The rise of biofuels – and their impact on the food industry – has provoked fierce debate in scientific and campaigning circles for months. Governments on both sides of the Atlantic, however, have pushed on with biofuels projects in the name of combating of climate change. This week, however, saw the first signs of discontent from political elites. Dean Best looks at a burning issue.

For the last 12 months, the story in food has been rising commodity costs and the onset of food inflation.

Food manufacturers around the world have suffered. The likes of US confectionery giant Hershey, Nordic food group Orkla Foods and the UK’s largest food firm Premier Foods, have warned shareholders of the threat of a lengthening raw materials bill. And some have seen profits take a hit.

Food processors have fought to get retailers to increase prices on supermarket shelves. Retailers, though, concerned about consumer spending have been reluctant to fully pass on the increased costs of their suppliers. However, there is little doubt that, somewhere down the line, someone’s margins are being affected.

Prices for a range of commodities, from wheat to dairy to soya (not to mention oil), have all soared in recent months, due to a perfect storm of droughts in key producing nations, soaring demand for protein in markets like India and China, and, the rising production of biofuels. These alternative fuels are seen as more environmentally friendly than oil but the rate at which biofuels are using up corn supplies – particularly in the US – is causing consternation in the food industry.

This week, PepsiCo chairman and CEO Indra Nooyi said government programmes to promote biofuels would continue to force commodity costs upwards. Indeed, Nooyi sees food prices continuing to rise for at least three years. Industry watchers have predicted that rising costs could lead to a wave of consolidation in the food industry but Nooyi rejects that notion. “This is not about scale and taking out costs,” she told a UK newspaper. “It is about the behaviour of governments, of ethanol programmes.”

President Bush has bet big on biofuels, handing out financial assistance to encourage biofuel production, in a bid to break American reliance on fuel from the Middle East. The EU has also been a vocal supporter of biofuels, wanting to see 10% of all fuel used for road transport coming from biofuels by 2020.

The European Commission has been drafting legislation that would force member states to increase biofuel production and consumption – while swatting away claims that using more corn for biofuels would lead to higher food prices. “I am keen to refute the idea that some people are putting about that it is largely the recent interest in biofuels that is driving up prices,” EU Agriculture Commissioner Mariann Fischer Boel said in August last year. “This is not the case – they play a marginal role at most in the EU context.”

The “food versus fuel” debate that Fischer Boel was quick to counter has been emanating from some academic and campaigning circles in recent months. People on the streets have also recognised a link between biofuels and higher shopping bills – one only has to witness the street protests in Mexico over the rising costs of tortillas. However, the scramble in political circles to combat climate change has led to biofuels being seen as a public good and to farmers being handed economic incentives to divert corn to cars.

Nevertheless, there are murmurs of doubt being heard from certain members of the political elite that perhaps biofuels are not as kind to the environment as first thought – and that there is a link between their production and higher food prices.

This week, a group of UK politicians criticised the country’s government and the EU for setting targets on biofuels and claimed that their use could damage the environment. Biofuels, the MPs said, biofuels are “an expensive and ineffective way” to cut greenhouse gas emissions. “Biofuels have a detrimental impact on the environment overall,” said one MP, Tim Yeo. “The Government must ensure that its biofuels policy balances greenhouse gas emission cuts with wider environmental impacts, so that biofuels are only used where they contribute to sustainable emissions reductions.”

Yeo also highlighted the link to higher food prices. “A large biofuel industry based on current technology is likely to increase food prices and could damage food security in developing countries,” he said.

The comments came just days before the EU launches an over-arching strategy to combat climate change, a programme that is due to be announced next week, and the Europeans reacted angrily to the UK report. EU Energy Commissioner Andris Piebalgs said the European Commission “strongly disagrees” with the claims and insisted biofuels are delivering “significant greenhouse gas reductions” compared with oil.

Nevertheless, Piebalgs echoed the call for biofuel production to become sustainable. Quite rightly, campaigners have expressed dismay that rain forests in Indonesia are being ripped up to get access to palm oil, a key component of first-generation biofuels. “The new [EU] directive for the promotion of renewable energy sources will call for the promotion of only sustainable biofuels,” Piebalgs said.

Biofuel campaigners argue that the fuels are vital in climate change and that many of the teething problems can be overcome. Second- or third-generation biofuels, made, for instance, from algae, can be more sustainable to produce. However, it is yet unclear how the EU will push to make biofuels production more sustainable. And there have been few noises on this issue from the US.

Biofuels, it seems, are here to stay. Their role in combating climate change could be vital but there are a myriad of issues that need to be ironed out before a definitive conclusion is drawn. Pulling corn out of food production has pushed up costs for producers and prices for consumers. And with consumers in the West seeing rising food bills – and, more urgently, riots over food prices from Mexico to Morocco – it is difficult to argue that biofuels are being produced in the best way right now.