The Impacts of Biofuel Production on Food Prices: A Review

Abstract

The various calculations of the impacts of biofuel production on the mid-term projections of food and agricultural commodity prices are difficult to reconcile. This is largely due to the intricate set of assumptions, the differences in the baseline scenario and in the projection horizon they are built upon. For similar reasons, studies evaluating the impact of biofuel production on food and commodity prices to date do not provide a clear consensus. Rather than discussing the merits of the different assumptions and methodologies, this paper focuses on the global trends that can be extracted from the different sources. Agreed upon by all sources is the fact that between 2005 and 2007 many agricultural commodity prices increased sharply, especially nominal prices. The impact of commodity prices on final food prices affecting household food expenditures is less clear. Nonetheless, many food price indices (national CPIs, WB food price index and FAO food price index) have also risen over the same period. It is a fact that the increasing demand for feedstocks from the biofuel sector is one among several factors impacting on agricultural commodity prices. Other factors cited include poor harvests, the structural change in food demand in certain countries, population growth, high oil prices, or the devaluation of the US dollar. To calculate the longer term projected commodity prices, these factors are integrated in the simulations, which are then subjected to different biofuel production scenarios. These scenarios largely determine the extent of the biofuels’ impact on food and commodity prices. Despite considerable differences in projection results, methodologies and assumptions, some common trends can be observed. The latest EU and US biofuel programs and legislations are expected to have the largest impact on vegetable oils over the mid term, increasing world real prices by more than 30% between 2011 and 2016. The impacts on prices are generally projected as lesser (+3 to 15%) for commodities such as wheat, corn and soybean, whilst the price of oilseed meals (an important part of fodder markets and a by-product of vegetable oil production) is predicted to decline (-11 to -17%) due to the increase in vegetable oil production. A (hypothetical) freezing of biofuel production at the 2007 levels predicts a decline in cassava, oils, sugar and wheat prices by less than 10% between 1997 and 2020. The price decreases would reach 10 to 20% had biofuel production completely stopped in 2007. The magnitude of the impacts is more contrasted when looking at real regional prices, but across all given regions biofuel mandates and targets are projected to impact oilseed prices most strongly (+25 to +72%), followed by grain prices (+5 to +21%).