Long‐Run Impact of Biofuels on Food Prices

• DOI: http://doi.org/10.1111/sjoe.12177
• Author: Marie‐Hélène Hubert,Michel Moreaux,Ujjayant Chakravorty,Linda Nøstbakken
• Date: 01 July 2017
• Published date: 01 July 2017

Scand. J. of Economics 119(3), 733–767, 2017

DOI: 10.1111/sjoe.12177

Long-Run Impact of Biofuels on Food

Prices∗

Ujjayant Chakravorty

Tufts University, Medford MA 02155, USA

ujjayant.chakravorty@tufts.edu

Marie-H´

el`

ene Hubert

University of Rennes 1, Rennes FR-35065, France

marie-helene.hubert@univ-rennes1.fr

Michel Moreaux

Toulouse School of Economics, Toulouse FR-31015, France

michel.moreaux@tse-fr.eu

Linda Nøstbakken

Norwegian School of Economics, Bergen NO-5045, Norway

linda.nostbakken@nhh.no

Abstract

About 40 percent of US corn is now used to produce biofuels, which are used as substitutes

for gasoline in transportation. In this paper, we use a Ricardian model with differential land

quality to show that world food prices could rise by about 32 percent by 2022. About half of

this increase is from the biofuel mandate and the rest is a result of demand-side effects in the

form of population growth and income-induced changes in dietary preferences, from cereals

to meat and dairy products. However, aggregate world carbon emissions would increase,

because of significant land conversion to farming and leakage from lower oil prices.

Keywords: Clean energy; food demand; land quality; renewable fuel standards; transporta-

tion

JEL classification:Q24; Q32; Q42

I. Introduction

Biofuels are providing an ever larger share of transport fuels, even though

they have been universally attacked for not being a “green” alternative to

gasoline. In the US, about 10 percent of gasoline now comes from corn, and

this share is expected to rise threefold in the near future if the renewable

∗We thank the Social Sciences and Humanities Research Council (SSHRC) and the French

Council of Energy for generous financial support. This paper was written when U. Chakra-

vorty was a Gilbert F. White Fellow at Resources for the Future (RFF), Washington, DC

20036, USA.

CThe editors of The Scandinavian Journal of Economics 2016.

734 Long-run impact of biofuels on food prices

fuel standard (RFS) is extended. The European Union (EU), India, and

China also have aggressive biofuel mandates. Studies that have modeled

the effect of these policies on food prices predict large increases, and

these models have been supported by the run-up in commodity prices in

recent years. For example, the International Food Policy Research Institute

(Rosegrant et al., 2008) suggests that the prices of certain crops might rise

by up to 70 percent by 2020.1

In this paper, we examine the long-run effects of US and EU biofuel

policy in a dynamic, partial equilibrium setting.2Our approach is unique

in two respects. It is common knowledge that as poor countries develop,

their diets change in fundamental ways. In particular, they eat less cereal

and more animal protein in the form of meat and dairy products.3This

fact is important because the production of meat and dairy uses more land

than for growing corn.4Coupled with global increases in population, these

demand shifts should cause an increase in food prices even without any

biofuel policy. Second, many studies assume a fixed supply of land. There is

plenty of land in the world, although of varying quality for food production.

Sustained food price increases will cause new land to be brought under

farming, but as we move down the Ricardian land-quality gradient, costs

will rise, which might in turn put an upward pressure on prices.5The

model we develop in this paper explicitly accounts for the above effects in

a dynamic setting, where we allow for a rising supply curve of crude oil.6

1Other studies have also found a significant impact, although not to the same degree.

For example, Roberts and Schlenker (2013) use weather-induced yield shocks to estimate

the supply and demand for calories and conclude that energy mandates might trigger a

rise in world food prices of 20–30 percent. Hausman et al. (2012) use structural vector

autoregression to examine the impact of biofuel production in the US on corn prices. They

find that one-third of the increase in corn prices during the period 2006–2008 (which rose

by 28 percent) can be attributed to the US biofuel mandate. Their short-run estimates are

consistent with our prediction that, in the long run, the effects might be significantly lower.

This is because higher food prices are likely to trigger supply-side responses only with a

time lag, especially if significant land conversion were to occur.

2Both have imposed large biofuel mandates. Other nations, such as China and India, have

also announced biofuel mandates but their implementation is still in progress. We discuss

them later in the paper.

3For instance, aggregate meat consumption in China has increased 33 times in the last 50

years, yet its population has only doubled (Roberts and Schlenker, 2013).

4On average, eight kilos of cereals produce one kilo of beef, and three kilos of cereals

produce one kilo of pork.

5Significant amounts of new land are currently being converted for farming (Tyner, 2012).

6Hertel et al. (2010a) use a general equilibrium trade model (GTAP) to explore the impact of

biofuel production on world agricultural markets, specifically focusing on US/EU mandatory

blending and its effects on individual countries. They use disaggregated data on world land

quality. However, their static framework does not account for changes in food preferences.

Reilly and Paltsev (2009) also develop a static energy model that does not account for

heterogeneity in land quality.

CThe editors of The Scandinavian Journal of Economics 2016.

U. Chakravorty et al. 735

Fig. 1. Per capita cereal and meat consumption in China and the US, 1961–2007

[Colour figure can be viewed at wileyonlinelibrary.com]

Source: Food and Agricultural Organization of the United Nations (FAOSTAT).

Note: Chinese cereal consumption excludes grain converted to meat.

Figure 1 shows the disparity in meat and cereal consumption in the US

and China. The per capita meat consumption in China is about half of

that of the US, but cereal consumption is much higher. These gaps are ex-

pected to narrow significantly in the near future as the diet in China takes

an increasing share of its calories from animal protein.7Income-induced

7Although we use China as an example, the trend holds for other countries as well. For

example, per capita meat and dairy consumption in developed nations is about four times

higher than in developing countries.

CThe editors of The Scandinavian Journal of Economics 2016.