Report: Biofuel not cause of food price spike

By Erin Voegele | July 13, 2010
Posted Aug. 3, 2010

A report recently published by the World Bank's Development Prospects Group argues that biofuel production has had a much smaller impact on food price increases than originally thought, but that the use of commodities by investment funds may have been partially responsible for the 2007/08 price spike. According to the report, titled "Placing the 2006/08 Commodity Price Boon into Perspective," a stronger link between energy and non-energy commodity prices is likely the dominant influence on development in commodity markets, especially food markets.

The report states that role played by biofuels in the commodity price spike of 2007/08 has been hotly debated, with some claiming that first generation ethanol and biodiesel production accounted for as much as two-thirds of the food price increase. Others have claimed there is little direct evidence that demand for ethanol and biodiesel feedstocks played any role in the price spike.

According to the World Bank's report, only 1.5 percent of the global cropland used to grow grains and oilseeds is used to produce feedstock for biofuels. "This raises serious doubts about claims that biofuels account for a big shift in global demand," said the Development Prospects Group in its report. "Even though widespread perceptions about such a shift played a big role during the recent commodity price boom, it is striking that maize prices hardly moved during the first period of increase in U.S. ethanol production, and oilseed prices dropped with the EU increased impressively its use of biodiesel. On the other hand, prices spiked while ethanol use was slowing down in the U.S. and biodiesel use was stabilizing in the EU."

According to the report, while much debate has focused on the amount of food crops that have been diverted to biofuels production, less attention has been paid the issue of how energy prices provide a floor for agricultural prices. While the average price of crude oil between 1984 and 2004 was slightly more than $20 per barrel in real 2000 terms, the authors of the report note that most analysts and researchers now believe the new equilibrium price of oil will be between three and four times higher. In the long term, the report states that prices of other energy sources will increase at the same proportion. "If such assessment is correct, then high energy prices coupled with the high energy intensity of agricultural commodities imply that developments in non-energy (especially food) markets will depend strongly on the nature and degree of the price links between energy and non-energy commodities," said Development Prospects Group in its report.
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