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Shattering the food versus fuel debate

April 6, 2010 – Like any good myth, the food versus fuel canard arising from 2008’s sky-high food prices will take a long time in dying. Perhaps a recently-released study from the United Kingdom’s Department for Environment, Food and Rural Affairs will hasten that process. Researchers Simone Pfuderer, Grant Davies, and Ian Mitchell took a closer look at the correlation between biofuel demand and food spikes in 2008, but also factored in other supply-side variables, such as the price of oil and associated spikes in fuel and fertilizer cost. The results prove interesting for an industry that took so much of the heat at the time.

“The primary impact of high oil prices on agricultural commodities seems still to be through the supply side, via increased costs of production, rather than the emerging demand side channel of biofuels. Fuel and fertilizer account for over half the operating costs of crop farms but many commentators have ignored oil’s ongoing importance as an input in agricultural production.” You only need see the effect that rising oil and fertilizer prices had on Canadian farmers’ fertilization practices through the 2009 season to see this impact.

Among other things, the researchers found that biofuels had a relatively small contribution to the 2008 spike in agricultural commodity prices, limited chiefly to the corn market. In contrast, the price of wheat increased before corn and to a higher peak, suggesting that incentives for any demand-side substitution were actually away from wheat. And of course while commodity prices have fallen sharply from their 2008 peaks, biofuel demand has remained steady, further indicating that the causal link from biofuel demand to short-term crop prices is still relatively weak. The study does indicate that increased biofuel production may have had some effect on corn process and a much smaller effect on soybean prices, but its analysis and events since then (steady biofuel demand but a halving of corn prices anyway) point to a relatively small impact compared to such other drivers as oil prices and speculation.

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