6. Impacts of biofuels on food prices

Expenditures on food amount to a large part of the budget of the poorest households, and so rising food prices threaten them with food insecurity, which is the lack of secure access to enough safe and nutritious for normal growth and development and for an active, healthy life (FAO, 2008a). The FAO (2008b) estimates that there were already 923 million undernourished people worldwide, and rapid growth in biofuel production, which is a significant source of demand for some agricultural commodities, such as sugar, maize, cassava, oilseeds and palm oil, has the potential to affect food security at both the national and household levels mainly through its impact on food prices.

Some studies criticize biofuels as one of the factors responsible for the 2008 food crisis9. These studies concur that the diversion of the US corn crop to biofuels is the strongest demand-induced force on food prices, given that the US accounts for about one-third of global maize production and two-thirds of global exports (Mitchell, 2008)10. An estimated 93 million tons of wheat and coarse grains, more than half of the growth in wheat and coarse grain use during the period, were used for ethanol production in 2007, double the level of 2005 (OECD–FAO, 2008). Most of this growth comes from the United States of America alone, where the use of maize for ethanol grew to 81 million tons in 2007 and is expected to rise by another 30 percent in 2008 (FAO, 2008b). Moreover, Collins (2008) attributed 52% of the increase in soybean oil use between 2005/06 and 2007/08 to biodiesel production. Table 3 summarizes the recent literature on the impacts of increased biofuel production on food prices.

Baier et al. (2009) estimate that the increase in worldwide biofuels production over the two years ending June 2008 accounted for almost 17 percent of the rise in corn prices and 14 percent of the rise in soybean prices. More specifically, they attribute nearly 14 percent of the rise in corn prices and nearly 10 percent of the rise in soybean prices to the increase in US biofuels production, whereas EU biofuels production growth accounted for roughly 2 percent of the increase in the price of these crops. In addition, the increase in EU biofuel production was responsible for around 3 percent of the increase in the price of barley. In the case of sugar, they find that the growth of sugar-based ethanol production in Brazil accounted for the entire escalation of the price of sugar over the same timeframe.

Although individual crop prices appear to be affected by biofuels, the impact of biofuels on global or aggregated food prices are rather small. Worldwide biofuels production growth over the two years ending June 2008 is estimated to account for a little over 12 percent of the rise in the IMF's food price index, of which, roughly 60%, 14% and 15% can be attributed to increased biofuels production in the US, Brazil and the EU respectively (Baier et al., 2009). This means that that about 88% of the rise in global food prices is caused by factors other than biofuels.

Table 3: Impacts of Increased Biofuel Production on Food Prices

Banse et al. (2008) show that if the mandatory 5.75% biofuel blending in EU member states is implemented, it would cause real prices of cereals, oilseeds and sugar in 2010 to be 2.75%, 3.5% and 2.5% higher than that in the reference scenario. In the case of the implementation of mandatory 11.5% biofuel blending, the corresponding price changes would be 7%, 10% and 9.75% (see Table 3). Rosegrant et al. (2008) show that increased biofuel demand accounted for 30 percent of the increase in weighted average grain prices in 2000-2007 compared to the historical baseline. More specifically, increased biofuel demand is estimated to account for 39 percent of the increase in real maize prices, whereas it is estimated to account for 21 percent of the increase in rice prices and 22 percent of the rise in wheat prices.

Some of the rises in food commodity prices are not caused by market forces, such as the price of gasoline, pertaining to biofuels, but rather by policy induced demand growth. McPhail et al. (2008) argue that the elimination of federal tax credits and tariffs, and to a far lesser extent, mandates, in the US would reduce ethanol production by 18.6 percent, resulting in the decline of the price of corn by 14.5 percent. However, if gas prices are high enough, i.e., $3 per gallon or higher, biofuel production may be profitable without support policies; ethanol production can beexpected to rise from the current levels of 6.5 billion gallons to 14 billion gallons, and corn price would remain at about $4 a bushel.

