Wageningen UR: biofuels not to blame for high food prices; decline in world food prices to continue

According to a new study by experts from the world's leading agronomic and agricultural economics research institution - the Wageningen University & Research Centre - neither speculation nor biofuels are to blame for the current high food prices. Instead, and despite some people's attempts to focus excessively on these factors, a complex set of many other forces is at play. Wageningen UR also projects world food prices to decline again, continuing the historic long term trend towards ever lower prices for food. What is more, compared with all other commodities, food prices have increased far less dramatically.

Wageningen UR asked a number of its experts to contribute to the national and international discussion by offering analysis from different perspectives. A first memorandum on the analysis of the recent price increases, titled Why Are Current World Food Prices So High? [*.pdf], has already been presented. Given Wageningen UR's undisputed authority in all matters relating to the analysis of world agricultural markets, the memorandum carries a lot of weight.

Influence on price formation
The long-term trend of world food prices shows a continued decline (figure 1, click to enlarge). This is happening because, among other things, technological developments are pushing up the production per hectare and that, in turn, is pushing the prices down, the researchers argue. Now and then brief peaks occur in food prices. It seems that the current wave of price surges is such a peak. The current peaks in the prices are lower than the peak in the food prices in the 1970s, which was the result of the oil crisis. Of course, the trend can change, but the expectation is that the response to the current, high prices - increased, large investments in agriculture - will again cause a decline.

Compared with the index for all other commodities and for oil, the food price index has remained well below the recent upward trend, remaining fairly stable over the long term, and increasing far less rapidly than the other indices (figure 2, click to enlarge).

The effects of speculative investments in food crops should not be overestimated, the researchers say. On the one hand, they can lead to a quick increase in prices. However, on the other hand, if a decrease in prices starts, the same investments will lead to a quick fall in prices.

According to the experts, the demand for agricultural products for the production of biofuels has a small effect: only 5 per cent of the oilseeds goes to biodiesel or directly to the transport sector; 4.5 per cent of the grain production is used for ethanol. Although this is a marginal demand, it still has a slight influence on the development of prices on the world market because the supply of food products on the world market is relatively small compared to what is consumed and produced locally. Countries heavily dependent on imported food may feel some effect (more than 90 per cent of all rice is produced and consumed locally; the same is true for maize and wheat, of which more than 75% is grown and consumed locally).

If neither speculation nor biofuels are having more than marginal effects on world food prices, then which are the factors influencing the current price developments? The experts list the following forces and events:

• Poor harvests have caused low wheat and barley yields in Australia, the Ukraine and Europe - the key production areas. The stores of these grains are running out, and the current barley and wheat prices are therefor high.
• High maize yields led to a world-wide increase of the total grain harvest in 2007. Because of this, maize prices remained relatively low. Only very recently have increases in maize prices been detected.
• High energy prices lead to high costs for artificial fertilizers and fuel, among other things. Higher transport costs lead to price effects for transport over long distances (note: this is why, counter-intuitively, biofuels can help lower food prices).
• Argentina, Kazakhstan, India, Vietnam and Egypt have levied export taxes to protect their own food supply. This has pushed up prices on the world market.
• The production limitations for food products in the EU have pushed up prices.
• In the past, the low prices for food production were not an incentive to invest in technology that increased production.
• The demand in Europe and North America is stable, but the demand is growing rapidly in Asian countries as a result of income developments and changes in diet (especially the trend towards increased meat consumption).

Towards ever lower prices
In the opinion of the Wageningen UR experts, a number of developments will appear in response to the high prices. These developments will, most likely, cause a downward push:
energy :: sustainability :: ethanol :: biodiesel :: biobutanol :: biomass :: bioenergy :: biofuels :: food :: agflation :: developing countries :: agriculture ::

• The high prices will lead to the use of agricultural land that is currently not in production. Huge potential exists particularly in Brazil and Russia. In other countries, production will be intensified, and this will lead to a decrease in prices.
• Because of the high prices, investments in R & D and technology will again become profitable, after many years of neglect.
  
• To dampen price instability, strategic stocks are indispensable.
• The influence of the biofuel directives on the development of world food prices is relative and depends on the technological developments around the production of biobased commodities. The investments in second generation biobased production are important because the production of second generation biobased products does not use the direct food product but the whole plant.

The development of the oil price is significant in predicting the demand from the biofuel sector. In the current price relation between oil and biofuels, most biofuels are not profitable (except for fuels based on tropical crops, such as sugarcane based ethanol). With this price relation, the volume of the biofuel market will be limited to the commitments in the biofuel EU's directive. However, with a relatively high oil price, biofuels can become competitive: the food and fuel markets will then be further integrated and the food prices will be determined, to a greater extent, by the oil price.

Problems remain
Unpredictable movements in food prices can still provide problems in the future. With high prices, the consequences in terms of hunger or malnutrition especially in poor urban areas will surface. But with low prices, the consequence for poor farmers will be large. Until recently, hundreds of millions of farmers could not lift themselves out of poverty because of low food prices. Seventy-five percent of the world's hungry people are still living in rural areas and are dependent on agriculture for their livelihoods. Over time, high prices should benefit them.

In poorer urban areas of the world, the expenditure for food makes up, on average, about 50 per cent of an individual's disposable income. As such, price increases in these regions have dramatic effects. This percentage climbs to 65 per cent if the food prices rise by 30 per cent. In the wealthy lands, these effects, on the other hand, will be limited to 1 to 2 per cent of an individual's income.

Apart from this, the researchers state in their report that the hunger issue is, however, only partially attributable to the demand for biofuels and is much more attributable to bad policy and the poor performance of the markets.

All figures courtesty of Wageningen UR.

References:
M. Banse, P. Nowicki, H. van Meijl, Why Are Current World Food Prices So High? [*.pdf], Wageningen University and Research Centre, Den Haag, LEI, Rapport 2008-040 - June 2008.

AlphaGalileo: Several factors influence world food prices - June 17, 2008.