A Tale of Two Studies

Don Mitchell of the World Bank’s Development Prospects Group has released an official version of his analysis of biofuels’ impact on the rise in global food prices. An early version of the study was leaked to the Guardian in London on July 4.

Mitchell attributes 70 to 75 percent of the increase in food commodities prices to “biofuels and the related consequences of low grain stocks, large land use shifts, speculative activity and export bans.” In other words, Mitchell assumes that U.S. and EU support for biofuel production is the direct cause of other phenomena that have contributed to the rise in food commodity prices. Mitchell attributes the remaining 25 to 30 percent of food price increases to the rising price of oil and the weakening of the U.S. dollar.

And how did biofuels contribute to low grain stocks? According to Mitchell, it is because biofuel crops were grown “on land that could have grown wheat.” Mitchell notes that worldwide wheat acreage declined by only 1 percent and wheat stocks actually grew. Nevertheless, in his opinion, more wheat should have been grown.

Mitchell’s assumptions contrast with the conclusions of other studies, including a recent one by Purdue University economists released by the Farm Foundation. That study follows others in concluding that the rising price of oil is the largest contributor to rising food costs, in part because it is a stronger driver of demand for biofuels than government policy has been. Researchers at Texas A&M University came to this same conclusion, as has been discussed on this blog.

Despite the fact that Mitchell admittedly “does not consider how supply would respond to high commodity prices and moderate price increases over time,” he nevertheless concludes that “biofuels policies which subsidize production need to be reconsidered in light of their impact on food prices.” The Purdue study concludes with a much more cautious note: “The challenge facing policy makers is to find policy options that deal with the short-term effects created by rising food prices without creating a new set of long-term problems.”

More Biofuels Bashing

Exactly a month ago, Roll Call newspaper revealed that the Grocery Manufacturers Association had launched a PR campaign to roll back U.S. biofuel policy. GMA is once again on the offensive, releasing an industry-funded study that blames biofuels for higher food prices, ignoring the rapid increase in the price of oil that is driving up the costs of agricultural production and increasing demand for alternatives.

Kraft Foods sponsored the recent study by Keith Collins, Ph.D., former chief economist at the USDA. Chief among the study’s conclusion is that “Nearly all of the increase in total use of corn over the past two years has been due to use of corn by ethanol plants, thus most of the corn price increase has likely been due to ethanol.” However, the study contradicts other recent studies, including one that current USDA Chief Economist Joseph Glauber presented to Congress earlier this month.

On June 12, Glauber testified before the U.S. Senate Committee on Energy and Natural Resources on biofuels’ impact on corn and food prices. Regarding corn, Glauber says, “We estimate that the percentage increase in the price of corn from April 2007 to April 2008 would have been 23 percent lower in the absence of any growth in biofuel production in the United States. Based on this analysis (see table below), we estimate that the price of corn would have increased by 47.5 percent assuming no growth in biofuel production in the United States, down from the actual increase of 61.7 percent, from April 2007 to April 2008.

Effects of biofuel production in the United States on global food commodity prices.
  With Biofuels Without Biofuels
  Percentage Change Percentage Change
Food 45.0 40.6
Corn (Maize) 61.7 47.5
Soybeans 78.6 54.2
Soybean Meal 69.3 51.2
Soybean Oil 80.9 61.5

And on the overall price of food, Glauber estimates,

“At this time, the expansion in biofuel production in the United States would appear to be a relatively modest contributor to food price inflation globally and in the United States. Assuming no expansion in biofuel production in the U.S., we estimate the IMF global food commodity price index would have increased by over 40 percent from April 2007 to April 2008, compared with the actual increase of 45 percent. In the U.S., the CPI for all food would have increased by 4.55- 4.60 percent during the first four months of 2008, compared with the actual increase of 4.8 percent, assuming no expansion in U.S. biofuel production.”

Collins’ analysis also claims that “The increase in corn demand due to ethanol is rising faster than growth in corn yields per acre.” He calculates that the year over year increase in ethanol production called for in the Renewable Fuel Standard will require an increase in production of corn by 330 million bushels each year. Last year, corn production in the United States rose to an average of 150 bushels per acre (from 145 in 2006). To gain the additional bushels on the same number of harvested acres (Collins cites 94 million acres) would require approximately a 2.5 percent increase in production.

Since 1996, corn production has increased over 30 percent, due in part to increased adoption of biotech seeds. Biotech companies are confident that the yield increases will continue, making the 2.5 percent annual increase that Collins dismisses out of hand appear quite achievable.

Interestingly, Collins also estimates that the increase in animals that consume grain – food animals including beef, chicken, pork, etc. – increased 5.3 percent between 2005 and 2007. To feed them, Collins notes, required an increase of 325 million bushels of corn, close to the amount estimated as needed for ethanol. However, Collins concludes that the increased grain consumption by these animals “would have a fairly small price effect.”

Part of the plan of the GMA and its allies is to promote state petitions to the Environmental Protection Agency for waivers from the Renewable Fuel Standard, such as the one filed by Texas Gov. Rick Perry (R). However, the study cited by Perry to support his petition for a waiver of the RFS clearly shows that a waiver will not provide the relief he seeks.

The study is by the Texas A&M University Agricultural and Food Policy Center, and it concludes that relaxing the RFS does not result in significantly lower corn prices and corn prices have had little to do with rising food costs.
Overall, the study shows that the underlying force driving changes in the agricultural industry, along with the economy as a whole, is higher energy costs. With rising energy costs, corn and other commodity prices increase.
See also BIO’s recent response to Texas’ petition to the EPA.