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Forget the Oil Crunch. Biofuels Feed Global Inflation Fears.

January 15th, 2008 · by Tim Minahan · 1 Comment · costing, enviro/social sustainability, supply management

Oil may have crested at the $100 per barrel mark recently (and is still holding high on production constraints), but buyers should keep a close eye on the rising cost of alternative fuels.

Global markets quaked last week as soybeans sprouted to near-record prices of $11.50 per bushel, the cost of corn reached an 11-year high, and wheat prices mounted a rally. The U.S. Department of Agriculture last week created havoc when it reported that:

  • World soybean harvest will fall 6.5% this year
  • U.S. corn inventories will be down 20%
  • U.S. wheat farmers cut back on production, even as the price of grain doubled.

The culprit? A mix of rising global food needs, coupled with demand for new biofuel alternatives to oil and gasoline.

No doubt the tightening of crop markets has been influenced by the new energy bill President George Bush signed into law before the holiday recess. The new rules call for production of 36 billion gallons of renewable fuel by 2022, including doubling the current ethanol production capacity to 15 billion gallons. The law also includes incentive for biodiesel from soybeans and cellulosic fuels from switchgrass, wood chips, and other agricultural byproducts. (As noted in previous posts, cellulosic fuels hold the greatest opportunity to generate alternative fuels with minimal impact on global food supplies. However, this new power-generation method is less mature than other biofuel generation approaches.)

New rules for cleaner fuel and rising global food demand has sent shockwaves around the world and across industries ranging from farming to clothing, where buyers worry that farmers will be wooed to trade in their cotton fields for more prosperous grain production. In the U.S. food prices have already jumped 5.3%, on average, this year. And that’s nothing compared to increases in developing nations.

Upshot: Don’t just expect to pay more on your grocery bill. At least for the near term, the biofuel rage will drive prices up (and supplies down) for a wide range of products.

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1 response so far ↓

  • 1 Supply Excellence » Supply Risk: The (Dinner)Table Stakes Just Got Higher // Apr 8, 2008 at 11:09 am

    [...] About a month ago I had dinner with the head of supply chain for one of the world’s most recognized food service brands. We weren’t even through the salad course when he lit into me about previous Supply Excellence posts encouraging buyers to consider alternative fuels, materials, and lighting methods. [...]

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