fuel levy for biodiesel manufacturers and the three-year accelerated depreciation (50%, 30%, 20%) have proved insufficient to attract investment in the biofuels sector, hence, according to the government, "the need for establishing a more enabling and supportive regulatory framework" (read subsidy).

The reason for the government's justifiable caution is the close association between the introduction of biofuel mandates in the big food-exporting countries, such as the US, the EU, Canada, Australia, Brazil and Argentina, and the rapid rise in food prices.

The World Bank report
In 2009, the World Bank issued a remarkable, controversial report that blamed the massive spike in food prices, especially in the price of maize that occurred in 2007-2008, in part on biofuel policies in the food-exporting countries.

At the time of writing, the South African government had not yet made public how it will incentivise farmers and manufacturers, be it through direct subsidies or by the price at which biofuels will be bought from manufacturers.

According to the department of energy website, an ethanol plant in South Africa using sorghum will take up about 4.6% of the sorghum production a year.

At this point the reader should be feeling what the late Australian prime minister Ben Chifley used to call a sharp pain "in the hip pocket nerve" — because, if the government wants the plant to make a normal profit of, say, 15%, according to its own estimates it will have to pay a subsidy of R2.70 a litre of ethanol.
With ethanol initially set to be 2% of total petrol production, that will mean a levy on petrol of 5.4c a litre.

This corresponds roughly to media accounts that the government is expected to raise a general levy on fuel of 4c a litre in order to subsidise ethanol.

The government has created a biofuels task team, which is expected to set the national strategy by the end of the year.

Displacing maize production
How much grain will the ethanol mandate require? To achieve the minimum of E2, an additional 620 000 tonnes of sorghum will have to be produced, Wessel Lemmer, a senior economist at Grains South Africa, has been quoted as saying.

Sorghum production in South Africa has been in long-term decline as tastes have changed and farmers in wetter areas have moved to higher-yielding maize.

But immediately after the government's announcement of the new biofuel policy, the sorghum futures price on the JSE rose by a modest 1.3%.

Currently, the country's sorghum production is between about 150 000 and 170 000 tonnes a year.

To supply the current use of sorghum for food, feed, the production of traditional beer and for ethanol will mean that the production of sorghum will have to reach levels not seen in South Africa for half a century.

More importantly, based on current yields of about three tonnes a hectare, just getting to E2 will require the use of about 210 000 hectares of land, perhaps even more if the government intends to help small farmers to benefit from the subsidies.

Moving to E10
E2 is modest by international standards and will not immediately affect the production of other crops such as maize, which remains the government's greatest concern.

However, legally there is nothing to stop the industry from moving to E10. This is the modal global standard for countries that have introduced biofuel mandates.

To achieve E10, the South African government would just have to dig deeper into the hip pocket of the driving population and increase the subsidies.

Assuming that the ban on using maize in ethanol continues and the bulk of feedstock continues to come from sorghum, approximately 1.1-million hectares of land will be required to reach that level and would almost certainly affect the production of maize, as sorghum production has moved from the drier western regions of South Africa to the Free State and the wetter eastern regions, where about half is produced.

Yes, but is it legal?
But the way in which South Africa has implemented its biofuel mandate is legally questionable.

Most of the countries that have implemented biofuel policies have done so specifically to support local farmers but generally they have not restricted the possibility of importing biofuels.

Indeed, there is a thriving trans-Atlantic trade in ethanol and biodiesel, with both the EU and the US importing from Latin America.

But this does not appear to be the case with the South African rules. The regulations make it clear that a petroleum manufacturer can only buy ethanol from a licensed biofuel manufacturer, which appears to preclude imports.

Of course, it would be an impossible sell to introduce a biofuel policy that makes the South African driver pay higher prices for fuel in order to pay for imported ethanol and, therefore, subsidise exports from Brazil or the Caribbean.

But prohibiting ethanol and biodiesel imports in this way is probably in violation of South Africa's World Trade Organisation obligations and the government needs to explain how it could be legal.

It also probably goes against South Africa's obligation to use its internal regulations in a way that does not discriminate against foreign producers — what is called national treatment by the WTO.

It's the money
With the constraints put on governments by the Uruguay round of agreements at the WTO in 1995 and the ongoing effects of the 2008 financial crisis, agricultural subsidies are legally and financially limited.

But with biofuels, governments are able to increase subsidies to farmers without spending a cent.

Governments just need to increase the biofuel mandate and the price of fuel and they can provide as big a subsidy as they think farmers and fuel manufacturers need.

In the US, as elsewhere, this is done in the name of fuel self-sufficiency and sustainable production.

If South Africa does impose a levy of 4c a litre to reach E2, the cost will run into hundreds of millions of rands, depending on how much the demand for petroleum products rises. The subsidies to reach E10 and B5 will run into the billions.

Given that South Africa uses about 3.2-million hectares of land for planting maize, it is hard to understand how a programme that will ultimately require an extra 1.1-million hectares of land just for ethanol will not in the longer term end up raising the price of both maize and sorghum.

South Africa is forcing the consumer to pay for the privilege of burning food in their cars through subsidies to what will generally be large agribusiness firms.

This policy, which also probably violates WTO rules, will decrease the excess capacity the South African agricultural sector has to supply the Southern African Development Community (SADC) region, which it has done for decades.

The effect of the policy will be felt most severely when there is a drought and SADC food supplies are in short supply.

Moreover, if the proposed 4c subsidy is set at the depot, then it is uncertain whether motorists in SADC countries that import fuel from South Africa will end up paying the same subsidy and a higher price for petrol.

Making SA's neighbours pay
It is South Africa's sovereign right to do with its land and resources what it chooses.

But, at E10, following this path will almost certainly worsen the food security of its citizens and all of South Africa's neighbours.

This sovereign right to conduct bad policy cannot extend to South Africa's right to raise the price of petrol to its neighbouring countries, such as Botswana, which are as dependent on fuel imported and processed in South Africa as they are on South African food imports.

These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed

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