Rob Katz

Guest Post: Exploring the Food-Fuel Relationship in Rural Development

Peter MoersGuest blogger Peter Moers is economist and the regional coordinator for the Social Trade Organization in Central America. He has worked in several countries in Central America, West Africa and in The Netherlands in small enterprise, cooperative, rural and local economic development. He believes that local production for local markets is an underexplored development strategy and that biofuels offer a unique opportunity to many rural areas to create strong, diversified and stable local economies.

By Peter MoersParis Hilton and biofuels may have more in common than you think.? After all, they have both experienced the ups and downs of fame lately. After having been presented for several years by the media as the ultimate solution for many energy and environmental problems, biofuels’ star has fallen to the point of being the main culprit of food shortages, high food prices, deforestation and even pollution.

Of course, there is neither a simple solution nor a single culprit. In the meantime, the generalizations that lead to biofuels? Paris Hilton moments–the ups and downs–lead to a negative image for many initiatives that DO contribute to positive social and environmental change.

This article explores the food-fuel relationship in the specific context of rural development project in Honduras, Gota Verde. The project uses small-scale biofuel production for local consumption as a strategy to create employment, stabilize income sources for small farmers, reduce their dependence on loan sharks, avoid soil erosion, protect water sources and increase food production.

Causes of food imports in Honduras
Honduras is a net importer of its main food crops: corn, beans and rice. Imports have increased during the past 15 years. Importing grains does not mean that there is a food crisis. However, in a world in which grain reserves are sinking, net food importing countries become vulnerable.

Without pretending to give a full analysis of the complex and multi-faceted rural development problems in Honduras, it is important to mention that the country has become a net importer long before most people had even heard about biofuels. Some of the primary reasons for this include:

  • Cheap food (grain) imports from abroad, which has caused many larger producers to shift to other, more profitable (and often exportable) crops. As a result, grain production has become mainly a “business” for subsistence farmers, for whom food security is more important than profitability. As a result, technical development in basic grains has come to a halt .
  • Tendency of governments to keep food prices low, rather than stimulate production through the free market.
  • Focus on export promotion, which makes some economic sense, but does not necessarily contribute to food security.
  • Migration from rural areas to the cities and abroad (mainly the US), resulting in reduced availability of (cheap) labor.

Who is to blame?
In principle, any economic activity that is more profitable than cultivating corn and beans can be blamed for increased food imports. But should we blame the US for converting corn into ethanol, thus reducing cheap (subsidised) corn imports in Central America? Or should we blame Europe for importing Honduran bananas and pineapples that grow on fertile lands that could have been used for national food production? Do we have to blame the over 100,000 Honduran emigrants (1.5% of the national population) who leave Honduras every year in search for a better life abroad instead of working as cheap laborers in agricultural activities? Or maybe we should we blame Taiwanese investors for employing thousands of persons that could have worked in agriculture? Can we blame Honduran cattle farmers for producing meat and cultivating fodder for animals instead of food for people? Should we condemn the thousands of coffee farmers for cultivating a luxury product for overseas markets, rather than food for domestic consumption? And – in the same logic – should we stop promoting the development of a biofuel-based agriculture, even if this is probably more profitable than basic grains?

These are perverse and unrealistic questions: eliminating (potential) pillars of a (poor) national economy is in nobody’s interest. We cannot ask poor farmers to dedicate themselves to unprofitable activities for the moral ease-of-mind of rest of humanity. The question is not how we can stimulate one crop at the expense of another, but how can we secure a stable food supply without affecting these (potential) economic pillars.

Improving production methods (training, access to inputs, credit etc.) with the aim to increase productivity is certainly part of the solution. Land distribution may be a necessary measure in some contexts. Strong investments in infrastructure are also necessary in most regions. Both cash crops and food crops can benefit from these measures.

How can small-scale biofuel and food production reinforce each other?

Small farmers do not need any government or NGO campaigns to make them aware of the importance of food security. Centuries of neglect (or even exploitation) by the collective sector have done their work. A strong indicator of basic grains’ importance is loan deviation: if one gives a loan for a cash crop to a small farmer, chances are high he/she will deviate part of the funding for corn or beans, while loans for basic grains will only very rarely be deviated. The strong preference for short-cycle crops is product of the same reality. Immediate problems ask for immediate solutions.

