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Rising Biofuels Prices – Rising Biofuels Prices – Blessing or Curse for Food Blessing or Curse for Food Security? Security?

USDA Global Conference on Agricultural Biofuels

Minneapolis, 20-23 August 2007

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LS Interest in the biofuels Interest in the biofuels

sector...sector...

recent rapid increase and volatility in fossil fuel recent rapid increase and volatility in fossil fuel prices, and prices, and

in parallel, rapid increase and volatility in in parallel, rapid increase and volatility in prices of some agricultural commoditiesprices of some agricultural commodities– some used as feedstock in biofuel productionsome used as feedstock in biofuel production– some competing with them for productive resourcessome competing with them for productive resources

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LS Food and fuel price Food and fuel price

indices...indices...

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LS Interest in the biofuels Interest in the biofuels

sector...sector...

recent rapid increase and volatility in fossil fuel recent rapid increase and volatility in fossil fuel prices, and prices, and

in parallel, rapid increase and volatility in prices in parallel, rapid increase and volatility in prices of some agricultural commoditiesof some agricultural commodities– some used as feedstock in biofuel productionsome used as feedstock in biofuel production– some competing with them for productive resourcessome competing with them for productive resources

national and international commitments national and international commitments towards cleaner fuels, which led over 2000-06 towards cleaner fuels, which led over 2000-06 period to period to – around a 3-fold increase in ethanol output, from 17.4 around a 3-fold increase in ethanol output, from 17.4

to 50.6 bll ltrsto 50.6 bll ltrs– nearly a 6-fold increase in biodiesel output, from 1.1 to nearly a 6-fold increase in biodiesel output, from 1.1 to

6.4 bll ltrs 6.4 bll ltrs

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LS Explaining the nature of Explaining the nature of

price linkages...price linkages... as energy prices rise costs of agricultural inputs as energy prices rise costs of agricultural inputs

(fertilizers, pesticides and diesel) increase, (fertilizers, pesticides and diesel) increase, putting pressure on agricultural prices putting pressure on agricultural prices

also biofuels derived from different feedstocks also biofuels derived from different feedstocks become competitive with fossil fuels at different become competitive with fossil fuels at different levels (so-called parity price), putting pressure levels (so-called parity price), putting pressure on the prices of the feedstocks (effectively on the prices of the feedstocks (effectively setting a ‘floor’ price for them) setting a ‘floor’ price for them)

the link, however, weakens as rising feedstock the link, however, weakens as rising feedstock prices make them too expensive as a source of prices make them too expensive as a source of fuel (acting as a ‘ceiling’ effect)fuel (acting as a ‘ceiling’ effect)

however, these can be significantly influenced however, these can be significantly influenced by policy interventionsby policy interventions

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Ethanol, maize and Ethanol, maize and sugar prices (USA and sugar prices (USA and Brazil)...Brazil)...

Weekly US Ethanol and Maize Prices25/03/05-16/02/2007

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Weekly US Ethanol and Crude Oil Prices25/03/05-16/02/2007

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Maize and sugar Maize and sugar ethanol and crude oil ethanol and crude oil prices...prices...

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Maize, sugar and Maize, sugar and crude oil prices (USA crude oil prices (USA and Brazil)...and Brazil)...

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Co-integrating Co-integrating relations among relations among relevant prices...relevant prices...

EthanolOil

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LS There could also be links to There could also be links to

other markets...other markets...

higher feedstock prices divert resources higher feedstock prices divert resources from other agricultural crops, reducing their from other agricultural crops, reducing their availability and increasing their pricesavailability and increasing their prices

on the demand side, as oil prices rise prices on the demand side, as oil prices rise prices of synthetic fibers rise influencing those of of synthetic fibers rise influencing those of natural fibernatural fiber

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Effects of rising fuel and Effects of rising fuel and food prices will not be food prices will not be uniform...uniform...

on food security of different countrieson food security of different countries across various feedstocks and other across various feedstocks and other

commoditiescommodities on food security of different on food security of different

economic agentseconomic agents

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LS FS effects across countries FS effects across countries

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rising food and fuel prices likely compromise rising food and fuel prices likely compromise food security of countries that are net food security of countries that are net importers of both food and fuel as their importers of both food and fuel as their current account deficits increase:current account deficits increase:– two-thirds of 47 low income food deficit countries two-thirds of 47 low income food deficit countries

(LFIDCs) for which data exist are also energy deficit (LFIDCs) for which data exist are also energy deficit and and

