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World food prices collapsing: biofuel critics were wrong

Monday, October 27, 2008
Posted in Biofuels | Tagged Biofuels

A whole army of biofuel critics was wrong: green fuels like ethanol and biodiesel have played virtually no role in the surge in food prices. The spectacular trends in agricultural commodity markets prove it. Some biofuel critics are courageous enough to admit their (costly) mistake. Others aren’t, because they have staked their reputation on this debate.

Prices for major grains and oilseeds that are used to make biofuels - like corn, wheat, soybeans, and palm oil - are collapsing. Corn and soybeans have lost more than half of their value, whereas wheat dropped even more and now costs 55% less than at its highpoint in March of this year. Canola fell from a high of $730 per ton earlier this year to $400/ton today. Prices of other internationally traded farm products are following the same downward path. Both cocoa and coffee have crashed, losing more than 40%. Cotton is in full free-fall as well. Clearly, all major agricultural commodities are seeing huge drops, while there is no outspoken ‘demand destruction’, as is the case with oil. This phenomenon proves that those who said biofuels played little to no role in the recent rise in food prices, were right. While a whole army of biofuel critics was wrong.

The Guardian is one of the few newspapers to openly admit its mistake:

Heavy demand for corn from ethanol makers was seen as a key driver of corn futures to record highs in June, but since then the sharp decline of corn along with other commodities shows that belief was mistaken.

Corn is down about 50 percent from its record high in June, even as the amount of the grain used to produce the renewable fuel in the United States remained the same.
“The record high prices were a speculative bubble”.

Here at Biopact, for once, we will not hesitate to take pride in the fact that we have made the correct assessment all along - against the grain and as a lone voice, because the temptation to jump on the simplistic “biofuels push up food prices”-bandwagon was very strong indeed.

The best illustration of the role of biofuels in this bizarre ‘food versus fuel’ story can be found by looking at the price movement of rice, one of the world’s staple crops. It’s an example we’ve presented before: rice has not been used as a biofuel feedstock on any significant scale, but its price suddenly accelerated at the beginning of this year, in line with record oil prices, only to drop just as spectacularly in recent weeks. No biofuels, no demand destruction, but excessively volatile prices, following the path of oil… this can only be the result of other market forces.

The correlation between the rapid decline of oil prices - which fell from a record $147 to below $65 today - and crashing agricultural commodity prices is obvious. The movements of all the internationally traded grains were part of a bigger speculative commodity boom, tied to oil, which itself fluctuated alongside the value of the dollar (and possibly in anticipation of the credit crunch). Biofuels output rose only very gradually over the course of the past two years, whereas prices for feedstocks jumped and then crashed. Today, the same amount of biofuels is being produced, world wide, than before the food price crash, and people are not eating less. But prices of feedstocks and food are in free-fall.

So it seems those who blamed biofuels for pushing up prices of major grains made a problematic mistake. The more cautious (and often less noisy) experts - like the Wageningen University’s agrocommodity specialists - were correct, when they said biofuels played a ‘marginal’ role at best. At a time when biofuel critics were at their harshest, the Wageningen experts even dared to write, calmly, that world food prices would continue to decline… The European Commission’s agrocommodity analysts too went so far as to say that biofuel was responsible for only 1 to 2% of the total rise in food prices. They put the blame elsewhere, mainly on the doorstep of commodity speculation and high oil prices. They too, were right.

Lessons learned
The fact that so many biofuel critics got it all wrong, holds an important lesson for the future of the green fuel debate. Some parties in this debate have an ideological agenda that is so strong it pushes them to ignore the most basic and rational analyses based on sound thinking and straightforward economics. They cannot afford to repeat this mistake in the future, because it would ruin their credibility once and for all.

But bioenergy experts and advocates have learned important lessons too: as they were designing strategies and scenarios to carefully assess any potential future impact of biofuels on food markets, they were surprised to see an unprecedented speculative frenzy unfolding in this very market. An at times ferocious ‘food versus fuel’ debate ensued, much earlier than expected. This debate made explicit a whole range of very important topics which can, indeed, better be discussed sooner rather than later. Issues like biofuels’ impact on the environment and on biodiversity, on rural and urban communities in the developing world, and on big and small farmers. Trade regimes became a hot topic. And many reports and papers delved into complex issues like ‘indirect’ land use change resulting from biofuels. On the policy front, ambitions and expectations were reviewed. Best of all, bioenergy stakeholders were forced to dump ‘bad’ biofuels and to come up with smarter ones (like the by now famous ‘low impact high diversity polycultures’ of perennial grass species, which are so promising).

In any case, the collapse of world grain and oilseed prices settles the debate for now: biofuels have played no or at best a marginal role in the sudden rise in global food prices. A new cycle of discussions can now begin, with this important knowledge in mind. The bioenergy expert’s view that biofuels can actually help lower food prices and that they could become a strong instrument in the fight against rural poverty and hunger, has lost none of its strengths.

References:
Biopact: Wageningen UR: biofuels not to blame for high food prices; decline in world food prices to continue - June 17, 2008

The Guardian: Ethanol no longer seen as big driver of food price - October 23, 2008.