Fuel prices increased three times in Mozambique this year due to high import costs. For this reason, the country is looking into biofuels as an alternative. Mozambique's ministries of agriculture and energy presented a study showing that more than five million hectares of land can be used sustainably in the production of crops that would produce biodiesel fuels. The first phase of a biofuel implementation plan was also presented, identifying the provinces of Inhambane, Zambezia, Nampula and Cabo Delgado as the first to benefit.
What we really need: a study showing the effects of high oil prices on food
Until now, we have seen reports about the potential effects of large scale biofuel production on food prices. These studies are important, but incomplete because they do not analyse the opportunity costs of competitive biofuels at high oil prices. Some media have drawn the straightforward but quite deceptive conclusion from the studies that biofuels are to blame for ending the era of cheap food. Reality is a bit more complex than this.
What we really need are studies showing the effects of high oil prices on agriculture and food as compared to the effects of biofuels. Why are biofuels produced in the first place? Because they reduce the cost of transport fuels. Take the Brazilian example: a barrel of oil equivalent ethanol costs between US$ 35 and 40. Crude oil currently costs more than US$ 70 per barrel, which makes gasoline without taxes standing at around US$100 per barrel. In short, the biofuel costs a third, to half as much as the refined oil alternative.
In this context it is not difficult to see that ultimately high oil prices are to blame for increasing food prices, and not biofuels. Biofuels may result in costlier food, but the opportunity costs are: even higher food prices and generalised inflation. It is about time some major economic, agriculture and social think tanks start making this comparison.
Transport fuels are used in all economic sectors and thus have impacts not only on food prices, but on the entire economy. This is especially true for developing economies with a high 'energy intensity' (the amount of oil and energy needed to produce an amount of GDP). They suffer most. But even in highly developed economies, high oil prices drive inflation.
There are few studies analysing the effects of high oil prices on food prices, compared to the biofuels effect. A recent analysis [*.pdf] written by LEGC, an expert services firm, does give us some clues, though: it shows that high energy costs, especially those of crude oil, have a far bigger impact on retail food prices than biofuels based on food crops like corn. Note that corn ethanol is used in this study, whereas we urge for a study starting out with a comparison of all types of biofuels, including competitive and unsubsidised fuels such as sugarcane ethanol or palm oil biodiesel. This aside, the findings are important because they indicate that biofuels, by replacing costly oil, slow down the growth rate of the increase in prices for food, as measured by the Consumer Price Index. Put differently, not producing biofuels that replace costly oil, means food prices would increase even faster than they are currently doing:
energy :: sustainability :: ethanol :: biodiesel :: biomass :: bioenergy :: biofuels :: inflation :: oil ::
The argument is critical: rising oil prices have an impact not only on food prices, but on all sectors of the economy. Biofuel production on the contrary only has a relatively small impact (compared to oil's effect) on food prices, but can replace costly oil and help reduce the over-all effects of oil price related inflation in all sectors of the economy. Energy demand is as price inelastic as food demand, which means it just as important a product for consumers.
According to the study, the spike in US retail food prices is driven by rapidly growing demand, by skyrocketing oil and transportation costs, and by increased processing and packaging costs, a result of increased energy prices. The use of corn for ethanol plays a marginal role, the report finds. What is more, the study also shows that distiller’s grains, a byproduct of ethanol production and a high quality livestock feed, may help put downward pressure on food prices as livestock farmers purchase the grains instead of corn (table, click to enlarge).
The study was written by LEGC, a global expert services firm, and published by the Renewable Fuels Association (RFA) (this warrants some caution, because the RFA is known as a staunch advocate of corn based ethanol).
The purpose of the study titled, "The Relative Impact of Corn and Energy Prices in the Grocery Aisle" [*.pdf] is to examine and compare the impact on consumer food prices resulting from increases in respectively petroleum and corn prices. It found that increasing oil prices have about twice the impact on consumer food prices as equivalent increases in corn prices:
Corn is an important feed ingredient for livestock and poultry producers and changes in corn prices can have significant impacts on profitability and production. However, meat, poultry, fish, eggs and dairy products account for only a fifth of the CPI for food which, in turn, is only 15 percent of the overall CPI. Crude oil and refined petroleum prices have increased sharply over the past several years and have put considerable pressure on consumers. Energy plays a significant role in the production of raw agricultural commodities, transportation and processing, and distribution of finished consumer food products. Several studies have looked at the impact of increased energy prices on food prices:
LEGC evaluated the impact of an increase in petroleum prices on consumer prices food prices by applying the impact elasticities summarized above to an assumed 33 percent increase in crude oil (the equivalent of a $1.00 increase in retail gasoline prices from current levels). To determine the impact of an increase in corn prices on livestock, poultry, dairy and consumer food prices the authors imposed a 33 percent increase in corn prices (about $1.00 per bushel from current levels) on the current LECG agricultural sector baseline forecast over the five year period 2007 through 2012. This is consistent with the increase in corn prices that has occurred over the past year.
