Biofuels and food
Good article from the Economist on the impact of compulsory biofuel regulations on food prices.
We commented on this a while back.
Biofuel regulations are an undeniable “structural shock” which will lead to “structurally higher” food prices. What do I mean? The price of food relative to other things is likely to stay higher than it would have in the absence of biofuel regulations.
Now, I don’t think these regulations are the main driver of the recent price volatility – that would be droughts and economic conditions. But we can expect the relative price of food products to stay above historical averages.
How far above is a different, and very difficult, question 😉
Its all part of a perfect storm of AGW hysteria followed by weather that seems to support AGW, followed by taxes, regulations and particularly ethanol subsidies in the US.
Ironically, just as many in the US are saying that ethanol is a scam, along comes oil price and supply instability!
JC
@JC
I’ve got no problem with biofuels as long as carbon is priced appropriately and people then decide to supply them – my issue is with compulsion. Get the pricing right and the results will follow 😉
Of course, that means getting the political will to get the pricing right
Regulations not causing the volatility? I disagree.
First, high demand for maize is increasing production – there is a response. The US Secretary for agriculture expects a 10% increase in the US ‘corn’ crop from last year. So supply will expand to meet the demand, right? Well, perhaps. I’d note that further increases in the US maize crop will have to come from increasing the planted area – that is, planting maize instead of wheat. (And agricultural expansion in the rest of the world is tagged for meeting increased Chinese demand and population growth.)
We need to think about the relative sizes of the food and fuel markets. If we fermented all the food in the world to produce energy, the ethanol would substitute for about an eighth of transport fuels. Fuel from food is like trying to top up a bath from a bucket – a big change in the contents of the bucket makes only a small change in the water level in the bath.
In other words, relatively small changes in biofuel targets or in fuel consumption will cause much larger changes in food availability.
Second, although that 10% growth in maize production sounds impressive, it’s not so great compared to the growth in ethanol production. According to the US Renewable Fuels Association, the 1985-2010 *trend* growth in biofuels is 11.8% instantaneous (12%APR).
From 1997 to 2010, the endpoint-to-endpoint trend is 18.8% instantaneous (20.6% annual). Now, not all of that is from maize, but well over 90% would be.
If you chart the % of the US maize crop used for fuel, it’s exponential, and the “take-off” part of the curve was reached about two and a half years ago.
I would say that the volatility *is* mainly caused by the underlying structural shift. It’s just compound growth at work.
Perhaps, Matt, you would have a bigger problem with biofuels if food expenditure was over 35% of your income, as it is for much of the world. Many people will literally starve if markets are used to equilibrate supply and demand at the “right” price. Demand isn’t the same as need, unfortunately.