Biodiesel Myth (Or Fact?) #23: Biodiesel is Raising Food Prices
Increased world demand for grains and vegetable oils due to population growth (esp. in China and India), the weak dollar, agricultural production problems around the world, and $100/barrel oil are some of the driving factors accounting for increasing food prices.
After covering 22 of the most popular myths about biodiesel, I realized I’d only given lip service to a major issue: increasing food prices. In Myth #2, I mentioned that the goal of biodiesel production is to move away from food-based feedstocks.
But until that happens, the question remains: if I use biodiesel made from soybeans right now, am I contributing to the larger problem of increasing commodity prices and starving poor people?
Quick Facts:
- The United States is the world’s largest producer and exporter of soybeans.
- Soybean prices approached a 33-year high last fall, while overall food prices had their biggest jump in 16 years (according to economists). Food inflation rose about 4% in 2007 compared to an annual average of 2.5%.
- World soybean consumption this year is expected to be up 13.2% over two years ago.
- Biodiesel production in the US accounted for 2.8 billion lbs. of soybean oil last year, which amounts to an estimated 20% of the total domestic consumption of soybean oil.
- Soybeans directly compete with corn for agricultural land. Soybean acreage is expected to decline over the next few years due to high demand for corn, which directly increases the price of soybeans.
- Biodiesel production in 2007 was estimated at 450 million gallons. Corn-based ethanol production is expected to exceed 10 billion gallons by 2009.
Taking this into account, it looks like both soy-based biodiesel and corn-based ethanol (even more so) are at least partly to blame for increasing food prices. But that’s not the whole story. Even corn-based ethanol, which is produced in volumes greatly exceeding biodiesel, may only be responsible for 0.2% - 0.3% of the total 4% increase in food prices over the last year.
According to Brent Searle, Special Assistant to the Director at the Oregon Department of Agriculture, food inflation as a whole can’t be pinned to a single source. Responding via email, Brent said that no single study has sorted out all the issues, but several studies have documented how much petroleum prices are affecting things. The 4-5% food price increase in 2007 has been attributed to:
- 0.2% - 0.3% due to ethanol use of corn
- 0.8% - 1% due to gasoline/fuel price increases
- 3.5 - 4 % due to other causes
Here’s an even more thorough list list of the factors affecting food prices (also received via email):
- A growing middle class in Latin America and Asia that can afford more meat and milk, which has driven up demand for grain to feed cattle and hogs.
- A drought in Australia in 2006 and 2007 reduced the supply of milk and wheat available for export.
- Low worldwide wheat prices the past several years have led growers to plant less wheat; additionally, grain traders store less wheat today with “just in time” deliveries, and there are no current government incentives for farmers to store wheat on farm. All this has led to record low wheat stocks, causing wheat prices to soar.
- Regional pests, diseases, freezes, droughts, floods and other natural disasters all impacted fresh fruits, vegetables, and other produce availability and price.
- Increases in labor costs, as state and federal minimum wages ratchet up, from farm to processing and the restaurant, affect food prices. 40% of the retail food price is related to labor costs after food leaves the farm.
- Rising fuel costs, over $100 per barrel, making it more expensive to grow, process, refrigerate, and transport food from the producers to stores and restaurants — impacts all aspects of the food chain.
- Personal choices – for example, organic milk costs nearly double conventional milk; consumers are choosing to pay higher prices based on preferences.
- Dollar decline — makes food imports more expensive at the store and creates greater demand for US ag exports. Approximately 30% of fruits and vegetables consumed in the US are imported. They are now more expensive.
- Corporate profits — an excuse to hike prices. Kroger, 4th quarter 2007 sales up 10% and profits up 18%. Kroger stated it paid 3% more for products. “In our view, periods of moderate inflation is a positive for our business because inflation tends to improve sales.”– VP Rodney McMullen, Jan. 2008. Safeway, sales up 3%, profits up 12%.
- Marginal impacts from Ethanol demand for corn (US) and sugarcane (Brazil).
So where does that leave us? This topic is worth more serious conversation and analysis than can be summed up in a single blog post. My gut is telling me that the most important factors affecting food prices are the price of oil and increasing worldwide food demand, but all of the factors above may play a role.
