Dusan Drabik & Harry de Gorter The effects of developing countries’ policy responses to the food price boom and biofuel policies 17 JUNE 2015 | ICABR,

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Presentation transcript:

Dusan Drabik & Harry de Gorter The effects of developing countries’ policy responses to the food price boom and biofuel policies 17 JUNE 2015 | ICABR, Ravello, Italy

Silent tsunamis Earthquake NOT felt round the world 8 years of price turmoil; Real corn prices 75% higher in 2014 than in 2005; wheat 40% higher; rice 30% higher

How biofuel policies the cause? Caused a link between crop and biofuel prices Biofuel-crop price multipliers very high 2 states of nature for biofuel prices: 1.Linked to energy prices (lowest prices can go) 2.Or float up and away New counterfactual is the crop-biofuel price link

Corn-ethanol prices became linked Corn-ethanol-gasoline-crude oil Now always locked Locked or ethanol prices float up & away Price floor for ethanol (corn) when locked; otherwise mandate premiums and even higher ethanol (corn prices) Always locked

Evidence?

Corn-ethanol price link 7

How well does the corn-ethanol price link formula forecast? 8

How well does the soybean oil price equation forecast? 9

The law of one international relative price of grains & oilseeds due to: - Competition for land - Substitution in demand 10

Earthquake not heard round the world June-10 April-11 Jul-2007 Dec-2008 Mandate premiums Dec-08 May-10

Developing country policy responses to food price increases “Standing up in the stadium effect” Economists overwhelming argued these policy responses were self-defeating And had negative effects on the rest of the world But that is under the assumption of traditional supply demand models (model biofuel demand as manna from heaven) 12

The Conventional Wisdom Or did policies follow prices?

Ch. 6: Developing Country Policy Responses “Standing up in the stadium effect” Really? 14

India rice prices 15

16 Corn price > $8.00 if tax credit was not allowed to expire (a savings of a possible an other $1 billion per day subsidy!)

Recent EIA baseline prediction of $141/barrel (2013 prices) by 2040 If correct, corn prices (in real terms) will never return to its previous long term decline 17

Implications for Food Security? Best cure for high prices is high prices (8 years ) Best cure for low prices is low prices (one and only one event sparked price boom)

IFPRI and Biofuels IFPRI’s 2015 Global Food Policy Report, one mention of biofuels on p. 28: “Recent food price volatility and spikes…The complex set of factors behind the recent food price crises in 2007–2008 and 2011—including diversion of crops for biofuel, extreme weather events, low grain stocks, and panicky trade behaviors—is still present or has the potential to reemerge” 19