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Category: Biofuels

Published August 7, 2012

What Can We Do About Food Price Volatility?

A new article by Brian Wright, of UC Berkeley, in the World Bank Research Observer:

In the long view, recent volatility of prices of the major grains is not anomalous. Wheat, rice, and maize are highly substitutable in the global market for calories, and when aggregate stocks decline to minimal feasible levels, prices become highly sensitive to small shocks, consistent with the economics of storage behavior. In this decade, stocks declined due to high global income growth and biofuels mandates, making markets unusually sensitive to subsequent unanticipated shocks, including biofuels demand boosts in reaction to high petroleum prices, the Australian drought, and other regional grain production problems. To protect their own vulnerable and politically influential consumers, key exporters restricted supplies in 2007, exacerbating the price rise. Understandably, vulnerable importers are now building strategic reserves. To reduce costs and disincentive effects, reserves should have quantitative goals related to targeted distribution to the most vulnerable in severe emergencies. For countries with significant animal feeding or biofuels industries, options contracts to protect the consumption of the most vulnerable from harvest shocks are likely to be more cost-effective than emergency reserves.

 

Published August 1, 2012

Ethanol and High Food Prices

It is not often that a stroke of a pen can quickly undo the ravages of nature, but federal regulators now have an opportunity to do just that. Americans’ food budgets will be hit hard by the ongoing Midwestern drought, the worst since 1956. Food bills will rise and many farmers will go bust.

An act of God, right? Well, the drought itself may be, but a human remedy for some of the fallout is at hand — if only the federal authorities would act. By suspending renewable-fuel standards that were unwise from the start, the Environmental Protection Agency could divert vast amounts of corn from inefficient ethanol production back into the food chain, where market forces and common sense dictate it should go.

From an excellent New York Times op-ed by Colin Carter, from the Department of Agricultural and Resource Economics at the UC Davis, and Henry Miller, a senior fellow at Stanford’s Hoover Institution.

Here is a telling series of numbers from the same op-ed:

Continue readingEthanol and High Food Prices
Published June 12, 2012

Biofuels and Food Prices

In a new survey article in the American Journal of Agricultural Economics, David Zilberman and his coauthors look at the relationship between biofuels and food prices:

[W] e conclude that introduction of biofuel may affect food prices but the impact varies across crops and locations. Furthermore, we found that the introduction of biofuel has a lower impact on food-commodity prices when biofuel production is not competing with food crops for resources, such as land and water. Thus, the expansion of sugarcane ethanol in Brazil and second-generation biofuels grown on nonagricultural lands are likely to have a much smaller impact on food prices than the expansion of corn ethanol. We further argue that the introduction of corn ethanol has had a significant impact on food commodity prices, but it is less substantial than the impact of economic growth and approximately of the same order of magnitude, though in the opposite direction, as the impact of the introduction of GM organisms.

Now, this is based in simulation analysis and economic theory, so it is not possible to make causal claims here.

But this is an interesting set of results in that it suggests that the impact of the growing demand for food due to increased incomes is more important than the impact of biofuels when it comes to food prices.

This is especially interesting when contrasted with the findings in the article I discussed yesterday, which concluded that China’s economic growth since 1995 has only had a weak effect on food prices.