Intercropping biofuel and food crops
The Gota Verde project uses this reality in its advantage. One problem found in the early (pure) jatropha plantations, is the neglect of the areas between the plants. Since the Jatropha plant does not produce a significant amount of fruits during the first two years, farmers prefer to dedicate their time to short-cycle crops, especially corn and beans. As a result, weeds take over the jatropha plantations, growth is delayed and yields drop.

To address this problem, Gota Verde has introduced a mixed cropping scheme, leaving 4 to 5 meters of space in between the jatropha rows. Farmers generally grow beans and corn in these spaces. The maintenance and fertilization of the grains also benefits the jatropha. In turn, the jatropha hedges reduce plagues and diseases, and function as wind breakers.? ?

Integrated financing model for biofuel and food crops
Many farmers only cultivate part of the arable land they possess. In fact, according to estimates, Honduras only cultivates 30% of the 2.8 million hectares appropriate for agriculture. When one asks a small farmer why he does not plant all of his lands, the main problem mentioned is generally the lack of access to credit. Financial institutions are very reluctant to finance basic grain production, especially to small farmers who tend to consume (and not sell) a large part of their production. As a result, many farmers sow with minimal inputs? or are forced into deals with middlemen (“coyotes”) that rake in a large proportion of the farmer’s margin.

Jatropha can provide a stable financial basis to make small farmers independent from (unwilling) financial institution or (exploitative) loan sharks, although external support remains necessary at first. One such example is the farmers’ owned biofuel processing enterprise, BYSA.? External funding may come from or private investors or bank loans contracted by BYSA, who in turn administers the loans to small farmers. The strategy involves:

Administration by BYSA instead of a financial institution reduces financial risks in several ways:

  • The risk of self-consumption of grains (and thus lack of cash at the moment of paying their debt) is eliminated. Farmers can consume (or sell to third parties) as much corn as they want because the value of the jatropha harvest is sufficient to cover the entire value of the loan.
  • The risk of loan deviation or robbery is reduced because all transactions take place in kind (or locally circulating vouchers).
  • The risk of farmers selling jatropha to third parties is small because–at least for the moment–they do not exist.
  • Fewer risks can be translated into lower financial costs for the farmers.

The model gives loan access to farmers that normally are not considered by financial institutions. BYSA offers a collective guarantee (production capacity, buildings, well-founded business plan, assured markets) that individual farmers cannot offer.

BYSA can obtain discounts for buying inputs at wholesale prices. The costs of BYSA for administrating the loans to farmers can be covered largely by this discount.

BYSA will also produce animal fodder, in which corn is an important ingredient (as well as oil press cake of other crops promoted by BYSA). The added value that derives from this transformation, places BYSA in a position to offer higher prices for corn than most middlemen.

In order to facilitate these transactions, BYSA administrates a voucher system with which farmers can go to predetermined distribution points to withdraw their agricultural inputs. The vouchers may also be used to finance part of the operational expenses of BYSA. This reduces its need for cash working capital and thus its financial costs.

Ensure fuel supply for food production
Fuel is an essential input for most food production. In many developing countries and especially in rural areas, fuel supply is irregular and unreliable. Local biofuel production can stabilise fuel supply stabilise, thus contributing to food security.

In May 2008, diesel was in short supply in large parts of Honduras due to a combination of deficient planning of importers and distributors speculating on price increases. May is a critical time for agriculture because of the start of the rainy season. Thanks to its access to self-produced biodiesel, Gota Verde was able to implement its ploughing plan, while many other farmers had to postpone this activity.

Biofuel Sustainability Criteria
The solution to damaging agricultural practices is not boycotting the product, but certifying the production process. Certification, both socially and environmentally, takes place for many products, like wood and coffee. Criteria for the sustainability of biofuels have been defined by several important players? and a harmonisation of criteria is likely to occur during the coming years. Projects like Gota Verde help to test development models that respond to these criteria and also test the feasibility of these criteria in an open market.