Food vs. Fuel – A Reversal by the World Bank

In a 180-degree turn from its previous position, the World Bank now says that spikes in grocery prices from 2007 to 2008 were not the fault of ethanol and other biofuels. The World Bank’s new report concludes exactly what Growth Energy has been saying for the last two years: the food-versus-fuel debate is myth.

While the newest report is a complete about-face from the 2008 Policy Research Working Paper, we at Growth Energy are wondering when the World Bank executives will actually admit that they were wrong two years ago when they claimed that ethanol’s use of grain was pushing up grocery prices. The newest report correctly points out that, in fact, it is the price of oil and other fossil fuels, as well as rampant market speculation, that played the most significant role in increasing food prices – not ethanol.

Unfortunately, ethanol’s critics have used the now-debunked World Bank study from 2008 to perpetuate the food-versus-fuel myth. Big Food and Big Oil have continuously cited the 2008 study more than any other to support their position on food-versus-fuel. In fact, this complete reversal by the World Bank confirms that food-versus-fuel has always been and will always be nothing more than a myth.

We are hopeful that this report will encourage others who have relentlessly perpetuated this untruth to admit their mistakes and put an end to this false debate.

That's a shame that the World Bank published that report because now that it's out there, it will take on a life of it's own and we'll be hearing it cited for years to come. Especially, if they don't publish an updated report so that the old report can start to fall into oblivion!

Bob "Free As The Wind" Mitchell

No, the "World Bank study" -- also, like the 2008 study, the product of individual researchers (one of whom is employed by the European Commission), and carrying the usual caveat: "The findings, interpretations, and conclusions expressed in this paper are entirely those
of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent" -- does NOT mark a 180-degree turn from the World Bank's previous position. The paper is a refinement of the earlier work done by Donald Mitchell, and if one actually reads the new report's conclusions, it is clear that it nowhere says that biofuels played no role in the food-price increases.

To save people having to find the document itself (which S. Dreyer failed to do), I quote here the relevant paragraphs:

"Numerous factors have contributed to the recent commodity boom, and have
been analyzed extensively in the literature. Yet their relative weight continues to be an area of contention. In this paper we examined three key factors whose role has been somewhat controversial: speculation, the growth of demand for food commodities by emerging economies and the role of biofuels. We conjecture that index fund activity (one type of "speculative" activity among the many that the literature refers to) played a key role during the 2008 price spike. Biofuels played some role too, but much less than initially thought. And we find no evidence that alleged stronger demand by emerging economies had any effect on world prices.

Although tentative, these conclusions provide insights into the determinants of the future path of commodity prices, which is still uncertain."

"Central among the uncertainties is the relationship between the prices of energy and of food commodities. Our examination of the key characteristics of longer-term commodity price behavior revealed a strong link between energy and non-energy prices, which increased considerably during the recent boom; it also revealed that co?movement among the prices of food commodities is very strong. The latter implies that events taking place in one sector (e.g., increased demand for maize for the production of ethanol) will affect other markets (e.g., for wheat) through reallocation of resources, especially land. It also implies that policy changes in one market may affect other markets. For example, expectations about the use of corn for biofuels could result in high wheat prices even in the presence of record levels of wheat stocks. Our results also show that agricultural commodity market fundamentals appear, in the short term, to be playing somewhat less of a role than in the past, tending to be overshadowed by the much stronger pull of energy prices.

Our conclusion about the long-term evolution of commodity prices is consistent with earlier literature, and supports the thesis that price variability overwhelms price trends. Variability is such that the average price does not exist in the statistical sense (i.e., prices exhibit non?stationary behavior), and the conclusions reached about trends depend on what time period is chosen for the analysis."

To obtain the document itself, knit together the two segments of the URL, given below:

http://www-wds.worldbank.org/external/default/WDSContentServer/ IW3P/IB/2010/07/21/000158349_20100721110120/Rendered/PDF/WPS5371.pdf

Note several important points:

1. The relative weight of the numerous factors that contributed to the recent commodity price boom continue to be an area of contention. This paper does not claim to provide the definitive answer.

2. Biofuels played some role too, but much less than initially thought. Note: not no role, but less than other studies (e.g., Mitchell's) found. Notably, the authors find no evidence -- contrary to claims of some in the biofuels industry -- that stronger demand for food commodities by emerging economies had any effect on world prices.

3. However, "events taking place in one sector (e.g., increased demand for maize for the production of ethanol) will affect other markets (e.g., for wheat) through reallocation of resources, especially land." And "policy changes in one market may affect other markets. For example, expectations about the use of corn for biofuels could result in high wheat prices even in the presence of record levels of wheat stocks." This interlinkage has been denied by many in the biofuels industry.

4. The authors find a strong link between energy prices and commodity prices. That is not surprising, given that energy prices affect input costs, and also drive up the demand for biofuels. But this strong link throws into question the claim made by some in the biofuels industry that biofuels are a solution to high energy prices and energy-price volatility.

The greatest contributor to the rising price of food around the world is the commoditisation of food crops. Commoditisation of food crops causes developing countries to export food they should be feeding their populations with because they can get a better price for it on the open market, leaving the poorest in those countries hungry while richer nations waste mountains of food because it's so cheap (because their buyers have the financial and political clout to get good prices) that end consumers are, in fact, incentivised to over-buy and waste food. "3 for the price of 2" "Buy 1 get 1 free" and bulk buy prices all motivate people to buy more than they need or can use before the 'use by' date and waste it. This is exacerbated by the fact that people are so used now to buying perfect looking produce that if a piece of food has the slightest blemish they will throw it away. This is all compounded by the fact that globalisation interferes with the movement of local seasonal produce to stores. For example, a farmer in the UK having a fresh crop of apples cannot sell to supermarkets because they are shipping in the same variety of apples from New Zealand. The UK farmer then has to store his apples in a climate controlled atmosphere - chemically controlled - which pushes the prices up and affects the quality of the apples - the reason so many apples are mushy these days.

The biggest arguments against food crop ethanol is that that cropland COULD be better used to feed the hungry, AND that it is becoming another big cause of deforestation. Has there been a study comparing the volume of CO2 released from rainforest removal for fuel crops, with the volume of CO2 saved by using ethanol grown on this land?

Since the corn ethanol scam is now taking about one third of the corn crop, it is bound to have some effect on the corn price. This isn't all bad as farmers can get get a reasonable price for the stuff and federal subsidies are reduced. The real problem is the effect on the land of this single crop and the chemicals which head down the Mississippi. The best way to get energy from corn is to eat it.

"This isn't all bad as farmers can get get a reasonable price for the stuff and federal subsidies are reduced." Price-linked commodity payments for grains and oilseeds are reduced, but not other farm subsidies. And the elimination of such crop subsidies is more than matched by the ever-rising losses to the Treasury from tax credits for biofuels.