Food vs Fuel Myth or Reality?

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Food vs FuelMyth or Reality?

• Sergio C. Trindade
• strindade_at_alum.mit.edu
• Ministry of Foreign Affairs of Thailand
• Bangkok, 20 June 2008

2
Many analysts minimize the link

• USDA Secretary only 3 of the food price hike of
  40 plus due to ethanol demand for corn
• LEGG US CPI oil impact on food is 2-3 times
  that of corn
• IFPRI claims 30 of price increase due to
  biofuels
• Merrill Lynch If biofuels off the market oil
  prices would rise 15, more pressure on food
  prices
• Trade proteccionism and intervention (e.g.
  subsidies) can distort prices, trigger hikes
• Market expectations often influence prices

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Biofuels production and consumption
concentrated in the US, Brazil and the EU
Source www.defra.gsi.gov.uk
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• Role of Agriculture and Trade Policies
• Inelastic demand and volatile supply lead to
  price spikes in agricultural markets
• Supply depends on one harvest per year plus
  stocks. Price is main short term market balance
  mechanism
• NAFTA and cheap subsidized American corn ruined
  the Mexican maize economy, millions of farmers
  left the land, the country became hooked on
  imports
• UK Governments Chief Scientific adviser, Sir
  David King confirmed the larger world scope of
  creating dependency, while having concerns about
  the targets set by the EU on biofuels
• Jonathan Scurlock, advisor on renewable energy to
  the UKs National Farmers Union biofuels
  actually help farmers in poorer countries, as
  greater demand creates investment in agriculture
  and bring more land into production

Sources Krenn, Alexander, Biofuels not to blame
for high food prices, Biodiesel Courier, 15
October 2007 www.defra.gsi.gov.uk
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World Grain Markets

• World grain (wheat, corn) production fairly
  concentrated Argentina, Australia, Canada, EU,
  US
• Trade across regions is 15-20 of production
• Disruption in supply in any of the five major
  exporters results in global market impacts
• Cyclical short term factors induce volatility
  into the market
• Structural long term factors (increased demand
  from emerging economies and expansion of
  biofuels industry) may impact on grain prices

Source www.defra.gsi.gov.uk
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Short-term cyclical factors

• Weather
• Australia wheat output declined from 25.4
  million tons (2005/6) to 10.6 million tons
  (2006/7). Share of world exports down from 14 to
  9, affecting prices
• Longer term global warming
• Will increase price volatility
• End of crop year inventories/stocks
• Maize and wheat for 2007/8 exceptionaly low
  expressed as stock to usage ratio
• Export restrictions
• Argentina, Ukraine, Russia, Kazakhstan,
  Indonesia
• Hot money and speculation
• Possible

Source www.defra.gsi.gov.uk
7
Long-term/Structural Factors

• Emerging economy demand
• Higher incomes, higher demand for
  resource intensive foods, higher income
  elasticity.
• But no acceleration recently
• Biofuels
• Impact must be put in perspective
• Only 0.6 of wheat globally into ethanol
• But US maïze to ethanol at 38 in 09/10!
• Plus US land use change between soy-maïze
• EU-25 in 2004 20 rapeseed to biodiesel
• Only one percent of palm oil for biodiesel
• In 06/07 grain shortfall 4x grain for EtOH

Source www.defra.gsi.gov.uk
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Long-term/Structural Factors contd

• High oil price impacts
• Increased cost of inputs fertilizers,
  pesticides, fuels
• Higher returns on biofuels, thus promoting land
  use change from food crop to fuel crop
• Biofuels feedstocks do not necessarily follow
• oil price curves
• Feed and food markets still the main
  destination for grain, sugar and oil seeds
• Under-investment in agriculture
• Decades of over supply and low prices in oil
  seeds and grains
• Serious under-investment in RD and innovation

Source www.defra.gsi.gov.uk
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Rice

• - Prices increased dramatically during last year.
  By early May 2008, prices were more than double
  their May 2007 level
• - Export restrictions put in place by some major
  rice producing countries plus surging import
  demand by other countries - to compensate for
  losses incurred by floods or to reconstitute rice
  reserves - had a dramatic effect on the market,
  especially since November 2007
• - NOT used for biofuel production, and so far
  only small amounts of rice cropland have changed
  to producing biofuel feedstocks

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Wheat

• - Prices increased by 126 per cent during
  Jan-Apr 2008, compared to 2007
• - But, only 1.4 of wheat is used for biofuels
  in the EU , 0.6 percent globally.
• - Demand for wheat to produce biofuels has NOT
  directly contributed to recent food price hikes
• - Unfavorable weather conditions in key
  producing countries (Australia, Ukraine) had
  major impact on prices
• - However, some indirect effects, through
  land-use changes, may have occurred

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Maize

• - Prices up by 23 percent during Jul 07 -Mar 08
• on top of a 45 surge in 2006/07
• - In the US, maize for ethanol production
  is expected to almost double between 2005/06 and
  2007/08
• - In 2009, almost 38 percent of total US
  domestic maize use, equivalent to 100 million
  tons, for ethanol making
• - US domestic ethanol industry growth linked to
  the 2007 Energy Bill requiring 35 billion gal
  ethanol in US transportation fuel (2022)
• - But, 21 billion gal must be from cellulosic RMs
• - Hence, future impacts on corn prices may
  be minimized

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Maize contd

• Ethanol production one of many factors
• Maïze and soybean markets linkages
• Spring 2006 price expectations led US farmers to
  increase soy acreage at the expense of corn
• Maïze production declined and prices rose
• Production fell in but demand for
  ethanol increased almost two times
• Maïze exports increased even further, suggesting
  ethanol demand is a minor factor on corn price
  increase
• Wheat prices may be driving corn prices upwards
  via intergrain substitution in feed market

Source www.defra.gsi.gov.uk
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Sugar

• - Sugar prices have declined despite reduced EU
  exports, continuous growth in demand for food
  and from ethanol producers.
• - More than half of all sugar cane grown in
  Brazil, the largest sugar exporter, is destined
  for the production of fuel alcohol.
• - Possible explanations for apparent
  disconnection between international sugar prices
  and market fundamentals
• high energy prices,
• weakness of the US dollar, and
• the potential influence of investment funds on
  the sugar futures markets.
• - Increasing demand for sugar for ethanol
  production has not modified the situation, in
  which global sugar production is estimated to
  exceed consumption.

