World Bank Report Takes New Look at Food and Fuel
Ethanol production probably had less impact on global commodity prices in 2008 than many were saying at the time.
A newly released working paper, entitled “Placing the 2006/08 Commodity Price Boom into Perspective,” from the Development Prospects Group at the World Bank, concludes that “…the effect of biofuels on food prices has not been as large as originally thought.”
Authors of the report, John Baffes and Tassos Haniotis, argue that energy prices, as well as speculation, played significant roles in the non-energy commodity price spikes seen in the recent past. “We conclude that a stronger link between energy and non‐energy commodity prices is likely to have been the dominant influence on developments in commodity, and especially food, markets,” says the report. “Demand by developing countries is unlikely to have put additional pressure on the prices of food commodities, although it may have created such pressure indirectly through energy prices.”
Another point they make is that biofuels only represent 1.5 percent of worldwide grain and oilseed use. “This raises serious doubts about claims that biofuels account for a big shift in global demand. Even though widespread perceptions about such a shift played a big role during the recent commodity price boom, it is striking that maize prices hardly moved during the first period of increase in US ethanol production, and oilseed prices dropped when the EU increased impressively its use of biodiesel. On the other hand, prices spiked while ethanol use was slowing down in the US and biodiesel use was stabilizing in the EU.”
In a 2008 Policy Research Working Paper, authored by Donald Mitchell, lead economist for the World Bank’s Development Prospects Group, which claimed 70-75 percent of the increase in food prices that year was due to biofuels and the related consequences of low grain stocks, large land use shifts, speculative activity and export bans.
So, this new paper is a big about-face from the 2008 view and actually says what most biofuels advocates were saying all along, according to Renewable Fuels Association president Bob Dinneen. “In reversing course, this World Bank report reaffirms the marginal role biofuels play in world commodity and food prices,” said Dinneen. “The RFA has long noted that ethanol production has continued to increase while corn prices have now returned to normal levels. Volatile oil prices, speculation, and adverse weather conditions all played far more significant roles in driving commodity prices to record and near record prices.”
Growth Energy CEO Tom Buis praised the World Bank for setting the record straight. “This study clearly shows that the notion of food-versus-fuel was simply wrong,” said Buis. “Food-versus-fuel has always been and will always be nothing more than a myth. We hope that this report will encourage others who have relentlessly perpetuated this untruth to admit their mistakes and put an end to this false debate.”
It is interesting to note that these “working papers,” although released by the World Bank, done by World Bank economists and posted on the World Bank website, come with a disclaimer that says they represent “work in progress” and that the findings “are entirely those of the authors” and do not necessarily represent the views of the World Bank.
Link to July 2008 working paper.
Link to July 2010 Working Paper.
5 Comments »
Rod McPhee
Unfortunately people never get the corrections to false facts after they’ve been perpetuated by “junk” scientists, they just continue to perpetuate the myths. Newspapers and journalists are the worst because they no longer fact check beyond some convenient article on the internet that is more opinion than fact.
Ron Steenblik
I think it is useful to quote the relevant paragraphs from the paper’s Concluding Remarks:
“Numerous factors have contributed to the recent commodity boom, and have been analyzed extensively in the literature. Yet their relative weight continues to be an area of contention. In this paper we examined three key factors whose role has been somewhat controversial: speculation, the growth of demand for food commodities by emerging economies and the role of biofuels. We conjecture that index fund activity (one type of “speculative” activity among the many that the literature refers to) played a key role during the 2008 price spike. Biofuels played some role too, but much less than initially thought. And we find no evidence that alleged stronger demand by emerging economies had any effect on world prices.
Although tentative, these conclusions provide insights into the determinants of the future path of commodity prices, which is still uncertain.
Central among the uncertainties is the relationship between the prices of energy and of food commodities. Our examination of the key characteristics of longer-term commodity price behavior revealed a strong link between energy and non-energy prices, which increased considerably during the recent boom; it also revealed that co-movement among the prices of food commodities is very strong. The latter implies that events taking place in one sector (e.g., increased demand for maize for the production of ethanol) will affect other markets (e.g., for wheat) through reallocation of resources, especially land. It also implies that policy changes in one market may affect other markets. For example, expectations about the use of corn for biofuels could result in high wheat prices even in the presence of record levels of wheat stocks. Our results also show that agricultural commodity market fundamentals appear, in the short term, to be playing somewhat less of a role than in the past, tending to be overshadowed by the much stronger pull of energy prices.
Our conclusion about the long-term evolution of commodity prices is consistent with earlier literature, and supports the thesis that price variability overwhelms price trends. Variability is such that the average price does not exist in the statistical sense (i.e., prices exhibit non?stationary behavior), and the conclusions reached about trends depend on what time period is chosen for the analysis.”
Note several important points:
1. The relative weight of the numerous factors that contributed to the recent commodity price boom continue to be an area of contention. This paper does not claim to provide the definitive answer.
2. Biofuels played some role too, but much less than initially thought. Note: not no role, but less than other studies (e.g., Mitchell’s) found. Notably, the authors find no evidence — contrary to claims of some in the biofuels industry — that stronger demand for food commodities by emerging economies had any effect on world prices.
3. However, “events taking place in one sector (e.g., increased demand for maize for the production of ethanol) will affect other markets (e.g., for wheat) through reallocation of resources, especially land.” And “policy changes in one market may affect other markets. For example, expectations about the use of corn for biofuels could result in high wheat prices even in the presence of record levels of wheat stocks.” This interlinkage has been denied by many in the biofuels industry.
4. The authors find a strong link between energy prices and commodity prices. That is not surprising, given that energy prices affect input costs, and also drive up the demand for biofuels. But this strong link throws into question the claim made by some in the biofuels industry that biofuels are a solution to high energy prices and energy-price volatility.
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