Biofuels Place Price Pressure on Food

A recent story in The Guardian reports on an unpublished World Bank study that suggests the conversion of food crops to biofuels, and the resulting economic pressures entailed in this process, is responsible for most of the steep price increases in food this year.  The World Bank report has not been published, though it was completed in April, and speculation is that the delay is meant to avoid embarrassing the Bush administration, who maintains that biofuels have had only a minor impact on food prices. For example, the report contradicts statements by US Agriculture Secretary Ed Schafer and Energy Secretary Samuel Bodman made in a letter sent to the Senate Energy Committee last month.  The World Bank report attributes fully 75% of the increase in food prices to biofuels in contrast to the official US estimates of just 3%.

Biofuel development distorts food markets in three ways, one of them obvious, the other two less so: (1) it diverts grain production for food to the production of biofuels, (2) it creates incentives for farmers to set aside more land for biofuel crop development, and (3) it induces speculation on the commodities market, driving up grain prices.

The results of this report (at least as reported in The Guardian) resonate well with my own intuitions about biofuels. It seems like a very bad idea to me to make fuel for SUVs out of food.  It’s all too easy for people in the developing world, where the leading dietary problem is obesity, to forget that a substantial portion of the world (somewhere in the vicinity of 800 million) is still regularly hungry. I remain open to the idea of generating biofuels from organic waste, but the consequences of growing grain and other basic foodstuffs for biofuels on commodity prices, and therefore the price that people pay for food, should be obvious to anyone who has taken an introductory economics class. Price increases with demand and decreases with supply, remember? Given that world population is still growing and that some formerly poor parts of the world are rapidly developing (and therefore increasing their demand for grain both directly and indirectly through increased demand for meat), there is no way that demand for grain as food is going to decrease.  This can only mean that increasing crop production for biofuel is bound to decrease supply for food in the absence of large expansions of crop land.  Generating demand for biofuels through legislation requiring a certain proportion of biofuel use (as is the case in the EU) or marketing ethanol-burning SUVs as somehow environmentally friendly is similarly going to increase demand for biofuels.  This means that prices for grains (and substitutable commodities) are bound to increase. Or am I missing something here?

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