7/4/08

Biofuels causes food prices to increase 75%?   According to the Guardian, a "confidential World Bank Report"  by senior economist Don Mitchell expanded biofuels production have caused food prices to increase 75%.  Of course without seeing the report, we can't know how this number was arrived at (or even know for sure whether such a report exists).  But the June WASDE puts corn used for ethanol at 4000 million bushels (or 100 MMT) -- about 13% of world corn production of 775 MMT.  If non-biofuel demand for corn has an own price elasticity of -0.10  a 75% price increase would reduce that demand by 7.5%,  and if corn supply has an own price elasticity of 0.07, a 75% price increase would increase supply by 5.25%,  so the combination (7.5+5.25 = 12.75) is about the amount needed to account for biofuels demand.  These elasticities seem to be a little on the low side, especially the supply elasticity number, and this may make the 75% number too high.  For example if demand elasticity is -0.15 and supply elasticity is  0.15, the impact of ethanol is to increase corn price by 43%.  And of course, this is the direct effect on corn, not the effect on all food.

posted July 4, 2008 at 4:50 p.m.