World Bank: Impact of Biofuels on Commodity Prices “Not As Large” as Originally Thought

(Renewable Fuels Association) A newly released report from the Development Prospects Group at the World Bank, conludes that “…the effect of biofuels on food prices has not been as large as originally thought, but that the use of commodities by financial investors (the so-called "financialization of commodities”) may have been partly responsible for the 2007/08 spike.” This is the same World Bank whose "leaked" report in 2008 erroneously blamed biofuels for 75 percent of the commodity price spike.

John Baffes and Tassos Haniotis, authors of the report entitled "Placing the 2006/08 Commodity Price Boom into Perspective", argue that energy prices, and as noted above speculation, played significant roles in the non-energy commodity price spikes seen in the recent past.

“We conclude that a stronger link between energy and non‐energy commodity prices is likely to have been the dominant influence on developments in commodity, and especially food, markets. Demand by developing countries is unlikely to have put additional pressure on the prices of food commodities, although it may have created such pressure indirectly through energy prices.”

The authors also conclude that it is unlikely biofuels played a significant role because they do not represent a large percentage of worldwide grain and oilseed use – a point the Renewable Fuels Association has routinely made.

The authors point out: “Yet, worldwide, biofuels account for only about 1.5 percent of the area under grains/oilseeds. This raises serious doubts about claims that biofuels account for a big shift in global demand. Even though widespread perceptions about such a shift played a big role during the recent commodity price boom, it is striking that maize prices hardly moved during the first period of increase in US ethanol production, and oilseed prices dropped when the EU increased impressively its use of biodiesel. On the other hand, prices spiked while ethanol use was slowing down in the US and biodiesel use was stabilizing in the EU.”

Biofuel producers, including those members of the Renewable Association, have long challenged those seeking to blame ethanol and biodiesel production for the run up in commodity prices. During the height of the debate (and in subsequent reports thereafter), the industry has always held that record oil prices had much more to do with commodity and food prices than biofuel production.

“In reversing course, this World Bank report reaffirms the marginal role biofuels play in world commodity and food prices,” said RFA President Bob Dinneen. “The RFA has long noted that ethanol production has continued to increase while corn prices have now returned to normal levels. Volatile oil prices, speculation, and adverse weather conditions all played far more significant roles in driving commodity prices to record and near record prices. This report should silence critics in the food processing industry, the livestock industry, on Capitol Hill, and anywhere else that sought to portray ethanol as the boogeyman. With this phony food and fuel discussion put behind us, perhaps a real conversation about America’s energy future can ensue.”

The report also came to some interesting conclusions about the role of energy prices and speculation in commodity prices, including:

• “Fiscal expansion in many countries and lax monetary policy created an environment that favored high commodity prices. The depreciation of the US dollar—the currency of choice for most international commodity transactions— strengthened demand (and limited supply) from non‐US$ commodity consumers (and producers). Other important contributing factors include low past investment especially in extractive commodities; investment fund activity by financial institutions that chose to include commodities in their portfolios; and geopolitical concerns, especially in energy markets.”

• “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.” READ MORE and MORE (Biofuels Digest) and MORE (Economists View) and MORE (Growth Energy) Download Report