The analyses by Reed and Lee indicate that a 33 percent increase in oil/energy prices would increase retail food prices by 0.6 percent and 0.9 percent. Reed indicates that a 100 percent increase in crude oil prices results in a shortterm increase of 1.82 percent in consumer food prices while Lee reports that a 10 percent increase in energy prices provides a 0.2709 percent increase in retail food prices. Restating these on an equivalent 33 percent basis (1.82 percent times .33 and 0.2709 times 3.3) provides the 0.6 to 0.9 percent range.
The equivalent 33 percent increase in corn prices over the fiveyear period is expected to reduce beef, pork, and broiler production by 2.6 percent between 2008 and 2012 and increase prices by 2.4 percent. Combined with higher turkey, egg, and dairy prices, the CPI for food is projected to increase an additional 0.3 percent. This result is consistent with the 0.2 percent contribution to food price inflation between September 2006 and April 2007 from meat, poultry, fish and dairy and the $1.15 per bushel increase in cash market corn prices.
The authors state that the days of cheap corn are more likely than not over. Livestock and poultry producers who enjoyed low and relatively stable corn (and other feed) prices over most of the past decade are now faced with the challenge of adjusting to an environment of higher feed prices. The new reality is that corn prices are likely to remain nearer to the $3.00 per bushel than the $2.00 per bushel mark for an extended period.
The good news, they write, is that prices may be more stable as corn production expands to meet ethanol requirements and new ethanol feedstocks and technologies emerge. Livestock and poultry producers also will have an incentive to increase use of the ethanol coproduct Distiller’s grains in order to control feed costs. This medium protein feed component can be used in place of corn in a substantial portion of the feed ration. As ethanol production expands, so will production of Distiller’s grains and thus putting downward pressure on prices.
Corn and energy prices both affect consumer food prices. However, since increases in corn prices are limited to a relatively small portion of the overall CPI for food, an increase in corn prices resulting from higher ethanol demand or a supply disruption such as a major drought is expected to have about half the impact of the same percentage increase in petroleum and energy prices.
Conclusion
Biofuels may increase the price of food. But high oil prices increase not only the price of food much more, they also drive inflation and push prices for all goods and services up. In some developing countries, governments are already forced to spend twice the amount of money on importing oil products than on health... In short, all economic and social sectors are impacted by oil.
Let us take an example of the importance of oil in our economy. The clothes we wear are made from cotton that is grown in West-Africa. There, farmers use machinery (harvesters, irrigation equipment) that is powered by liquid fuels. Once harvested, the cotton is transported (needs oil) to ports, where it is shipped (needs oil), to Bangladesh or China, 10,000 miles away. There, the raw product is transported to, and transformed in factories (both steps need oil), and then shipped again to markets in the wealthy West (needs oil). Here, we use our cars to go to shops to buy our clothes. With our new clothes, we go out to have diner, to eat food that was produced by relying on liquid fuels. In short, in all the many steps from production to consumption, oil is required - in countless agricultural, industrial, and service sectors.
And the worst is yet to come. Just imagine what would happen (to the poorest, energy intensive economies) when oil production reaches a peak and a barrel costs US$100 or more. That would be outright disastrous for the world economy.
So it is time major economic, energy and agriculture think tanks join forces to write a clear report showing the opportunity costs of biofuels - that is, the effects of high oil prices on agriculture, industry, and society as a whole. Such a report may well show that biofuels are actually beneficial to all of us (at least when they are produced from crops that make sense and when they are not subsidised).
Such a study would not even address the benefits of biofuels on long-term agricultural production. As is well known, climate change may reduce farm output in vast parts of the world, which would obviously impact food prices tremendously; biofuels are one of the most straightforward ways to mitigate climate change. So there too, the opportunity costs of biofuels should be analysed in the context of long term agricultural production.
More information:
John M. Urbanchuk, The Relative Impact of Corn and Energy Prices in the Grocery Aisle [*.pdf], June 14, 2007
The Renewable Fuels Association: Energy Prices, Not Corn, Chief Reason for Rising Food Prices, Study Finds - June 14, 2007.
