« What I've Been Reading | Main | Mental activity halts some of your self-deception and hypocrisy »
How much do biofuels drive up food prices?
Biofuels have forced global food prices up by 75% - far more than previously estimated - according to a confidential World Bank report obtained by the Guardian.
The damning unpublished assessment is based on the most detailed analysis of the crisis so far, carried out by an internationally-respected economist at global financial body.
The figure emphatically contradicts the US government's claims that plant-derived fuels contribute less than 3% to food-price rises. It will add to pressure on governments in Washington and across Europe, which have turned to plant-derived fuels to reduce emissions of greenhouse gases and reduce their dependence on imported oil.
Here is the story, the report is not yet available, at least not to me. Seventy-five percent seems like a high estimate to me, especially since many foods are more expensive but they are not all used for biofuels. Still, the government's estimate of three percent is surely way too low. Biofuels are maybe a good test case for various estimates of government quality: will the bad biofuels still be subsidized five years from now?
Posted by Tyler Cowen on July 4, 2008 at 08:46 AM in Food and Drink | Permalink
Comments
This entire biofuels fiasco has been an appalling indictment of (not just the US) government and should give significant pause to those who see massive government intervention as the solution to our energy and environmental crises.
Posted by: Andrew at Jul 4, 2008 9:08:47 AM
If they have raised food prices that much, what has their effect been on oil prices? If all those food products go back to use as food do we see oil up by 10-20%? What will that do to food prices? Nice little loop here.
Steve
Posted by: steve at Jul 4, 2008 9:13:34 AM
Seem to be saying that 75 percent of a 140 percent increase in food costs since 2002 is due to biofuels and income growth in India and China has not [repeat not] led to significant increases in grain consumption? Not credible, IMHO.
One should be careful of the percentages, base periods, and claims being made in this area--lots of people with an axe to grind. Also note that Keith Collins, retired USDA economist, has changed his position on the impact of biofuels.
Posted by: Bill Harshaw at Jul 4, 2008 9:16:19 AM
According to the IMF, biofuels accounted for 75% of the incremental demand for corn from 2006 to 2007 (see here.) This makes "large" numbers seem more plausible.
Posted by: Isaac at Jul 4, 2008 9:34:07 AM
Steve,
I have seen any papers indicating that biofuels consume more oil to produce then can be extracted from them.
So it's likely that both oil and food prices decrease.
Posted by: David Shor at Jul 4, 2008 10:17:53 AM
"... many foods are more expensive but they are not all used for biofuels."
But if you decide not to plant X because you want to plant corn or soy for biofuels, the supply of X is reduced. The field down the street from us switched from cotton to corn this year even though cotton is also up this year (and in contango, I think).
Posted by: Eric H at Jul 4, 2008 10:29:09 AM
"will the bad biofuels still be subsidized five years from now?"
If Obama has anything to say about it, yes.
Posted by: Some Random Economist at Jul 4, 2008 10:58:04 AM
Wide crop choice does not apply in much of the Heartland. Farmers can raise corn or soybeans and in some cases wheat to earn a living. Most farmers rotate their crops with a mix of corn and soy beans.
Most of agriculture is tied to energy and its costs. Diesel, pesticides, fertilizer and other inputs are now so expensive that without the high prices farmers are getting for grain, they would go broke. Filling a tractor tank with fuel can, for example cost a thousand dollars.
Many farmers in our area cut back on their corn acreage because soy beans are cheaper to raise. Several proposed ethanol plants will not be built because corn is too expensive. A Danish company is building a plant near us which will manufacture an enzyme to make ethanol production much more efficient than it is now. Much of the ethanol byproduct feeds livestock. With this enzyme, little will be wasted and some by products will be consumed by people.
Switch grass, algae and other more efficient sources of energy will replace corn as technology improves.
The Omaha World Herald estimated soy diesel and ethanol cut $.30 per gallon from gasoline. They also attributed much of the food increase to greater world demand.
A potential problem is the 17 to 20 year drought cycle which has affected the corn belt for at least five hundred years. The last widespread corn belt drought occurred in 1988. Floods have killed up to ten percent of the corn crop this year. Suppose a drought begins in July and we have weeks of 95 to 105 degree weather.
Corn needs fairly early season dry weather to grow deep roots. With rain caused shallow roots and extreme heat, corn would suffer, even with ample sub soil moisture. It would be a perfect storm. Pray it keeps raining.
Posted by: James at Jul 4, 2008 10:59:39 AM
Wide crop choice does not apply in much of the Heartland. Farmers can raise corn or soybeans and in some cases wheat to earn a living. Most farmers rotate their crops with a mix of corn and soy beans.