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4526lang1, www.defra.gsi.gov.uk
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Growth in Brazilian Sugar Cane Ethanol Production
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Relationship between Sugar and Oil Prices
Source www.defra.gsi.gov.uk
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Oilseeds

• - Prices went up 94 per cent compared with 2007
  and 140 per cent compared to 2006.
• - Biofuels becoming a significant driver of the
  oilseeds market, both directly through the use
  of vegetable oils for biodiesel production, and
• - indirectly as increased cereal demand for
  ethanol production affects the relative prices
  of oilseeds and thereby the competition for
  arable land between these crops.
• - The use of vegetable oils for biodiesel
  production may alter trade patterns.
• - In the EU, the largest global biodiesel
  producer, the use of rapeseed oil for biodiesel
  production could reach over 8 per cent of
  worldwide and 41 per cent of domestic vegetable
  oil consumption by 2017.
• - The EC's proposal for a mandatory 10 percent
  minimum target for the share of biofuels in
  transport gasoline and diesel consumption by
  2020 is likely increasing pressure on the
  oilseeds market.

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Food prices suffer many influences

• Biofuels expanded by a factor of 3 over the past
  20 years
• Agricultural commodities inelastic demand and
  volatile supply.
• i) Real wheat prices in 1995 same as today
• ii) Sugar prices peaked in 2003, but in 2008
  fell below production costs
• In isolation, biofuel production should pressure
  oil seeds, cereal and sugar, but there are other
  factors at play

Source www.defra.gsi.gov.uk
19
Food prices suffer many influences

• Agricultural prices more volatile than consumer
  prices
• Share of agricultural raw materials in food
  production decreases with degree of manufacturing
• Other factors more important labor capital
  energy
• Food supply chains tend to have competitive
  structures, which may restrain the transmission
  of primary comnmodity changes to consumers
• Increasing household incomes causes consumer
  behavior to change
• Food costs as a proportion of income tend to have
  a smaller effect on consumers in developed
  countries
• Study by Iowa State University concluded that in
  the long run general food prices will increase
  0.7-1.8 more than they otherwise would have
• Higher feed prices will put upward pressure on
  livestock prices, but
• Marketing bill more relevant to food CPI than
  feed cost

Source www.defra.gsi.gov.uk
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Agricultural prices has fluctuated around a
moderately stable trend whereas the Consumer
Price Index (CPI) for food has risen steadily
Source www.defra.gsi.gov.uk
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Impact of higher commodity prices on developing
countries

• Present evidence that biofuels are leading to
  food price increases is circumstancial
• Import bill increases compensated by export bill
  increases
• Of the three main staples rice, wheat and
  maïze
• only maïze is currently used significantly for
  ethanol
• production
• Inter-grain substitution
• Imperfect transmission of world prices to
  domestic
• prices
• Biofuel production has the potential to make
  agricultural infrastructure investment socially
  profitable

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Prices are pressured by

• Short term, cyclical factors
• Adverse weather reduced supply
• Stock reduction due to lower than expected
  harvests induced volatility and higher risk
  premium
• Export restrictions by many countries
• Speculative investment?

Source www.defra.gsi.gov.uk
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Prices are also pressured by

• Longer-term, structural factors
• Expanded demand from emerging economies
• Discrete impact on maïze from US ethanol
  development
• Higher oil prices increase agricultural prices
• Low levels of investment research
• in agriculture curbed supply

Source www.defra.gsi.gov.uk
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Furthermore

• Changes in agricultural prices are not always
  fully reflected in consumer prices
• Studies and models to assess the impact of
  biofuels on commodity prices need to be viewed
  with caution
• Second generation biofuel production could
  reduce land requirement and increase
  productivity.

Source www.defra.gsi.gov.uk
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Conclusions

• Scale of fuel market much larger than food
  markets driving substitution of biofuel for
  fossil fuels
• Short term not a major cause of price hikes
• Long term if continued reliance on grain
  feedstocks (US and EU) and edible oils (soy,
  rapeseed and palm) could become major cause
• Switch to non food sources (sweet sorghum,
  jatropha) and second generation cellulosics to
  avoid adding pressure to food prices
• Freer international trade, less subsidies and
  the Biopact are the sustainable solution

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Responding to the Challenge

• Integrate and better coordinate policy frameworks
• Assess benefits and impacts of biofuels trade,
  use and production, and monitor them
• Address negative indirect effects of biofuels
  trade, use and production
• Reward positive impacts and investments,
  including through carbon management
• Use informed stakeholders dialogues to build
  consensus for new projects
• Increase investment in research, development and
  demonstration
• Build capacity to enable producers to manage
  carbon and water
• Make sure that trade policies and climate change
  policies work together. Promote a BioPact

Source Sustainable Biofuels Consensus (2008)