food and Fuel – What are the Cost Drivers? T. Randall Fortenbery November 13, 2008

1. food and Fuel – What are the Cost Drivers?T. Randall FortenberyNovember 13, 2008 Renk Agribusiness Institute Dept. of Ag and Applied Economics and School of Business University of Wisconsin - Madison

2. Is it Really Food vs. Fuel?

3. Energy Independence • If half of the corn grown in the US was used in ethanol production, current technology would yield about 15 billion gallons of ethanol per year. The US uses about 390 million gallons of gasoline per day (11% current consumption). • The US produces about 23.7 billion pounds of vegetable oil, and about 11.6 billion pounds of animal fat each year. This translates into 4.64 billion gallons of bio-diesel, or 8 percent of current US consumption.

10. Fortenbery and Park Corn price elasticity of ethanol is about 0.25 depending on model specification. This does not explain the summer corn price, or current price volatility.

20. Current Empirical Research Shows: • Corn and ethanol prices have a correlation near Zero. • Ethanol prices are highly sensitive to gasoline prices. • Food prices are sensitive to energy prices.

21. CONCERN: Land is being diverted from food to fuel production, and that is incresing food prices

27. Amazon palm oil:Palm oil industry moves into the Amazon rainforestRhett Butler, mongabay.comJuly 9, 2008 Malaysia's Land Development Authority FELDA has announced plans to immediately establish 100,000 hectares (250,000) of oil palm plantations in the Brazilian Amazon. The agency will partner with Braspalma, a local company, to form Felda Global Ventures Brazil Sdn Bhd. FELDA will have a 70 percent stake in the venture. "As a start, 20,000ha in Tefe will be opened for oil palm planting. After that, between 3,000ha and 5,000ha will be opened yearly," said Deputy Prime Minister Datuk Seri Najib Razak. "Felda wants to emulate Petronas as a global player," he added, referring to Malaysia's national oil company.

28. Oil palm plantations and heavily logged forest near Lahad Datu, Malaysia. Photo by Rhett A. Butler

29. November 11, 2008Monogabay.com Malaysia, Indonesia to curtail palm oil production due to low prices(11/8/2008) Malaysia and Indonesia ̵ countries that account for more than 85 percent of global palm oil production — will cut production in an effort to shore up collapsing palm oil prices, reports The Jakarta Post. The decline in palm oil prices is expected to slow expansion of oil palm plantations in Indonesia and Malaysia, a development that will please environmentalists who blame the palm oil industry for large-scale destruction of rainforests across Southeast Asia.

31. Biofuels markets are commodity markets • Relatively low rates of return (not necessarily bad – Cargill deals in commodity markets). • Must be a low cost producers. • Must be aggressive at managing price risk.

32. Conclusions • Some of our greatest challenges will be focusing debates concerning benefits and costs of any new bio-economic enterprise on accurately describing what we actually know and understand, and on being honest relative to what we do not yet know. • While demand for bio-fuels has had a positive impact on agricultural commodity prices, it does not fully explain the price levels and volatility experienced in the past year. • We need to focus on Food and Fuel, not Food vs. Fuel. If we are to meet global food demand in the coming couple of decades we will seriously need to address access to energy, and the development of sustainable energy production and delivery systems. • The greatest costs, both social and economic, of food and bioenergy production systems will come from the environmental side.