The existing literature not only assesses the impacts of biofuels on the 2007-2008 food crisis but also projects the impacts on food prices in the future. The International Food Policy Research Institute (IFPRI) finds price increases for maize of 23% to 72%, wheat of 8% to 30%, oilseeds of 18% to 76%, and sugar of 11.5% to 66%, in response to countries implementing the plans they have announced for biofuels by 2020 (ODI, 2008). Trostle (2008) projects price rises of 65%, 64%, 33% and 19%, for maize, sorghum, wheat and soy oil, respectively, due to the expansion of biofuels, rising energy costs and demand from emerging economies. Moreover, should biofuel production be frozen at 2007 levels for all countries and for all crops used as feedstock, maize prices can be expected to decline by 6 percent by 2010 and 14 percent by 2015, along with lesser price reductions for oil crops, cassava, wheat, and sugar (Rosegrant et al., 2008). If a global moratorium on crop-based biofuel production is imposed from 2007 onwards, by 2010, prices of key food crops would drop even further: by 20 percent for maize, 14 percent for cassava, 11 percent for sugar, and 8 percent for wheat.

Taheripour et al. (2010) emphasize the importance of including by-products when modeling the impact on non-energy commodity prices of expanded biofuel production in response to US and EU biofuel mandates. They show that the price of coarse grains increases sharply in the US, EU, and Brazil by 22.7%, 23.0%, and 11.9%, respectively, over the period 2006-2015; once byproducts are incorporated into the model, the price of coarse grains exhibits significantly lower growth rates of 14%, 15.9%, and 9.6%, respectively. The inclusion of by-products reduces the price rise of oilseeds in the EU from 62.5% to 56.4% in the same period. The prices of most other agricultural commodities grow at a slightly lower rate when by-products are accounted for.

Fischer et al. (2009) model the prices of food staples in 2020 and 2030 under several different scenarios for biofuel production. Under a scenario based on the International Energy Agency's World Energy Outlook 2008 projections, price increases for both cereals and other crops in 2020 are about 10 percent higher compared to a reference scenario where biofuel development after 2008 is kept constant at the 2008 level. Since the contribution of second-generation biofuels is still small in 2020, a variation of this scenario, featuring delayed introduction of second-generation technologies, only results in moderate further crop price increases. In the more aggressive target scenario, based on the mandates and targets announced by several developed and developing countries, the impact of increased biofuel production on crop prices is much more significant: prices rises of about 30 percent. When the target scenario is modified to incorporate the accelerated introduction of cellulosic ethanol, the price impact on cereals is cut in half to about 15 percent. Because of the high targets in developing countries, which feature a higher share of biodiesel and somewhat slower deployment of second-generation technologies, the price impact on non-cereal crops (especially vegetable oils) is greater than that on cereals.

In addition to the impacts on food price, Fischer et al. (2009) also examine the impact of expanded biofuel production on food supply. Although higher agricultural prices lead to increased cereal production, at range from around 100 million tons to 330 million tons under various scenarios, the increased cereal production is diverted to biofuel production and demand for food and feed would decrease. However the percentage reduction in food demand is found to be small; even in the worst case, the reduction in global cereal food consumption is about 29 million tons, which constitutes about a 1% of the global cereal consumption of 2,775 million tons in the reference case where biofuel production is frozen at 2008 levels.

One interesting observation from the existing literature is that the magnitude of the impacts of biofuels on food prices is very much sensitive to the models used to assess those impacts. Partial equilibrium models (e.g. Rosegrant et al., 2008; Trostle, 2008; ODI, 2008), which model the food and agricultural sector in isolation, ignoring this sector's interaction with other sectors of the economy, find higher impacts on food prices. On the other hand, general equilibrium models, which account for interactions of various sectors and agents (e.g., Banse et al., 2008; Fischer et al., 2009) find the impacts to be relatively small.

9 Other factors include strong income growth and subsequent demand for meat products and feed grains for meat production in emerging economies, such as China and India (Schnepf, 2008); adverse weather conditions, such as the severe drought in Australia (FAO, 2008a); the devaluation of the US dollar, growth in foreign exchange holdings by major food-importing countries, and protective policies adopted by some exporting and importing countries to suppress domestic food price inflation (Trostle, 2008); lower level of global stocks of grains and oilseeds (Zilberman et al. 2008) and increased oil prices (Schmidhuber, 2006).

10 The expansion of maize area in the US by 23% in 2007 entailed the contraction of soybean area by 16%, leading to lower soybean output and playing a part in the 75% rise in soybean prices from April 2007 to April 2008.