# **III. Recent estimates of the contribution of biofuels production to food prices**

**Estimates of the contribution of biofuels production to food price increases are difficult, if not impossible to compare.** Estimates can differ widely due to different time periods considered, different prices (export, import, wholesale, retail) considered, and different coverage of food products. Moreover, the analyses depend on the currency in which prices are expressed, and whether the price increases are inflation adjusted (real) or not (nominal). Different methodologies will likely yield different results. General equilibrium model exercises generate long-term price impacts of specific shocks. They take into account interactions with other markets, but do not capture short-term price dynamics that are significantly more pronounced. Detailed studies of specific crops may include the short-term dynamics, but often exclude the impact on other markets. Methodologies may also differ to the extent they consider shocks to be independent. For example, speculation may be seen as an independent driver, or may be attributed to a change in fundamentals that would not have otherwise occurred.

**Despite all the differences in approach, many studies recognize biofuels production as a major driver of food prices.** The USDA’s chief economist in testimony before the Joint Economic Committee of Congress on May 1, attributed much of the increase in farm prices of maize and soybeans to biofuels production (Glauber, May 1, 2008). The IMF estimated that the increased demand for biofuels accounted for 70 percent of the increase in maize prices and 40 percent of the increase in soybean prices (Lipsky, May 8, 2008). Collins (2008) used a mathematical simulation to estimate that about 60 percent of the increase in maize prices from 2006 to 2008 may have been due to the increase in maize used in ethanol. Rosegrant, et al. (2008), using a general equilibrium model, calculated the long-term impact on weighted cereal prices of the acceleration in biofuel production from 2000 to 2007 to be 30 percent in real terms. Maize prices were estimated to have increased 39 percent in real terms, wheat prices increased 22 percent and rice prices increased 21 percent. During this period, the U.S. CPI increased by 20.4 percent, which would imply nominal prices increases of 47, 26, and 25, respectively, for maize, wheat and rice prices. This is the same order of magnitude as was calculated with the World Bank’s linkages model (van der Mensbrugghe 2006). Differences in the estimates of the impact of biofuels on the price index of all food depend largely on how broadly the food basket is defined and what is assumed about the interaction between prices of maize and vegetable oils (directly influenced by demand for biofuels) to prices of other crops such as rice through substitution on the supply or demand side. For example, the Council of Economic Advisors (Lazear, May 14, 2008) estimated that retail food prices increased only about 3 percent over the past 12 months due to ethanol production, in part because they only considered the impact of maize prices, directly and indirectly, on retail prices.

**Many other potential drivers of the escalating food prices are mentioned in discussions, but there are few quantitative estimates of their impacts.** For example, a recent USDA report (Trostle, May 2008) attributed the increase in world market prices for major food commodities such as grains and vegetable oils to many factors including biofuels as well as other factors including the declining dollar, rising energy prices, increasing agricultural costs of production, growing foreign exchange holdings by major

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