– include countries like Bangladesh, Ethiopia, Eritrea, include countries like Bangladesh, Ethiopia, Eritrea, Ghana, Haiti, India, Kenya etc.Ghana, Haiti, India, Kenya etc.

countries that are net exporters of both food countries that are net exporters of both food and fuel will be in a win-win situationand fuel will be in a win-win situation

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LS FS effects across countries FS effects across countries

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for countries that are net exporters in for countries that are net exporters in one and net importers of the other, the one and net importers of the other, the situation depends on the relative size of situation depends on the relative size of the food or energy exports and importsthe food or energy exports and imports

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LS Effects across commodities...Effects across commodities...

different feedstocks become competitive in biofuel different feedstocks become competitive in biofuel production with fossil fuel at different price levels:production with fossil fuel at different price levels:– US$ 35-45/bbl for cane-based ethanol in BrazilUS$ 35-45/bbl for cane-based ethanol in Brazil– US$ 40/bbl for large-scale casava-based ethanol in US$ 40/bbl for large-scale casava-based ethanol in

ThailandThailand– US$ 45/bbl for palm oil-based biodiesel in MalaysiaUS$ 45/bbl for palm oil-based biodiesel in Malaysia– US$ 60/bbl maize-based ethanol in the USAUS$ 60/bbl maize-based ethanol in the USA

different feedstocks have different protein different feedstocks have different protein contents, which could significantly reduce protein contents, which could significantly reduce protein prices and enhance food security as crushings prices and enhance food security as crushings increaseincrease

different feedstocks have different degrees of different feedstocks have different degrees of integration into the fuels market (i.e. field-to-wheel integration into the fuels market (i.e. field-to-wheel system, the most developed of which is in Brazil)system, the most developed of which is in Brazil)

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LS FS effects across economic FS effects across economic

agents...agents...

producers of feedstocks will benefit from producers of feedstocks will benefit from increased revenuesincreased revenues

though they may face higher wages and land though they may face higher wages and land valuesvalues

employment in rural areas might also employment in rural areas might also increase (trickle down effect)increase (trickle down effect)

net effects on incomes in rural areas in net effects on incomes in rural areas in general and in agricultural incomes in general and in agricultural incomes in particular though should be positiveparticular though should be positive

urban households, however, will face higher urban households, however, will face higher food pricesfood prices– HHs with high share of food and fuel expenditure HHs with high share of food and fuel expenditure

will be particularly hard hitwill be particularly hard hit

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LS Three further uncertainties Three further uncertainties

complicate the analysis...complicate the analysis...

uncertainties about the future uncertainties about the future developments of fossil fuel pricesdevelopments of fossil fuel prices

uncertainties about the policies uncertainties about the policies that will be implemented to that will be implemented to support the relevant sector in support the relevant sector in different countriesdifferent countries

uncertainties about the future uncertainties about the future developments in second developments in second generation bioenergy technologiesgeneration bioenergy technologies

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LS Some concluding remarks...Some concluding remarks...

subsidies and border protection could distort subsidies and border protection could distort agricultural markets, hindering market agricultural markets, hindering market access by developing countries and raising access by developing countries and raising domestic prices and hurting poor consumersdomestic prices and hurting poor consumers

there is a great potential for making there is a great potential for making ‘bioenergy pro-poor’ ‘bioenergy pro-poor’

by not blocking market access to products from by not blocking market access to products from developing countriesdeveloping countries

by devoting public resources to developing by devoting public resources to developing technologies that are labour-intensive, capital-technologies that are labour-intensive, capital-saving and technology-saving to match the saving and technology-saving to match the factor endowment of the poorfactor endowment of the poor

by supporting institutions that could pool by supporting institutions that could pool meagre resources of the poormeagre resources of the poor

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‘‘... as things now stand, the International ... as things now stand, the International Energy Agency projects that in 2030, Energy Agency projects that in 2030, biofuels will provide between 4 percent biofuels will provide between 4 percent and 7 percent of all fuels used for and 7 percent of all fuels used for transport, with the US, the European transport, with the US, the European Union and Brazil remaining the leading Union and Brazil remaining the leading producers and consumers. If that producers and consumers. If that proves correct, it will mean that we proves correct, it will mean that we had a chance to honour all our solemn had a chance to honour all our solemn pledges to banish hunger and poverty pledges to banish hunger and poverty but to chose to look the other way...” but to chose to look the other way...”

Dr. J. Diouf, The Director-General of FAO, Dr. J. Diouf, The Director-General of FAO, 15 August 200715 August 2007