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.”

Purdue University Weighs In on What’s Driving Food Prices

The Farm Foundation recently released a report prepared by Purdue University agricultural economists on the forces driving food price increases. They conclude that higher food prices are the result of the complex interaction of global changes in supply and demand for commodities, the depreciation of the U.S. dollar, as well as growth in production of biofuels.

According to the authors, these factors have combined to rapidly raise demand for U.S. grains beyond current production, leading to “the change from a surplus to a shortage era” and to increased prices. The authors also say that 75 percent of the demand for biofuels has come as the result of increased oil prices rather than the renewable fuel standard.

This is much the same conclusion drawn by researchers at Texas A&M University (see earlier post). It is also similar to the stated view of Bruce Babcock of Iowa state University’s Center for Agricultural and Rural Development during testimony to the Senate Committee on Homeland Security:
“Elimination of the [RFS] mandate would reduce expected ethanol production by about 4 percent … and the price of corn would fall by slightly more than 1 percent.”

The Purdue University researchers also highlight “the potentially large supply response that could result as farmers in developing countries increase production and productivity.”