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Food-Based Biofuels Are Helping Drive Up Food Prices

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"Food-Based Biofuels Are Helping Drive Up Food Prices"

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Many factors contribute to rising prices of food: Demand from rapidly-growing developing countries; droughts; energy prices; the value of the dollar; and, as a new report from Purdue University concludes, ethanol production.

While the Purdue researchers are careful to explain the phenomenon is caused by a combination of all these factors, the report targets two main culprits:  Chinese demand for soybeans and American ethanol. In 2010 and into this year, 27% of the U.S. corn crop went toward ethanol — up from 10% in 2005 and 2006.

[T]he demand surges from biofuels and Chinese soybean purchases appear to be persistent. While the demand shifts to date are expected to persist, the rate of increase in demand growth is expected to slow as corn biofuels mandates are reached and as China has built adequate soybeans stocks levels. This slowing of the demand surges may give world supply a better opportunity to catch up in coming years. Other events—such as additional demand growth, the degree of supply response, and macroeconomic variables—will all be important in determining how this cycle plays out.

[T]aking up around 27% of the corn crop (net of the by-product credit), there is little doubt that biofuels play a role in the corn price level and variability, and this has spilled over into other commodity markets. The RFS2 has been important in establishing ethanol production capacity and the minimum biofuels demand for corn realized today.

The researchers found, “Market inelasticity—a reduction in the responsiveness of prices to demand and supply forces—is one of the key mechanisms in today’s commodity markets.” They offer this remarkable chart of the  soaring amount of US crop acreage required to produce ethanol and soybeans for China:

Land adjustments highlight the impact of the two demand shocks. In 2005, 16.1 million acres of land in the United States were required to meet the demand for biofuels production and U.S. soybean exports to China. In 2010, it took 46.5 million acres—an increase of 189%—to satisfy these demands, or 29% of total U.S. corn and soybean harvested acreage. Globally, 70% of the expanded acres used to grow high-demand crops were new land being brought into production; 30% resulted from shifting acres out of other crops. In the United States, where land area has been fairly stable, the new demands caused land to be reallocated from other crops….

Low stocks are an important contributor to market inelasticity. When stocks are abundant, much of the adjustment to supply or demand shocks is through changes in expected carry-over stocks. If stocks are low, this adjustment mechanism is no longer available, contributing to inelasticity and higher prices.

While the report authors see a possible easing of prices in the future, the short-term will still be tight: ‘”We don’t think these prices are going to come down in a year,” said a co-author of the report, Wallace Tyner, speaking to the Guardian. “It’s going to take at least a couple of years to see a significant reduction in price.”

— Tyce Herrman

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