Food vs fuel analysis wrong says World Bank

By Susanne Retka Schill | July 15, 2010
Posted August 2, 2010

Ethanol supporters were crowing loudly about the latest World Bank report finding that the biofuel impact on food prices was not as great as reported earlier in the 2006-‘08 commodity price boom.

"The biofuel industry is finally vindicated," said Rob Vierhout, secretary general of eBio, the European ethanol industry organization. "We have always said that our industry had been wrongly blamed for the food versus fuel crisis and now we are proven right. This report should finally silence those that have blamed the biofuel producers for food shortages, food price increases and for committing a ‘crime against humanity'. It is about time these people recognize the facts." He added that this latest report comes from the World Bank, the very same organization whose "leaked" report in 2008 wrongly blamed biofuels for 75 percent of the commodity price spike.

"I applaud the World Bank for admitting the error of their ways and setting the record straight," said Tom Buis, CEO of Growth Energy. "They have dispelled the myths and lies perpetuated by those who tried to say there was a food-versus-fuel issue. This study clearly shows that the notion of food versus fuel was simply wrong. In fact, this study confirms what we've known for some time—the impact of ethanol production on food prices is minimal and other factors, including increased oil prices, were the main drivers in the rise of food prices."

"In reversing course, this World Bank report reaffirms the marginal role biofuels play in world commodity and food prices," said Renewable Fuels Association President Bob Dinneen. "The RFA has long noted that ethanol production has continued to increase while corn prices have now returned to normal levels. Volatile oil prices, speculation, and adverse weather conditions all played far more significant roles in driving commodity prices to record and near record prices. This report should silence critics in the food processing industry, the livestock industry, on Capitol Hill, and anywhere else that sought to portray ethanol as the boogeyman. With this phony food and fuel discussion put behind us, perhaps a real conversation about America's energy future can ensue."

The World Bank paper by John Baffes and Tassos Haniotis sought to analyze the nature of the 2006-'08 commodity boom and the key factors that fueled it, as well as put the boom into perspective. They also examined long-term trends and characteristics, asking the question whether some of the factors behind the recent boom are more permanent in nature. "We conclude that a stronger link between energy and non‐energy commodity prices is likely to have been the dominant influence on developments in commodity, and especially food, markets," the authors wrote in their introductory remarks. "Demand by developing countries is unlikely to have put additional pressure on the prices of food commodities, although it may have created such pressure indirectly through energy prices. We also conclude that the effect of biofuels on food prices has not been as large as originally thought, but that the use of commodities by investment funds may have been partly responsible for the 2007/08 spike. Finally, econometric analysis of the long‐term evolution of commodity prices supports the thesis that price variability overwhelms price trends."

The 42-page paper goes on to examine the three major commodity sectors—energy, metals and agriculture—and the nature of the markets, the influence of speculation and new investment vehicles. It examines the impact of dietary changes and income growth in middle-income countries as well as the role of biofuels. "Clearly US maize‐based ethanol production, and (to a lesser extent) EU biodiesel production) affected the corresponding market balances and land use in both US maize and EU oilseeds. Yet, worldwide, biofuels account for only about 1.5 percent of the area under grains/oilseeds. This raises serious doubts about claims that biofuels account for a big shift in global demand. Even though widespread perceptions about such a shift played a big role during the recent commodity price boom, it is striking that maize prices hardly moved during the first period of increase in U.S. ethanol production, and oilseed prices dropped when the EU increased impressively its use of biodiesel. On the other hand, prices spiked while ethanol use was slowing down in the U.S. and biodiesel use was stabilizing in the EU."

To read the analysis in the full report "Placing the 2006/08 Commodity Price Boom into Perspective" follow this link.