Most of agriculture is tied to energy and its costs. Diesel, pesticides, fertilizer and other inputs are now so expensive that without the high prices farmers are getting for grain, they would go broke. Filling a tractor tank with fuel can, for example cost a thousand dollars.
Many farmers in our area cut back on their corn acreage because soy beans are cheaper to raise. Several proposed ethanol plants will not be built because corn is too expensive. A Danish company is building a plant near us which will manufacture an enzyme to make ethanol production much more efficient than it is now. Much of the ethanol byproduct feeds livestock. With this enzyme, little will be wasted and some by products will be consumed by people.
Switch grass, algae and other more efficient sources of energy will replace corn as technology improves.
The Omaha World Herald estimated soy diesel and ethanol cut $.30 per gallon from gasoline. They also attributed much of the food increase to greater world demand.
A potential problem is the 17 to 20 year drought cycle which has affected the corn belt for at least five hundred years. The last widespread corn belt drought occurred in 1988. Floods have killed up to ten percent of the corn crop this year. Suppose a drought begins in July and we have weeks of 95 to 105 degree weather.
Corn needs fairly early season dry weather to grow deep roots. With rain caused shallow roots and extreme heat, corn would suffer, even with ample sub soil moisture. It would be a perfect storm. Pray it keeps raining.
Posted by: James at Jul 4, 2008 11:01:46 AM
Demand for food is pretty inelastic so we should expect crashing prices if there is any overproduction and soaring prices if supplies are even slightly short. In those conditions even a small hike in demand can have a dramatic input.
It is only recently that we have left the former state.
In principal the ability to use food for fuel could improve matters by for example supporting excess capacity that could be used for food in lean years and fuel in fat. With the introduction coinciding with a fuel crisis it won't be working like that.
Posted by: bunbury at Jul 4, 2008 11:27:24 AM
Not all foods need to be used in biofuel for the price to be affected. Take for example wheat products. Wheat products are more expensive now because farmers are realizing they can use the same acreage they're currently using for wheat for corn and make a lot more money. This drives up the price of wheat, because now there's less on the market.
Meat prices and milk prices have risen because feed for these animals (corn) is more expensive. We don't use milk or animals in biofuel.
Posted by: MaE at Jul 4, 2008 11:34:44 AM
Surprise, surprise! Anti-American newspaper has 'secret evidence' that world food crises is all the fault of the U.S.!
In other news, the KKK announced they have a new secret report that world food crises is all the fault of The Jews!
Posted by: Tulip Brain at Jul 4, 2008 11:42:57 AM
75% doesn't seem high at all. The price increase in corn spurned on by the higher demand for biofuels which crowds out many other crops, even those not subsidized. Thus, it makes sense that all crops will be impacted by the biofuels subsidy.
Tulip Brain,
Shut up. Our government does lots of stupid things all of the time, there's no need to defend it.
Posted by: Alex at Jul 4, 2008 1:14:38 PM
"... many foods are more expensive but they are not all used for biofuels."
For example corn is used to feed cattle, higher priced corn = higher priced beef.
Posted by: A. Madden at Jul 4, 2008 1:21:17 PM
According to the Guardian story, the report blames biofuels for food commodity speculation, and includes speculation-related price increases in its "caused by biofuels" estimate. That's a crock of s***, in my humble opinion.
It would be interesting to see how much of that 75% they think is caused by speculation.
Posted by: Mitch at Jul 4, 2008 2:42:29 PM
"Seventy-five percent seems like a high estimate to me, especially since many foods are more expensive but they are not all used for biofuels."
True, but these other foods are competing with corn, sugar cane, etc. for many of the same land plots. That has certainly been the case in the Pampas in South America, contributing to drive up the price of soja, beef, etc.
On the other hand (I couldn't call my self an economist without having a second hand), we should expect this same pattern due to the increased growth in China and India.
Posted by: Diego at Jul 4, 2008 7:52:29 PM
Next up ..
Cellulosic Exploitation
As fossil fuel reserves become depleted, a renewable feed-stock for the chemical industry becomes more significant The obvious renewable resource is cellulose, which is already in embarrassingly large supply and largely wasted.
I scanned through this piece and couldn't come up with exactly what this "embarrassingly large supply" of cellulose comes from. I can think of a few, like corn husks and stalks, but the next most obvious are trees. While this may make old copies of the NYT and LAT valuable, some how I just can't see the Sierra Club signing on if it involves large numbers of trees.
