Brazil's Biofuel Drama Goes Global

By Eric Ehrmann

Speculators hedging uncertainty in world energy markets are again making renewable fuels derived from corn, cane sugar and soybeans the drivers offood price inflation, just as they did on the eve of the 2008 economic crisis.

With G-20 nations currently meeting in Buenos Airesto discuss controlling volatile commodities, Brazil has dropped prices 25% on pure E-100 ethanol, claiming fresh supplies from the current cane sugar harvest are taking pressure off the market. But government efforts to get major gasoline companies to reduce prices on gasoline-ethanol blends (E-18 and E-25) resulted in a cutback of only six percent.

Two weeks ago pure E-100 sugar ethanol was selling at the pump for the equivalent of $5.61 a gallon at most filling stations in southern Brazil. Now, after intervention by the Dilma government, it sells for around $4.22 a gallon, what regular unleaded gasoline blended with subsidized corn ethanol sells for in Washington, D.C.

While the move may slow efforts by speculators from taking over commodities markets controlled historically by supply and demand, it's unlikely to uncouple Brazil's huge food export economy from the politics and cycles of the oil market. In spite of the ethanol rollback, gasoline blended with ethanol costs on the average 2.89 reais per liter at the pump, the equivalent of $7.22 a gallon, three dollars more than what consumers pay inside the Beltway for regular or mid unleaded. Brazil can also elect to reduce its high taxes on gasoline and ethanol to help consumers on already tight budgets. But food price inflation remains a major issue that can push inflation above government projections by year's end.

Brazilian sugar ethanol increased in price 123% last year, shadowing price hikes in barrel oil. World Bank president Robert Zoellick, meanwhile, says world food prices have increased 36% over the past year and speculators hedging instability in oil nations factor into the rise. Couple that with a recent study by the Asian Development Bank indicating that each 10 percent rise in food prices puts an additional 64 million people into abject poverty, and Zoellick´s number quickly morphs into a group of 190 million marginalized, hungry humans, more than three times the population of France.

Derivatives traders, hedge fund operators and banks, detached from the social costs of food price inflation, have no qualms about speculating. According to the Daily Telegraph of London, Barclays Bank makes half a billion dollars a year speculating on food prices, and they are not the only bank who engages in such operations.

Brazil's history developing the sugar ethanol industry is full of the triumphs and contradictions one finds in Larry Rohter´s bestselling book on the land of the samba. When the military government opted for ethanol as the national fuel for automobiles back in 1976 it was not looking for a green solution or a biofuel. The junta viewed ethanol distilled from cane sugar as a national project to avoid dollar outlays for expensive foreign oil in the wake of price shocks that followed the Yom Kippur war. By 1985, with the transition to democracy well underway, 92% of the new cars sold in Brazil -- Fiats, Chevys and Volkswagens -- were built to run on E100.

Now, Brazil finds itself sitting on what some say are the world's largest oil discoveries in the past 100 years, and the emphasis has changed. Just one in four motorists prefer using pure E100 to gasoline blends even with the new flex motor vehicles that enable them to take advantage of the cheaper biofuel price.

Moreover, studies indicate that E100 delivers less miles per gallon or kilometer and generates only about 70 percent of the power offered by gasoline blended with ethanol. E100 ethanol derived from cane sugar, however, has an energy balance seven times greater than subsidized American ethanol derived from corn. The energy balance represents the statistical relationship between the energy required to produce the biofuel and the amount of energy the fuel releases when ignited by the engine of a car or truck or generator. But you can Google or even Bing and find other studies and social media storytelling that say ethanol is more powerful than Popeye after eating a can of spinach.

All of this reinforces the view of those who argue that biofuels and US ethanol subsidies are a boondoggle for global agribusiness and some US farmers. According to the US Congressional Budget Office, the amount it costs taxpayers to use corn ethanol to lower gasoline consumption by just one gallon is $1.78.

High energy prices are pushing up food costs everywhere. In Germany bread prices have jumped 15% this year, and the Federation of Food Producers blame biofuels and feed grain for pork, beef and dairy cattle. Demand for food in China has sparked double digit inflation for the past six months causing Beijing to acquire the soy production of an area in Brazil the size of Germany. AndSouth Korea, a major China trade partner, is now starting to see food prices spiral. New census results in Brazil indicate that hunger is becoming a bigger problem; 16 million people are living in abject poverty on monthly incomes of less than $60.

Brazil's biofuel drama is a reminder that solutions packaged in green wrappers fail to scale with billions facing starvation in the Americas, Africa and Asia. And while the biofuel economy has become too big and too noisy to fail the high degree of relative deprivation experienced by those it makes hungry make it all too tempting for them to trade their rice for a rifle. You don't need Twitter to hear about it... you can see it in the favelas, you see it in the emerging nation of Southern Sudan, and you see it along the borderlands of Cambodia and Thailand right now.

UPDATE 1: G-20 has downgraded meeting in Buenos Aires to workshop status and no unified substantive action to deal with food price inflation emerged at this gathering.

UPDATE 2: In conference call I participated yesterday with Brazil Central Bank governor Tombini, the governor acknowledged food price inflation and fuel costs are major concerns and that they are now on a watchlist of a new committee that meets weekly to deal with inflation policy.