Food fuel and food: when competition starts to bite

1. Food fuel and food:when competition starts to bite Max Merbis Centre for World Food Studies (SOW-VU)

2. Hunger amidst plenty One planet with two worlds, where scarcity manifests itself as Increased demand for feed and biofuels Hunger and undernutrition, destitution Stylized review of world food situation The food crisis and its causes Role of emerging countries Biofuel policies Conclusion: where are we now?

8. “Terms of trade” • Wheat price nominally stable, surging from mid-2007 • The longer term: in real terms declining wheat price • More general: index of agricultural commodities declines of the past 100 years, by about one percent per year • Predicament of the farmer: declining terms-of-trade • Adjustment: higher productivity / larger farms • Occupational outmigration • Agricultural labor force in 1960s: 10% of labor force, now <3%.

9. World market and futures prices

10. World market and futures prices

11. Causes • Rising income growth and meat consumption in emerging economies • Biofuel policies in EU and US • Other (short term) effects • Production shortfalls (Australia) • Weakness of dollar and rise of crude oil price • Volatility on futures markets caused by speculators • Trade constraints imposed by exporting countries

12. The kinked meat demand function

13. Meat demand in emerging contries • Threshold effects, at low and high income • Shift from low to high propensity to consume meat • Corroborating effects • Urbanization: shift to ready-to-eat diets • Change in feeding technology: from roaming around the farm to industrial type feedlots based on compound feed • Strong driver for pressure on feed (cereals) markets • Mitigated by the high income threshold effect • Mitigated by technological progress in feed conversion

14. Biofuels policies in US and EU • US • EISA legislation (2007) • 36 billion gallons of biofuels in 2022 • Lavish subsidies on corn, soybeans, and biomass • Main arguments: import dependence of oil and improving terms-of-trade • EU • Biofuel promotion through exemption of excise tax (Member states) • EU-regulation (2003) on biofuel mixing targets: 5.75% in 2010, and plans for up to 10% in 2020 • Main argument: reduction of GHGs and greening the energy sector • Can agriculture adjust so fast?

15. Competition of food and fuel • Biodiesel and petrol diesel: near substitutes • Biodiesel from rapeseed oil • Petrol diesel from refining crude oil • Price mechanism drives substitution • Petrol diesel prices acts as floor for biodiesel and thus as a floor for agricultural prices • EU policies on mandatory mixing switch off this mechanism • Large implicit subsidization of biofuel producers • Annual subsidy that is increasing when mixing targets go up • Direct measures to combat GHGs are to be preferred • Introduction of carbon tax • Flat in C (thus differentiated over fuel types) • Exemption for biofuels (emissions have been sequestered)

16. Conclusion and prospects • The food crisis is primarily a demand crisis • Improvement of safety nets in developing countries • Lack of international policy coordination • Raising agricultural production while protecting the environment • Credit crunch • Toxic assets • Colateralization • Surge in commodity prices noraml signals a recession • Back to normal (?), focus on the real economy, which is a raw material constrained economy • How to benefit from high commodity prices? • Resource assessment and appropriate policies

17. Thank you.

18. Urban-rural population trends

19. Energy demand

20. Biofuels in US

21. Biofuels in EU

22. Biofuels in US Note: For 2010 and 2020 %-areas are relative to the 2007 surface, hence a figure exceeding 100% for soybeans in 2022.

23. Biomass potentials and use of nutrients Note: current fertilizer application is 160 mln tons of nutrients

24. III II I Biodiesel parity price and price observations

25. Biomass potentials and use of nutrients Note: based on Fischer and Schrattenholzer Current nutrient application: 160 mln tons