Why does Easter Island come to mind ? ...
The population of Easter Island reached its peak at perhaps more than 10,000, far exceeding the capabilities of the small island's ecosystem. Resources became scarce, and the once lush palm forests were destroyed - cleared for agriculture and moving the massive stone Moai. In this regard, Easter Island has become, for many, a metaphor for ecological disaster.
Posted by: Neo at Jul 5, 2008 12:10:38 AM
Tulip: It's really not that simple. The World Bank is hardly in the pocket of left-leaning British newspapers. And the U.S. is hardly the only country massively ramping up biofuel use.
Mitch: Presumably the report attributes almost nothing to speculation, because for speculation to raise the price of a commodity, the speculators need to be willing to take delivery. That's what happened in the housing market. Not only is it impractical to take delivery of large ammounts of agricultural commodoties, but, being perishable, they wouldn't hold their value long if you did.
Even the second-order mechanism that some believe is operating in the oil market -- high futures prices induce suppliers to leave the stuff in the ground in hopes of selling at the higher price in the future -- doesn't work for agricultural comodoties, because if you leave them in the ground, they just rot.
Posted by: David Wright at Jul 5, 2008 2:50:03 AM
Ethanol production removes the starch from corn but leaves the minerals, protein and other nutrients in the distillers grain byproduct that is fed to cattle. Consequently, production of ethanol does not remove corn from the food chain as is assumed in all the analysis that blames the higher food prices on ethanol.
why pay any attention to an analysis that is based on completely false assumptions?
Also note that in the US grain accounts for less than 5% of the final cost of the food basket and corn is only part of that.
The entire analysis is making a mountain out of a molehill.
Look at a different analysis by someone who actually knows what they are talking about.
http://digitalcommons.unl.edu/ageconfacpub/49
Posted by: spencer at Jul 5, 2008 8:39:28 AM
The answer is simple. We should zero out all energy subsidies, put a light to moderate carbon tax in place, and let the market work it out.
If we DON'T do that simple thing, then yeah, we can spill millions of words on what exactly are the effects of our cobbled and pork-laden energy policy.
Posted by: odograph at Jul 5, 2008 9:12:15 AM
'Shut up. Our government does lots of stupid things all of the time, there's no need to defend it.'
Actually, everyones government does stupid things all of the time.
Ususlly due to someone insisting that the government make them a winner - subsidies, rent controls, price floors, etc.
Posted by: at Jul 5, 2008 12:24:19 PM
The question is what we should do after subsidies are ended and ethanol production and high food prices remain.
Posted by: Lord at Jul 5, 2008 4:30:46 PM
Lord, the answer is "the same as we have always done."
Humans have always grown luxury crops, to make Champagne, Cuban cigars, and the like.
We seem to find some balance in that. It seems to be our nature to allow the affluent their luxuries if they in turn show the poor some appropriate concern.
The balance is interesting though and I wonder what an alien would make of it ...
(As a human, I'd still kill the subsidies, and let my peers choose between Champagin and Feed the Children pledge drives. I suspect they'll find a sense of balance.)
Posted by: odographars at Jul 5, 2008 5:24:42 PM
Tulip: It's really not that simple. The World Bank is hardly in the pocket of left-leaning British newspapers.
You are making the wrong sort of argument.
The Guardian was writing this article based on a "secret report" that none of us will be able to see, and may not even exist. This report is kind of like Joseph McCarthy's list of Communists in the State Department. If you are going to say "I have no evidence that this story is true, and I expect you to take it on 100% pure faith", then it isn't outrageous to look at the Guardian's anti-American political agenda when evaluating their claims.
I mean, I have a secret report from the FBI that proves beyond any shadow of a doubt that you are a child molester. It is true that I have every incentive to lie about you, and I have no evidence whatsoever to back up my claim - But if anyone doubts my claim, it is because they are a child molester as well!
See how this secret evidence stuff works?
If you don't have sources that you can make public, copies of documents, or any evidence whatsoever, people should not believe your claims. If people do believe your claims, it is probably because it confirms their biases.
Posted by: Tulip Brain at Jul 6, 2008 1:44:56 AM
Ethanol subsidies would still be corrupting to our energy markets, even without this (so far) secret study.
Who do you want to decide between ethanol or biodiesel or simple efficiency, you (when you shop for a new car) or your congressman?
What did someone tell me at lunch ... that GM wants a $7K tax credit for Volt buyers? Madness.
Posted by: odograph at Jul 6, 2008 8:54:58 AM
