Food Versus Fuel: How Biofuels Make Food More Costly and Gasoline Cheaper

Special Issue: Causes and Consequences of the Food Price Crisis Biofuel production in the United States has been ridiculed in recent months, following the release of reports that suggest ethanol and biod­ iesel not only increase greenhouse gas emissions relative to fossil fuels, but also raise food prices and lower food production. The impact of biofuels on food markets came under particular scrutiny this year as the world entered its first food crisis in more than 30 years. It is certainly true that biofuels have increased the price of agricultural com­ modities, but the magnitude of biofuel impacts on food markets is unsettled. High food prices have been accompanied by record high oil prices, and, while biofuels have been blamed for exacer­ bating the former, they have not been credited with mitigating the latter. But just as surely as they have contributed to raising food prices, biofuels have helped reduce oil prices relative to prices that would prevail absent biofuel produc­ tion. This article presents a model to demonstrate the effects of biofuels on corn, soybean, and gasoline prices, and to derive the distribution of benefits from U.S. biofuel production. We con­ clude that biofuels have a nontrivial impact on food security. We argue that underinvestment in research and overregulation of agricultural biotechnology led to a decline in productivity growth that is also responsible for higher prices and must be reversed if global food and energy security are to improve. The rapid increases in food prices that began in 2007 have resulted in deadly food riots, increased robberies of food-aid caravans, export restric­ tions in grain-producing countries, and pleas for supplemental funding for food-aid programs. A 140 percent increase in food prices from 2002 to 2008 led humanitarian organizations to predict human suffering and starvation not seen in more than a generation. The Food and Agriculture Organization of the United Nations (FAO) reports food prices increased 53 percent in just one year from March 2007 to March 2008. Vegetable oils rose 97 percent, followed by grains, which rose 87 percent. Food price increases in the past year constitute the most rapid increase over a 12-month period in more than 30 years. The 55 percent increase in food prices in the past 12 months is exceeded only by their doubling from 1973 to 1974. The poor will suffer most from high prices because they devote large shares of their household budgets to food purchases. Even in countries where the rural poor benefit on average from higher prices for their agricultural output, the poorest of the poor will suffer.