Food price and biofuels

Citation

Holly Wang, H. and Xin, X. (2012), "Food price and biofuels", China Agricultural Economic Review, Vol. 4 No. 4. https://doi.org/10.1108/caer.2012.40604daa.001

Food price and biofuels

Article Type: Editorial From: China Agricultural Economic Review, Volume 4, Issue 4

Unlike any other commodities, real estate, or stocks whose prices can increase sharply and be considered normal, food is a very different commodity with important national security implications. Food price increases can result in hunger, life loss, and even government overthrown as a consequence. This is why the recent global food price rise has brought so much attention from everyone, especially agricultural economists (Mittal, 2009; Chen, 2010; Neves, 2010; Harvey and Pilgrim, 2011; Swinnen et al., 2011).

Several factors have been identified as contributing to food price increases, such as natural disasters caused by climate change, increasing demand from population growth in developing countries and income growth of emerging economies, slowdown of production growth caused by low investment incentives after a long period of low food price (Mittal, 2009; Barros et al., 2010; Harvey and Pilgrim, 2011; Hansen et al., 2011; Wang et al., 2011). However, most concerns have been focused on biofuel policies of developed countries. This is because each of the other aforementioned factors is either technically infeasible to prevent in the short term (natural disasters), too sensitive to control (population growth among people with religious preferences), or unethical to prevent (income growth), but only the biofuel policy is a political decision. In this issue, we include an invited article on this issue, “The impact of US biofuel policies on agricultural price levels and volatility” written by Professor Bruce Babcock from the Center for Agricultural and Rural Development at Iowa State University, US (Babcock, 2011).

The USA is the largest corn producer in the world with about one-third of its corn used in ethanol production. It is also a large soybean producer which can generate biodiesel. There is strong government support in ethanol production through policy. Babcock summarized the current US policy including:

• •

  the renewable fuel standard (RFS), which mandates a market demand floor in the USA, 12.6 billion gallons of ethanol and 0.8 billion gallons of biodiesel in 2011 and will continue to increase; and

• •

  tax credits, which is $1.00 per gallon for biodiesel and $0.45 for ethanol (the latter number is not from this paper).

Based on a demand-supply model developed by Center for Agricultural and Rural Development (CARD) at Iowa State University and Food and Agricultural Policy Research Institute (FAPRI) at University of Missouri, Babcock found the US ethanol policy’s impact on food price is small, and rather, the impact on food prices from market-driven (high crude oil price) expansion of ethanol is much larger. He suggested more flexible US biofuel policy including removing the blend tax credit, which does not help US biofuel industry as long as the mandates are in place, and relaxing blending mandates when feedstock supplies are low.

This research is solely based on the US market of crop, food and biofuel. Because US grain market has been open, its actual prices are in line with world food prices. It is unclear whether the model results of ethanol policy impact on food prices can stay robust, if US demand and supply factors are considered within the context of global market in the model. Quantitative research on drivers of global food price is needed in this area.

What implications can we derive from this research? With the fast development of large economies, the demand of food and energy will remain strong and increasing. The crisis in the crude oil market can easily spill over to the food market because the biofuel industry has been established with the capacity to produce, even though the biofuel subsidy in developed countries may reduce in the future. The crop yield increase brought by more investment in agricultural technology has to deal with too much pressure from increased demand brought by population increase, income induced food need increase, and energy demand increase. The world economy is path dependent, and whatever occurred in the past is no longer reversible. Globally responsible policies are called for each country to help control the global food price and keep it from rising too fast.

Based on Babcock and others’ papers cited here, these policies should include but not only emphasize on biofuel subsidies. Other policies include:

• •

  investment in energy technology development from sources noncompeting with food production;

• •

  investment in agricultural and biological science and technology to facilitate furthermore crop yield growth; and

• •

  population control and promotion of energy saving consumption.

H. Holly Wang, Xian Xin