E85 Boondoggle of the Day: Biofuels Drive Food Price Up 75%

Richard Chen
by Richard Chen
e85 boondoggle of the day biofuels drive food price up 75

According to the The Guardian, a [formerly] secret study completed by the World Bank has concluded biofuels are responsible for \75 percent of the recent run-up in world food prices. [A yet-to-be-released British Study reportedly came to the same conclusion, contradicting a U.S. government study concluding that food-for-fuel accounted for just two to three percent of that increase,] According to the British newspaper, the World Bank withheld the study to avoid embarrassing President Bush and the U.S. Government at next week's [non-Pontiac] G8 summit, at which Uncle Sam has full veto powers (sort of like Ford Motor Company and the few fortunate recipients of Crazy Henry's genes.) Leaders at the summit will be under pressure to cut back their biofuels mandates to avoid worsening the ongoing food shortage, which has been called "the first real economic crisis of globalization." The truth will out?

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  • Pfingst Pfingst on Jul 07, 2008

    OK, it's quite simple: The ethanol mandate artificially drives up demand for corn (since that's what many/most ethanol producers make fuel out of). As demand goes up for corn, corn prices rise. As corn prices rise, more farmers grow corn, since they can get more money per acre for corn than for whatever they used to grow. More farmers choosing to grow corn means they are not planting other crops (or are planting less of them). This reduces the supply of those other crops. Because demand for those other things has not fallen, but the supply has, prices for the other food crops rise. The supply-demand relationship works on both sides, remember. Thus the ethanol mandate is responsible for most of the rise in food prices, even for the crops we don't make fuel out of. The weak dollar, speculation, etc. are probably also factors, but I put it to you that you could remove every other factor from the equation and see the same effect. Supply and demand is a very simple concept, so simple that many people refuse to recognize the truth contained within. Yes, the global economy is complicated, but the complications you see are mostly noise distracting you from the more basic economic drivers. By artificially mucking around with the demand for corn, the US and other governments have ended up sending prices for most food crops soaring. The "Law of Unintended Consequences" strikes again!

  • Pch101 Pch101 on Jul 07, 2008

    The supply and demand argument is quite compelling. Well, that is until you look at the underlying data. Let's take just one commodity for the sake of example: wheat. During the 2003-04 season, global production was 553.8 million metric tons. Consumption was 588.6 tons, actually exceeding supply. Remaining stocks were 132.1 tons. Fast forward to 2007-8. Consumption increased 33.6 metric tons; supplies increased 57.0 metric tons. Remaining stocks ended up being the same as in 2003-4. Now let's look at the price. During 2003/4, when supply outstripped demand and had to be met by depleting stocks, the price varied between about $150-160/bushel. During 2007/8, when supply exceeded demand and stocks were being replenished, the prices moved into $400/bushel territory. There is an absolute disconnect between supply and demand in this scenario. If anything, the price should have been substantially higher back in 2003 and should have fallen since, given that we clearly have enough inventories and new supplies to meet demand, and supply is exceeding demand. The supply and demand numbers for the commodity don't correlate with the price of wheat. Within the last decade, we've had two economic bubbles, one for technology stocks and another for real estate. Same situation as here, really -- prices that defy gravity and don't correlate with supply and demand. To follow the problem requires getting beyond the basic first semester economics course and requires looking at the macro. What the latest bubbles have in common is that investors are looking for opportunities to dramatically increase their returns through either scale (tech) or low margin requirements (real estate, commodities.) The ability to turn one dollar into twenty or more is highly attractive these days, and it creates distortion as it goes. The market is being increasingly driven by financial vehicles, rather than demand for underlying goods, as has traditionally been the case. As we can see, it makes a big difference.

    • 2ronnies1cup 2ronnies1cup on Aug 13, 2011

      Well put. My father worked as an estate surveyor, and he told me 'When the price for a house is more than the insurance company would pay to rebuild it if it burned to the ground, don't buy - it's a bubble.' Works for more things than just houses.

  • 50merc 50merc on Jul 07, 2008

    "If you want to keep paying $5/gal for gas, then keep ignoring the markets and keep supporting the war." For some people, it seems that using our military to defend modernity is the all-purpose bugaboo. OK, suppose we say "We give up; the troops are coming home immediately." Is there any reason to think that would bring the price of gas down noticeably? My answer: no. But it would likely encourage Iran to be more aggressive in efforts to establish Islamist hegemony over the Gulf, and that would have dire consequences for oil commerce.

    • 2ronnies1cup 2ronnies1cup on Aug 13, 2011

      Yeah, but if you were really serious about confronting militant Islamacism you'd be fighting in Saudi Arabia. But you aren't, so...

  • Pch101 Pch101 on Jul 07, 2008
    Is there any reason to think that would bring the price of gas down noticeably? Yep. Because it gives the US an opportunity to reduce or eliminate its budget deficit, and assures the world that the US is once again available to address global crises as they arise. Speculators are looking for opportunities to bet on potential supply constraints, and conflict raises the specter of supply constraints. A lot of the current price is about potential supply constraints, not actual constraints that exist today. The key to a successful US withdrawal would involve making sure that Iraq doesn't become a destabilizing force within the region that could attack its neighbors. This is pretty much what Bush 41 was attempting to accomplish with the Kuwait War, and he did very well with it. The oil markets remained calm and stable for over a decade as a result. The markets would welcome a containment policy; they don't appreciate the US being tethered down to a budget busting quagmire that costs money that the US can't afford and saps energy from a military too stretched to deal with anything else that may occur. The US may have to just get it over with, partition Iraq, and make some effort that the Shiites don't allow their area to become a western province of Iran. Fortunately for the US, no one else in the neighborhood wants Iran to get too much out of this, either.