Proving the Link Between Biofuel and Food Prices

Many politicians deny or minimize the link between ethanol production and global food prices. The evidence proves them wrong.

To anyone with any insight at all, there is an obvious connection between food prices and what Fidel Castro has justly called “the sinister idea of converting food into fuel.”

That hasn’t stopped politicians in the United States, Europe and Canada from minimizing or denying the link.

  • “Those rising global food prices have nothing to do biofuels.” – German Chancellor Angela Merkel, April 17, 2008
  • “… about 1.5% of that [food price inflation], is due to an increase in biofuel production.” – White House spokesperson Scott Stanzel, May 5, 2008
  • “…our decision here in Ontario is not having a significant impact because of a whole bunch of circumstances that are driving up food prices.” Ontario (Canada) Premier Dalton McGuinty, April 16, 2008.

They’ll probably deny this as well:

On May 7, Mark W. Rosegrant, a director of the International Food Policy Research Institute, testified before the U.S. Senate’s Homeland Security Committee. He reported on an economic modeling study conducted by the IFPRI into the effect of biofuel production on food prices.

First the IFPRI looked at current grain prices.

“Unsurprisingly, the biggest impact was on maize prices, for which increased biofuel demand is estimated to account for 39 percent of the increase in real prices. Increased biofuel demand is estimated to account for 21 percent of the increase in rice prices and 22 percent of the rise in wheat prices.”

Then they looked at what would happen if worldwide biofuel production is frozen:

“If biofuel production was frozen at 2007 levels for all countries and for all crops used as feedstock, maize prices are projected to decline by 6 percent by 2010 and 14 percent by 2015. Smaller price reductions are also expected for oil crops, cassava, wheat, and sugar.”

And finally, at the impact of abolishing biofuels entirely:

“If biofuel demand from food crops were abolished after 2007 (in other words, if a global moratorium on crop-based biofuel production were imposed), prices of key food crops would drop more significantly—by 20 percent for maize, 14 percent for cassava, 11 percent for sugar, and 8 percent for wheat by 2010.”

Case closed.

Posted in Biofuel, Food and Farming
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Brad
8 years 4 months ago
Even the impact of biofuels is being intensified by the speculative bubble in commodities markets. Financial speculators reap profits from global hunger By Stefan Steinberg Global Research, April 24, 2008 wsws.org A series of reports in the international media have drawn attention to the role of professional speculators and hedge funds in driving up the price of basic commodities—in particular, foodstuffs. The sharp increase in food prices in recent months has led to protests and riots in a number of countries across the globe. On Tuesday, April 22, a UN spokesperson referred to a “silent tsunami” that threatens to plunge more than 100 million people on every continent into hunger. Josette Sheeran, executive director of the UN World Food Programme (WFP), noted: “This is the new face of hunger—the millions of people who were not in the urgent hunger category six months ago but now are.” A recent article in the British New Statesman magazine, entitled “The Trading Frenzy That Sent Prices Soaring,” notes that increases in global population and the switch to bio-fuels are important factors in the rise of food prices, but then declares: “These long-term factors are important, but they are not the real reasons why food prices have doubled or why India is rationing rice, or why British farmers are killing pigs for which they can’t afford feedstocks. It’s the credit crisis.” The article states that the food crisis has developed over “an incredibly short space of time—essentially over the past 18 months.” It continues: “The reason for food ‘shortages’ is speculation in commodity futures following the collapse of the financial derivatives markets. Desperate for quick returns, dealers are taking trillions of dollars out of equities and mortgage bonds and ploughing them into food and raw materials. It’s called the ‘commodities super-cycle’ on Wall Street, and it is likely to cause starvation on an epic scale.” World prices for basic commodities such as cereals, cooking oil and milk have risen steadily since 2000, but have escalated dramatically since the developing financial crisis in the US began to bite in 2006. Since the start of 2006, the average world price for rice has risen by 217 percent, wheat by 136 percent, corn by 125 percent and soybeans by 107 percent. Under conditions of growing debt defaults arising from the US subprime crisis, speculators and hedge fund groups have increasingly switched their investments from high-risk “bundled” securities into so-called “stores of value,” which include gold and oil at one end of the spectrum and “soft commodities” such as corn, cocoa and cattle at the other. The article in the New Statesman points out that “speculators are even placing bets on water prices” and then concludes: “Just like the boom in house prices, commodity price inflation feeds on itself. The more prices rise, and big profits are made, the more others invest, hoping for big returns. Look at the financial web sites: everyone and their mother is piling into commodities…. The trouble is that if you are one of the 2.8 billion people, almost half the world’s population, who live on less than $2 a day, you may pay for these profits with your life.” Investment in “soft commodities” is currently highly recommended by leading market analysts. According to Patrick Armstrong, a manager at Insight Investment Management in London, “Raw materials can prove to be the best investment class for hedge funds because the market is so inefficient. This results in more chances for profit.” Much of the international speculation in food commodities takes place on the Chicago Stock Exchange (CHX), where a number of hedge funds, investment banks and pension funds have substantially increased their activities in the past two years. Since January of this year alone, investment activity in the agricultural sector has risen by a quarter at the CHX, and, according to the Chicago firm Cole Partners, involvement by hedge funds in the raw material sector has trebled in the past two years to reach a total of $55 billion. Large-scale investors such as hedge and pension funds buy futures—shares in basic goods and foodstuffs to be delivered at a fixed date in the future. When the price of the commodity rises significantly between the time of the investment and the time of delivery, the investor is able to take home a large profit. In light of the current food crisis, substantial returns of profit are guaranteed. According to CHX figures, wheat futures (for delivery in December) are expected to rise by at least 73 percent, soybeans by 52 percent, and soy oil by 44 percent. Major ecological disasters, such as the recent drought in Australia, which hit food production and drive up basic commodity prices, are good news for the corporate investor. Substantially reduced harvests in Australia and Canada this year have led to soaring wheat prices. Deutsche Bank has estimated that the price for corn will double, while the price for wheat will rise by 80 percent in the short term. Such ecological disasters, which can ruin ordinary farmers and mean poverty for millions through increased food prices, are an aspect of the “inefficiency” of the raw materials market referred to above, which currently makes “soft commodities” such an attractive prospect for major speculators. Deadly greed An article headlined “Deadly Greed” in the current edition of the German weekly Der Spiegel gives some details of the activities of hedge funds in food market speculation. The magazine cites the example of the hedge fund Ospraie, which is generally regarded as the biggest of the management funds currently dealing in basic foodstuffs. The manager of the fund, Dwight Anderson, is nicknamed “the raw materials king.” Already, in the summer of 2006, Anderson was recommending the “extraordinary profitability” of agricultural crops to his shareholders. While Ospraie is reluctant to publicise its profit levels from speculation in basic commodities, a leading German investor is less reticent. Andreas Grünewald started up his Münchner Investment Club (MIC) in 1989 with seed capital equal to just €15,000. MIC now controls a… Read more »
Brad
8 years 4 months ago

This is a very unconvincing argument. While I am no fan of biofuels and they do play a role in food inflation, that impact is rather small compared to that of the commodity market futures and options bubble and the falling dollar. Both of these two account for nearly 60% of the rise in food prices. The notion that the rise in biofuels is increasing demand and therefore increasing prices is neoclassical economic mystification of a finacial scam based on assymetric power relations (class). This should be obvious to any Marxist.

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