Biomedical Engineering Reference
In-Depth Information
factors affecting the transmission from biofuel price to food prices - due to
exogenous shocks, such as bad weather or an increase in food demand due to an
income growth - are food demand elasticities, availability of land, and crop yield
improvements.
16
The food price response to biofuel prices decreases with higher
food demand elasticities because a higher demand elasticity implies less agricul-
tural price responsiveness to supply change. In a special situation when food
demand is perfectly elastic, food prices would not be affected by the biofuel
price. Similarly, price transmission decreases with land availability and crop
yield improvement - higher land supply availability and higher yields allow for
feedstock production expansion, thus reducing pressure on food price increase.
It is important to note that because of limited availability of land, biofuels
increase prices of all agricultural commodities, including those not directly used
as inputs to biofuel production. The expansion of biofuels induces higher produc-
tion of biofuel feedstocks (e.g., corn or soybeans), which in turn increases agricul-
tural factor prices such as land. Higher factor prices push up agricultural production
costs, leading to lower production of non-biofuel agricultural commodities (e.g.,
rice or coffee), hence the increase in prices of these commodities. However, the
price transmission onto non-biofuel agricultural commodities may be delayed
because of various institutional and market rigidities present in rural factor markets
(e.g., land rental contracts or constrained access to capital). Biofuel feedstocks are
likely to respond to biofuel policies first, followed by other commodities when the
adjustments in the factor markets occur [
1
,
10
,
39
,
46
,
56
-
58
].
The boom in biofuel production coincides with the significant increase in food
grain/oilseed prices worldwide. This is shown in Fig.
18.4
where the FAO food
price index increased by 70 % in 2008 relative to 2005, and this increase was even
more marked in 2011 (94 %). Rausser and de Gorter [
61
] and de Gorter et al. [
36
,
45
] give a detailed account of the relationship between food, ethanol, and oil prices
in the period 2006-2012.
higher biomass yields and/or due to using residues from agriculture. As a result, second-generation
biofuels may lead to lesser competition between biofuels and food demand for agricultural
commodities, hence posing lower pressure on food price increase [
53
]. However, this result may
not hold in general. In particular, it depends on the origin of feedstock used for the second-
generation biofuels. Havlik et al. [
54
] find that if second-generation biofuels are produced on
agricultural land, they result in higher food price increase than the first-generation biofuels,
whereas if second-generation biofuels are sourced from traditional forests or marginal lands,
then they result in lower food price increases. In this section, we focus on the first-generation
biofuels' impact on food prices as there is more research done in this direction and the second-
generation biofuels' effects are more difficult to be empirically evaluated given that they are not
commercially exploited at a larger scale yet.
16
de Gorter and Just [
51
] derive a theoretical link between ethanol and corn prices, where a $1/gal
increase in the ethanol price results in a $4/bushel increase in the corn price. Using cash prices,
Drabik [
16
] shows this theoretical link holds also empirically. Mallory et al. [
55
] lent support to
this relationship using futures prices.
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