Water Supplies Dry Up In Biofuels Blaze

9 Feb 2007 (TODAY)

In World News

As India and China thirst for more, food prices will soar

Andy Mukherjee

If water were a globally traded commodity, with unmet demand in China and
India reflected in its price, the world might shed its new-found craze for
biofuels. It is bad enough that some of us need ethanol distilled in
Scotland to liven up our evenings.

Growing corn to make ethanol to run sport-utility vehicles is downright
silly; nowhere more so than in China and India.

As many as 400 Chinese cities are facing water shortages; farmers in the
most-populous nation are forgoing millions of tonnes of grain production
every year. Per-capita availability of water is expected to shrink to
alarming levels by 2030.

How serious is the shortage?

"The only thing that worries me about the China story is the water
problem," commodities investor Jim Rogers, chairman of Beeland Interests
Inc in New York and a fan of China, said this week at a press conference
in Melbourne.

"If China cannot solve the water problem, that could be the end of the
story," said Mr Rogers, who co-founded Quantum Fund with George Soros and
then went biking around the world.

Amid this water scarcity, China has gone on to become the world's
third-largest bio-ethanol producer after Brazil and the United States,
pouring thousands of gallons of water to grow a tonne of corn, and then
using more water to turn the corn into ethanol.

What a colossal waste. As recently as December, the Chinese government
came up with controls on corn-to-ethanol projects so as not to lose more
precious water to producing fuel at the expense of food.

The tradeoff between water and biofuels may also be crucial for India.
One-sixth of India's food output is supported by pumping groundwater,
which is depleting rapidly.

In the state of Tamil Nadu, more than a third of aquifers are
"overexploited", meaning the rate at which water is being extracted is
more than the pace of recharge.

According to the World Bank's estimates, by 2050 demand for water in India
will exceed all available supplies.

India passed a law in May last year requiring petrol to be mixed with 5
per cent ethanol. The saving grace, from the point of view of water
conservation, is that India doesn't yet allow sugarcane juice to be
converted into ethanol. The fuel can only be produced from molasses, as a
byproduct of sugar.

"The downside of growing food for fuel is water," Mr Fred Pearce, an
environmentalist and the author of the 2006 book When the Rivers Run Dry,
said at a sugar-industry conference in Geneva in October.

Sugarcane growers, some of the biggest guzzlers of water, are dreaming of
biofuel riches when the world, following the lead of Brazil, moves to
flex-fuel cars, which run on both gasoline and ethanol.

Just because there is no worldwide market in water, it doesn't mean the
price of wasting this scarce resource to make fuel won't have to be paid.
The adjustment will come through food prices. And it will be severe.

China and India, which are going dry, will import more food. As
urbanisation gathers momentum, many farmers in India will sell their water
entitlement to condominium and factory owners.

When two of the world's top three grain producers become importers, it
will have a big impact on prices internationally.

Global wheat prices climbed to a 10-year high in October, partly because
India resumed imports in February last year after a six-year gap.

Now, there's a possibility that China may become a net importer of corn,
which, too, rose to its highest in a decade in January, thanks to the
biofuel frenzy.

Neither China nor India wants to contemplate a future without agriculture.
Both countries have an avowed preference for self-sufficiency in staple
food.

Chinese Premier Wen Jiabao sees falling grain output as a threat to
national food security. The sentiment in India is the same.

The rest of the world is gasping with wonder at the fast-growing economies
of China and India and betting that fossil fuels won't be enough to meet
the burgeoning demand for energy.

Therefore, there is a rush to find alternative fuel sources in everything
from corn to sugarcane to oil palm. Alarmed by the tripling of crude-oil
prices in five years, policy makers in Beijing and New Delhi, too, have
begun rooting for biofuels.

Ethanol plants in Minnesota use from 3.5 gallons to 6 gallons of water to
produce 1 gallon of ethanol from corn, says the Minneapolis-based
Institute for Agriculture and Trade Policy.

For the US as a whole, there will be a 254 per cent increase in the volume
of water used in ethanol production from 1998 through 2008, according to
the institute.

The US has plenty of water; the world as a whole doesn't.

"If water would have its correct price, then we wouldn't even be thinking
about biofuels," Nestle SA chief executive officer Peter Brabeck-Letmathe
said last month at the World Economic Forum in Davos, Switzerland. "If I
had to identify one resource I'm worried about, that's water.''

Perhaps, we will know the true price of water only when corn syrup is more
expensive than oil. - BLOOMBERG

Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are
his own.