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| Fig. 1: American Cornfield in Indiana. (Source: Wikimedia Commons) |
Biofuels are energy sources produced over a relatively short time span from biomass. Biofuels can be blended with other sources of energy or used directly as drop-in fuels. In the United States, ethanol fuel from corn comprises 85% of biofuel production. [1] Roughly 40% of American corn, pictured in Fig. 1, is used for biofuel production, an over 650x increase since 1982. [1] One major criticism of biofuels as an energy source is that their use introduces competition in the market for edible crops - which can theoretically lead to higher prices for food. Some organizations, such as the IMF, estimate that the increased demand for biofuels can account for over 70% of the increase in corn prices from 2005 to 2007. [2] Given the rapid increase in biofuel use, one can examine the data for corn prices to ask the question: does demand for crops as biofuel use lead to higher food prices?
We will consider two metrics to estimate the effect of biofuel corn demand on the price of food. First, we will look at the price of corn itself. Then, since a large portion of corn is also used as feed for livestock and in production of other foods, we will investigate the effects on the rise in food prices. Variation in corn prices has multiple instigating factors, including but not limited to, government subsidies on corn, variable cost of land, demand of corn products, etc. Use of biofuels is similar influenced by different factors on its demand - including government mandates on biofuel production and usage.
Baier et al. find that the US increase in biofuel production pushed up corn prices by 22%, but only accounted for 14% of the rise in corn prices between June 2006 to June 2008. [3] On corn prices specifically, the authors find that over 80% of the price increase in corn is due to factors other than increased biofuel production. [3] Furthermore, they find that over 90% of the price increase in global food prices is due to factors other than increased biofuel production. [3] This analysis provides evidence that the increase in both corn prices and food prices overall due to increased production of biofuels is meager.
Chakravorty et al. models the long-run impact of biofuels on food prices - comparing groups such as the US and EU where biofuel production has increased by government mandate to economic regions where it has not. In 2022, the food price increase resulting from energy regulation is projected to be approximately 17% if current energy production and agriculture practices remain the same as today. [4] However, the authors project that, considering supply-side adjustments that would probably occur in the future, the rise in food costs is approximately 7%. [4] The authors also point out that demand-side effects may have an equivalent impact on food prices that biofuel policy would. This analysis provides evidence that the increase in food prices due to increased biofuel production - even by government mandate - is modest.
In conclusion, there is some evidence to suggest that increased demand on crops like corn leads to slightly higher prices on said crops and even more marginal increases in the price of food as a whole. However, these increases can be offset by supply-side interventions and are often trivial compared to the multitude of other factors influencing price of specific crops and global food prices as a whole.[5] Based on these analyses, there is little evidence to suggest that increased demand on crops due to increased biofuel production has had a dramatic effect on food prices.
© Bikal Sharma. The author warrants that the work is the author's own and that Stanford University provided no input other than typesetting and referencing guidelines. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
[1] "Monthly Energy Review, June 2022," U.S. Energy Information Administration, DOE/EIA-0035(2022/6)," June 2022.
[2] D. Mitchell, "A Note on Rising Food Prices", World Bank, Policy Research Working Paper 4682, July 2008.
[3] S. Baier et al., "Biofuels Impact on Crop and Food Prics: Using an Interactive Spreadsheet," Board of Governors of the Federal Reserve System, International Finance Discussion Paper No. 967, March 2009.
[4] U. Chakravorty et al., "The Long-Run Impact of Biofuels on Food Prices," Resources For the Future, FRR-DP-15-48, October 2015.
[5] G. R. Timilsina and A. Shrestha, "Biofuels: Markets, Targets, and Impacts," World Bank, Policy Research Working Paper 5364, July 2010.
