# Presentation: 164086

## Rising Biofuels Prices – Blessing or Curse for Food Security? 

**USDA Global Conference on Agricultural Biofuels**
**Minneapolis,  20-23 August 2007**

## Interest in the biofuels sector...

- recent rapid increase and volatility in fossil fuel prices, and
- in parallel, rapid increase and volatility in prices of some agricultural commodities
- some used as feedstock in biofuel production
- some competing with them for productive resources

## Food and fuel price indices...

## Interest in the biofuels sector...

- recent rapid increase and volatility in fossil fuel prices, and
- in parallel, rapid increase and volatility in prices of some agricultural commodities
- some used as feedstock in biofuel production
- some competing with them for productive resources
- national and international commitments towards cleaner fuels, which led over 2000-06 period to
- around a 3-fold increase in ethanol output, from 17.4 to 50.6 bll ltrs
- nearly a 6-fold increase in biodiesel output, from 1.1 to  6.4 bll ltrs

## Explaining the nature of price linkages...

- as energy prices rise costs of agricultural inputs (fertilizers, pesticides and diesel) increase, putting pressure on agricultural prices
- also biofuels derived from different feedstocks become competitive with fossil fuels at different levels (so-called parity price), putting pressure on the prices of the feedstocks (effectively setting a ‘floor’ price for them)
- the link, however, weakens as rising feedstock prices make them too expensive as a source of fuel (acting as a ‘ceiling’ effect)
- however, these can be significantly influenced by policy interventions

**Notes:**
parity price: cost of producing a unit of energy derived from agricultural feedstocks (ethanol, biodiesel) that equals the cost of producing the same energy unit derived from crude oil (petrol, diesel) (J. Schmidhuber, Impact of an increased biomass use on agricultural markets, prices and food security,  2007)
given that the cost of the feedstock can be a very large part of the total cost of producing biofuel, sometimes up to 80 percent, feedstock prices in the long run cannot rise faster than the prices of fossil fuels, thus establishing a ceiling

## Ethanol, maize and sugar prices (USA and Brazil)...

**Notes:**
Crude oil prices are the Brent Spot 
Maize prices are fob US No. 2, Gulf Ports. 
US Ethanol prices are from CBOT, nearest future. 
Brazil Ethanol prices are hydrous, sourced from CEPEA. 
Sugar prices are the ISA, average week.

## Maize and sugar ethanol and crude oil prices...

**Maize and sugar ethanol and crude oil prices...**

## Maize, sugar and crude oil prices (USA and Brazil)...

## Co-integrating relations among relevant prices...

**Ethanol**

**Oil**

**Maize**

**Ethanol**

**Oil**

**0.92**

**0.58**

**0.21**

**0.61**

**-0.89**

**-0.13**

**-0.24**

**Sugar**

**USA**

**BRAZIL**

**Notes:**
The numbers refer to the long-run (co-integration) coefficients, which are all significant at the 5% level or better. They are actually price-transmission coefficients (data are in natural logs, so these are unit-percentage responses).
The arrows refer to channels of (granger) causality (conducted via likelihood ratio tests of Block Granger Non-Causality in an unrestricted VAR plus variance decomposition tests).
The signs of the transmission coefficients require some thought. The unrestricted framework using just prices does not give much indication in explaining the dynamics of price movements under demand and supply hypotheses. Price relationships are simply the outcome of these processes. 
In the US, positive (negative) shocks in the price of oil produce negative (positive) responses in the prices of maize and domestic ethanol. This could be a result of ‘complementarity’ between ethanol and petroleum, which characterises the US market: e.g., as the price of petroleum rises, gasoline demand falls, as does the demand for blending. With regard to maize-ethanol, as the price of ethanol rises the derived demand for maize falls. Also, substitution with imported ethanol could explain the price interaction. Excess supply in the maize market in response to higher ethanol prices could also be a candidate.
In Brazil, bio-energy markets are characterised by substitutability, namely the dominance of flex-fuel cars. Therefore, positive oil price shocks lead to higher demand for ethanol.  As for sugar-ethanol, higher sugar prices are also reflected in the higher cost of ethanol, and higher demand for ethanol leads to higher demand for sugar 
(FAO, GRAINS FOR FOOD AND FUEL – AT WHAT PRICE?, Document CCP: GR-RI 07/CRS 5, Rome 2007)

## There could also be links to other markets...

- higher feedstock prices divert resources from other agricultural crops, reducing their availability and increasing their prices
- on the demand side, as oil prices rise prices of synthetic fibers rise influencing those of natural fiber

## Effects of rising fuel and food prices will not be uniform...

- on food security of different countries
- across various feedstocks and other commodities
- on food security of different economic agents

**Notes:**
FAO defines food security as: a situation that exists when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food that meets their dietary needs and food preferences for an active and healthy life (FAO, The State of Food Insecurity in the World 2001, Rome 2002)

## FS effects across countries (1)...

- rising food and fuel prices likely compromise food security of countries that are net importers of both food and fuel as their current account deficits increase:
- two-thirds of 47 low income food deficit countries (LFIDCs) for which data exist are also energy deficit and
- include countries like Bangladesh, Ethiopia, Eritrea, Ghana, Haiti, India, Kenya etc.
- countries that are net exporters of both food and fuel will be in a win-win situation

## FS effects across countries (2)...

- for countries that are net exporters in one and net importers of the other, the situation depends on the relative size of the food or energy exports and imports

## Effects across commodities...

- different feedstocks become competitive in biofuel production with fossil fuel at different price levels:
- US$ 35-45/bbl for cane-based ethanol in Brazil
- US$ 40/bbl for large-scale casava-based ethanol in Thailand
- US$ 45/bbl for palm oil-based biodiesel in Malaysia
- US$ 60/bbl maize-based ethanol in the USA
- different feedstocks have different protein contents, which could significantly reduce protein prices and enhance food security as crushings increase
- different feedstocks have different degrees of integration into the fuels market (i.e. field-to-wheel system, the most developed of which is in Brazil)

**Notes:**
with respect to protein prices, however, substitution of feed proteins for more expensive energy feeds and use of second generation  technologies that processes all of the feedstock for bio-energy production (Schmidhuber 2007)

## FS effects across economic agents...

- producers of feedstocks will benefit from increased revenues
- though they may face higher wages and land values
- employment in rural areas might also increase (trickle down effect)
- net effects on incomes in rural areas in general and in agricultural incomes in particular though should be positive
- urban households, however, will face higher food prices
- HHs with high share of food and fuel expenditure will be particularly hard hit

## Three further uncertainties complicate the analysis...

- uncertainties about the future developments of fossil fuel prices
- uncertainties about the policies that will be implemented to support the relevant sector in different countries
- uncertainties about the future developments in second generation bioenergy technologies

## Some concluding remarks...

- subsidies and border protection could distort agricultural markets, hindering market access by developing countries and raising domestic prices and hurting poor consumers
- there is a great potential for making ‘bioenergy pro-poor’
- by not blocking market access to products from developing countries
- by devoting public resources to developing technologies that are labour-intensive, capital-saving and technology-saving to match the factor endowment of the poor
- by supporting institutions that could pool meagre resources of the poor

## ‘... as things now stand, the International Energy Agency projects  that in 2030, biofuels will provide between 4 percent and 7 percent of all fuels used for transport, with the US, the European Union and Brazil remaining the leading producers and consumers. If that proves correct, it will mean that we had a chance to honour all our solemn pledges to banish hunger and poverty but to chose to look the other way...” 
Dr. J. Diouf, The Director-General of FAO, 15 August 2007

- Dr. J. Diouf, The Director-General of FAO, 15 August 2007