Ethanol Production and Food Price: Simultaneous Estimation of Food Demand and Supply

Abstract

(ProQuest: ... denotes formulae omitted.)1.IntroductionWorldwide ethanol production has more than quadrupled since 2000 with the U.S. and Brazil leading in production (RFA n.d.a). Brazil, who has been a long time global leader in ethanol production, attributes its main reason to the high oil prices in the 1970s (Dias de Moraes 2007). Other countries who boosted their production in the mid-2000 justified their decision based on ethanol's positive impact on rural development, reducing reliance on unfriendly nations for energy, and environmental stewardship (Rosill°Calle & Johnson 2010), the last of which is often criticized because of the perceived negative energy balance of ethanol. The United States, with the help of government support (e.g., capital investment, blenders' subsidies, and tariffs), surpassed Brazil to become the leading producer of ethanol in 2006. Besides the negative energy balance of ethanol production, one of the major criticisms against ethanol is the impact on food prices. Since 2000, world food prices have more than doubled (World Bank n.d.).The high food prices, especially in poor countries, led to calls to curtail ethanol production (Grunwald 2008; Sharma 2008), and subsequently triggered many studies to examine the relationship between the ethanol market and the food market. Monteiro, et al. (2012) studied the impact of ethanol production in the U.S. and Brazil on food prices by focusing on the 1980-2007 time period. They found the share of Brazilian ethanol in the world market, the value of the U.S. dollar, and the price of oil have significantly affected food prices. Literature reviewed by Armah, et al. (2009) attributes the rise in food prices to increased energy cost, the devaluation of the U.S. dollar, and the increased energy demand by developing countries such as India and China. Other studies have found the price of ethanol to be influenced by food and energy prices (Serra, et al. 2011a; Serra, et al. 2011b; Kristoufek, et al. 2012), confirming a connection between the food and ethanol markets.In response to the outcry against ethanol production, policies such as import tariffs and blenders' subsidies have been discontinued in the U.S., and ethanol use mandates have been reduced in the U.S.1 and Europe (Taylor 2013 & Kenny 2014). Although ethanol production in the U.S. and Brazil has slowed as a result of these policy changes, it increased more than 9% from 2012 to 2014, while food prices dropped by nearly 14% over the same time period. Moreover, from 2012 to 2014, energy prices fell by more than 7%, which begs the question, is ethanol production responsible for high food prices? The purpose of our study is to investigate the impact of U.S. and Brazilian ethanol production on global food prices by estimating food demand and food supply equations simultaneously. We include data from 1980 to 2014 and control for the increased demand for food by developing countries due to improving economies and increasing populations, the depreciation of the U.S. dollar, energy prices, and technological advancement in agricultural production.2.Ethanol Production in the U.S. and BrazilThe U.S. and Brazil are the leading producers of ethanol in the world, accounting for over 80% of production (RFA). In response to the higher oil prices in the early 1970s, Brazil embarked on a massive ethanol production program. Policies implemented in Brazil include mandatory blending, capital subsidies, flex-fuel vehicle subsidies, and a 20% import tariff (Monteiro et al. 2012). Production has grown from about 0.16 billion gallons in the mid-1970s to 6.2 billion gallons in 2014 (RFA). In addition to the government programs, the success of Brazilian ethanol production is owed to the abundant supply of sugarcane, a very cost- and environmentally-efficient feedstock. Brazil is now a leader in sugarcane-based ethanol production. Currently, pure gasoline (i.e. zero ethanol blend) is no longer available in Brazil (Rico 2008). …