Nexus Blog // Food vs. Fuel: Current Research and Policy Implications

Over the same period, food prices have risen steadily, after having been generally stable or dropping for most of the previous half century. This current trend is cause for concern, especially when high prices lead to reduced food security for vulnerable populations. Increased demand for biofuels — driven in large part by government mandates — has come under fire as a potentially important driver of elevated food prices. While still a small segment of overall commodity crop demand, the effect of biofuels on global markets is growing rapidly. For example, the proportion of global maize output used to produce ethanol rose from 4% in 2001 to 12% in 2008. Meanwhile, demand for ethanol fuel is expected to rise by 110% over the next decade while biodiesel demand will nearly triple. This represents the largest new crop demand in decades and could be a strong factor underpinning the upward shift in agricultural commodity prices. This "food vs. fuel" issue is of increasing interest to decision makers who want to ensure that biofuel policies — aimed at enhancing energy security and environmental sustainability — do not reduce food security for vulnerable populations. Of particular interest and concern is the commodity price spike of 2007 and 2008, which is estimated to have added 100 million people globally to the ranks of the undernourished. This crisis has subsequently been studied extensively as it can provide a window into the mechanisms of food price fluctuation as well as insights into how the impacts of such spikes might be mitigated in the future. Increased demand for biofuels is only one of several important factors that have been identified as possibly playing a role in the 2007/08 food price spike. Some others are:

• Elevated cost of agricultural inputs such as fuel, fertilizer, and shipping, due to record high petroleum prices in the same period;
• Low projections of global grain stocks and crop size for 2008;
• Steadily increasing food import demand and rising meat consumption globally;
• Weakening of the U.S. dollar, in which international commodity prices are denominated;
• Export restrictions and other protectionist domestic policies in some countries;

It is difficult to robustly divide responsibility among the above factors. However, researchers are using economic models to better understand these effects in the interest of preventing or mitigating future food security crises. Their findings indicate that production costs and global food demand increases are probably the largest drivers of food price. However, they also find that biofuel expansion can be expected to exert significant upward pressure on food prices going forward. Estimates of this effect range from 5 to 25% elevation in food prices over the coming 20 years.

Policy implications

Among the major drivers of food price increase, biofuel expansion is the only one that stems primarily from government intervention. Recognizing this, incentive structures must be designed or altered so as to support food security among vulnerable populations. Some of the following proposals could help to avoid or reduce any negative effects on food security: Make biofuel mandates flexible. Where targets are inflexible, any market response to higher international prices will be concentrated in the food and feed sectors. Mandates can include a "pressure release" mechanism, lowering or removing the target when global food price indicators reach certain predetermined levels. Implement regular reviews of food price and land use effects of biofuel policies, adapting those policies accordingly. Incentivize expansion of second generation biofuels where they do not compete with food and animal feed. These fuels may sometimes cause a net decrease in food prices by reducing fuel costs and thereby the cost of agricultural production. Design biofuel policies to minimize indirect land use change (ILUC). Where ILUC is included in life cycle GHG accounting for biofuel policies, calculations should hold food production constant or project future expansion. This will reduce incentives to divert food crops or productive land to biofuel. Kevin Fingerman is a Ph.D. candidate in UC Berkeley's Energy & Resources Group as well as serving as Vice-Chair of the Geneva-based Roundtable on Sustainable Biofuels.
Contact: kfingerman@berkeley.edu Please contact jcornforth@stakeholderforum.org for a full list of citations used in this blog.