What we really need are studies showing the effects of high oil prices on agriculture and food as compared to the effects of biofuels. Why are biofuels produced in the first place? Because they reduce the cost of transport fuels. Take the Brazilian example: a barrel of oil equivalent ethanol costs between US$ 35 and 40. Crude oil currently costs more than US$ 70 per barrel, which makes gasoline without taxes standing at around US$100 per barrel. In short, the biofuel costs a third, to half as much as the refined oil alternative.
In this context it is not difficult to see that ultimately high oil prices are to blame for increasing food prices, and not biofuels. Biofuels may result in costlier food, but the opportunity costs are: even higher food prices and generalised inflation. It is about time some major economic, agriculture and social think tanks start making this comparison.
Transport fuels are used in all economic sectors and thus have impacts not only on food prices, but on the entire economy. This is especially true for developing economies with a high 'energy intensity' (the amount of oil and energy needed to produce an amount of GDP). They suffer most. But even in highly developed economies, high oil prices drive inflation.
There are few studies analysing the effects of high oil prices on food prices, compared to the biofuels effect. A recent analysis [*.pdf] written by LEGC, an expert services firm, does give us some clues, though: it shows that high energy costs, especially those of crude oil, have a far bigger impact on retail food prices than biofuels based on food crops like corn. Note that corn ethanol is used in this study, whereas we urge for a study starting out with a comparison of all types of biofuels, including competitive and unsubsidised fuels such as sugarcane ethanol or palm oil biodiesel. This aside, the findings are important because they indicate that biofuels, by replacing costly oil, slow down the growth rate of the increase in prices for food, as measured by the Consumer Price Index. Put differently, not producing biofuels that replace costly oil, means food prices would increase even faster than they are currently doing:
energy :: sustainability :: ethanol :: biodiesel :: biomass :: bioenergy :: biofuels :: inflation :: oil :: 
The argument is critical: rising oil prices have an impact not only on food prices, but on all sectors of the economy. Biofuel production on the contrary only has a relatively small impact (compared to oil's effect) on food prices, but can replace costly oil and help reduce the over-all effects of oil price related inflation in all sectors of the economy. Energy demand is as price inelastic as food demand, which means it just as important a product for consumers.According to the study, the spike in US retail food prices is driven by rapidly growing demand, by skyrocketing oil and transportation costs, and by increased processing and packaging costs, a result of increased energy prices. The use of corn for ethanol plays a marginal role, the report finds. What is more, the study also shows that distiller’s grains, a byproduct of ethanol production and a high quality livestock feed, may help put downward pressure on food prices as livestock farmers purchase the grains instead of corn (table, click to enlarge).
The study was written by LEGC, a global expert services firm, and published by the Renewable Fuels Association (RFA) (this warrants some caution, because the RFA is known as a staunch advocate of corn based ethanol).
The purpose of the study titled, "The Relative Impact of Corn and Energy Prices in the Grocery Aisle" [*.pdf] is to examine and compare the impact on consumer food prices resulting from increases in respectively petroleum and corn prices. It found that increasing oil prices have about twice the impact on consumer food prices as equivalent increases in corn prices:
A 33 percent increase in crude oil prices – which translates into a $1.00 per gallon increase in the price of conventional regular gasoline – results in a 0.6 percent to 0.9 percent increase in the CPI for food while an equivalent increase inThe reason for the larger impact on food prices from petroleum and energy prices stems from the relative importance of energy in food production, packaging, and distribution compared to that of a single ingredient. While petroleum and energy prices affect virtually all aspects of agricultural raw material transportation, processing, and distribution of all finished consumer food products, corn prices affect only a segment of consumer foods – livestock, poultry and dairy.
corn prices ($1.00 per bushel) would cause the CPI for food to increase only 0.3 percent.
Corn is an important feed ingredient for livestock and poultry producers and changes in corn prices can have significant impacts on profitability and production. However, meat, poultry, fish, eggs and dairy products account for only a fifth of the CPI for food which, in turn, is only 15 percent of the overall CPI. Crude oil and refined petroleum prices have increased sharply over the past several years and have put considerable pressure on consumers. Energy plays a significant role in the production of raw agricultural commodities, transportation and processing, and distribution of finished consumer food products. Several studies have looked at the impact of increased energy prices on food prices:
- Reed, Hanson, Elitzak and Schluter utilized three different model structures to examine the impact of a doubling of crude oil prices on the CPI for food. They conclude that the short run impact of a doubling (e.g. 100 percent increase) in crude oil prices would cause a 1.82 percent rise in average food prices in the short run and 0.27 percent in the long run.
- A more recent analysis published by Chinkook Lee examined the impact of energy price increases as an intermediate input for food processing and concluded that a 10 percent increase in energy prices results in a 0.2709 percent increase in the purchase (consumer) price of food and kindred products prices.
