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Biofuels and food prices

Dan Farber, professor of law | March 27, 2014

Berkeley economist Brian Wright has a disquieting article in the Winter 2014 issues of the Journal of Economic Perspectives, which just crossed my desk. JEP is published by the American Economic Association and is a great resource for those of us who are interested in economics but aren’t professional economists. This article is a case in point.

Wright’s methodology is simple, at least in principle. He first creates a model for grain prices based on three factors: (a) annual production and demand, (b) year-to-year storage, and (c) substitution by consumers between grains.   he model works really well up through 2004.  But after 2004, prices suddenly start to go much higher than the model predicts.

What happened in 2005? Corn ethanol. By 2004, fuel accounted for almost two billions bushels of corn, Currently, biofuels account for about one-third of U.S. corn production other than by-products used for animal feed. The result: more corn is grown, but corn prices are also higher, and so are other grains since they are partial substitutes. Wright also considers but rejects other theories of the price increase.

The urban poor are perhaps the main victims. Something in the neighborhood of 300 million people in the world live on less than $1 per day. This group paid $5 billion or more in extra food costs in 2012.

This is another reason to be skeptical about corn ethanol, which also has unclear advantages in terms of reducing carbon emissions. (The higher grain costs also lead to clearing of forests in developing countries, releasing a lot of carbon and offsetting the direct benefits of the fuel.)

We badly need new technology to allow us to shift to cellulosic biofuels, which are much less prone to these problems.

Cross-posted from the environmental law and policy blog Legal Planet.

Comments to “Biofuels and food prices

  1. Dan, now that the IPCC report is out today, one of the first things we must do is overcome one of the communications problems between academics and the public that Chancellor Dirks pointed out in the Summer 2013 issue of California Magazine’s cover story “Administering Change”:

    “— I’ve actually been thinking about the question of purity because of reading Richard Hofstadter’s [1963 book] Anti-Intellectualism in American Life. He talked about how academics characterized themselves as pure. And he noted that one of the reasons, perhaps, why there were so few public intellectuals of note in America is not just because America is anti-intellectual —- which of course it is—- but also because so many intellectuals don’t want to take on the sort of complications and impurities that come with being public.”

    It’s time for Berkeley’s professors and scholars to unite, lead, speak out, inform and motivate the public to take action today.

  2. Oil prices soared post-2004 and that is why grain prices hit the roof, particulary in 2007-2008. Oil prices drive grain (and food) prices, not biofuels.

  3. Dan, the newest IPPC report, about to be released, appears to be saying we are out of time for finding enough unconventional sources of energy free of CO2 in time to substitute for any but a small part of present energy consumption, especially because major tipping points are toppling already.

    It is time for the preeminent faculty and researchers at UC Berkeley and Berkeley Lab to achieve fusion energy generation today to meet global energy demands.

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