LEGC evaluated the impact of an increase in petroleum prices on consumer prices food prices by applying the impact elasticities summarized above to an assumed 33 percent increase in crude oil (the equivalent of a $1.00 increase in retail gasoline prices from current levels). To determine the impact of an increase in corn prices on livestock, poultry, dairy and consumer food prices the authors imposed a 33 percent increase in corn prices (about $1.00 per bushel from current levels) on the current LECG agricultural sector baseline forecast over the five year period 2007 through 2012. This is consistent with the increase in corn prices that has occurred over the past year.
The analyses by Reed and Lee indicate that a 33 percent increase in oil/energy prices would increase retail food prices by 0.6 percent and 0.9 percent. Reed indicates that a 100 percent increase in crude oil prices results in a shortterm increase of 1.82 percent in consumer food prices while Lee reports that a 10 percent increase in energy prices provides a 0.2709 percent increase in retail food prices. Restating these on an equivalent 33 percent basis (1.82 percent times .33 and 0.2709 times 3.3) provides the 0.6 to 0.9 percent range.
The equivalent 33 percent increase in corn prices over the fiveyear period is expected to reduce beef, pork, and broiler production by 2.6 percent between 2008 and 2012 and increase prices by 2.4 percent. Combined with higher turkey, egg, and dairy prices, the CPI for food is projected to increase an additional 0.3 percent. This result is consistent with the 0.2 percent contribution to food price inflation between September 2006 and April 2007 from meat, poultry, fish and dairy and the $1.15 per bushel increase in cash market corn prices.
The authors state that the days of cheap corn are more likely than not over. Livestock and poultry producers who enjoyed low and relatively stable corn (and other feed) prices over most of the past decade are now faced with the challenge of adjusting to an environment of higher feed prices. The new reality is that corn prices are likely to remain nearer to the $3.00 per bushel than the $2.00 per bushel mark for an extended period.
The good news, they write, is that prices may be more stable as corn production expands to meet ethanol requirements and new ethanol feedstocks and technologies emerge. Livestock and poultry producers also will have an incentive to increase use of the ethanol coproduct Distiller’s grains in order to control feed costs. This medium protein feed component can be used in place of corn in a substantial portion of the feed ration. As ethanol production expands, so will production of Distiller’s grains and thus putting downward pressure on prices.
Corn and energy prices both affect consumer food prices. However, since increases in corn prices are limited to a relatively small portion of the overall CPI for food, an increase in corn prices resulting from higher ethanol demand or a supply disruption such as a major drought is expected to have about half the impact of the same percentage increase in petroleum and energy prices.
Conclusion
Biofuels may increase the price of food. But high oil prices increase not only the price of food much more, they also drive inflation and push prices for all goods and services up. In some developing countries, governments are already forced to spend twice the amount of money on importing oil products than on health... In short, all economic and social sectors are impacted by oil.
Let us take an example of the importance of oil in our economy. The clothes we wear are made from cotton that is grown in West-Africa. There, farmers use machinery (harvesters, irrigation equipment) that is powered by liquid fuels. Once harvested, the cotton is transported (needs oil) to ports, where it is shipped (needs oil), to Bangladesh or China, 10,000 miles away. There, the raw product is transported to, and transformed in factories (both steps need oil), and then shipped again to markets in the wealthy West (needs oil). Here, we use our cars to go to shops to buy our clothes. With our new clothes, we go out to have diner, to eat food that was produced by relying on liquid fuels. In short, in all the many steps from production to consumption, oil is required - in countless agricultural, industrial, and service sectors.
And the worst is yet to come. Just imagine what would happen (to the poorest, energy intensive economies) when oil production reaches a peak and a barrel costs US$100 or more. That would be outright disastrous for the world economy.
So it is time major economic, energy and agriculture think tanks join forces to write a clear report showing the opportunity costs of biofuels - that is, the effects of high oil prices on agriculture, industry, and society as a whole. Such a report may well show that biofuels are actually beneficial to all of us (at least when they are produced from crops that make sense and when they are not subsidised).
Such a study would not even address the benefits of biofuels on long-term agricultural production. As is well known, climate change may reduce farm output in vast parts of the world, which would obviously impact food prices tremendously; biofuels are one of the most straightforward ways to mitigate climate change. So there too, the opportunity costs of biofuels should be analysed in the context of long term agricultural production.
More information:
John M. Urbanchuk, The Relative Impact of Corn and Energy Prices in the Grocery Aisle [*.pdf], June 14, 2007
The Renewable Fuels Association: Energy Prices, Not Corn, Chief Reason for Rising Food Prices, Study Finds - June 14, 2007.
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