I would also wager that corn-based ethanol, which will require about 30% of the US corn harvest by 2015, is a much bigger culprit than soy-based biodiesel if either one is significantly contributing to rising food costs. If you’re worried about using retail biodiesel, talk to your supplier about the source of their oil, and do more research with the links below.
I’m sure you have an opinion about this. What do you think? (Let me just repeat that I am all in favor of non-food based biofuels, some of which were listed in the rest of the biodiesel mythbuster).
Posts Related to Increasing Food Costs:
- European Union Defends Biofuel Targets As Food Prices Soar
- “Perfect Storm” Inflating Food Prices Worldwide
- 2015: 30% of US Corn Harvest Will Be Gasoline
Sources:
USDA Economic Research Service: Soybean and Oil Crops Briefing Room, and
Ethanol Expansion in the United States How Will the Agricultural Sector Adjust?
Reuters (Aug. 8, 07): Cooking Oil to Further Fuel Global Food Inflation
ThePoultrySite.com (Mar. 18, 08): Weekly Outlook: Focus On Soybean Oil
Special thanks to Brent Searle for providing this information.
Excellent summary of the arguments, Thanks!
I hope you’re right and that biofuel plays a smaller role in the price increases then we might have thought. I’m definitely for non-food sources of biofuel and it seems everyday there are more producers making it that way. I think it is definitely starting to turn that direction, whether it’s from WVO, algae, etc. Just today I posted up an interview with Phoenix’s first source of WVO biodiesel at a retail pump. There are also a few algae plants in the planning and I believe one is in production in Texas. Pretty cool.
I’ve been spending a lot of time looking at soybeans recently. One point that never comes up is that only 20% (give or take a point) of the soybean is oil. The other 80% or so is soybean meal. The demand for feed for cattle is driving the increased planting of soy as much or more than the demand for the oil. If you couldn’t sell that other 80% of the bean, you’d be in big trouble even if there was a huge market for the biodiesel you’re producing. So that’s a fundamental argument for increased meat production being a key culprit.
But let’s look at the economics overall of soybean production. I’m taking Friday’s closing CBOT prices for soybeans, meal and oil. (I converted them all to short tons to standardize.) I can’t find a biodiesel price, so I’m going to use a price that I think is about right. But, anyway, this is how the math works, in the most general rule-of-thumb sense. Beans costs $450 per short ton and the meal is somewhat less, at $350 per short ton. Muitply that 350 by 80% and you have around $278 in sales from meal per ton of beans. The biodiesel is going at, let’s say, $1400 per ton. Times 20% = $360, less say $100 per ton to process = $260. Then you’re total revenue per ton is $538 on $450 of costs for a $88 profit. (Please these are rough numbers - feel free to tweak them and see how it effects the overall economics.)
So note that the revenue from the meal is at least an equal driver of profitability in soy production. Before biodiesel came along, you sold the other 20% as oil. Clearly biodiesel is more profitable, particularly with the $300 credit in the US. (If you used today’s oil price you’d create $242 of revenue from selling it as oil - only $20 less as the price of oil to some extent has moved up to reflect its value as a biofuel.)
So this is just some info that I think is relevant to the discussion. A good economist with a strong statistics background could probably look at historical data and ferret out how important each part of the bean is to the overall price increase of soy. But given that oil is only 20% of the bean at most, common sense suggest that it’s hard to blame it for all of the run up in prices.
Pondering my analysis after the fact, I realized that I over estimated processing costs. It’s probably more like $20 (as you should take 20% of the cost, which is around $100 per ton). So you’re making maybe $340 on the biodiesel and $278 on the meal per ton of beans. So my point is still valid, I think, as you need to be able to sell the meal to make it work financially. But that analysis suggests that the profitability of biodiesel is a pretty strong driver. It adds something like $100 per ton to the profitability of the offering, over just selling the oil.
Yes, it’s a crucial social justice issue.
Hungry people are rioting right now in parts of west Africa, Indonesia and Bangladesh because the prices of rice, soya and wheat have risen sharply and they cannot afford to buy them.
The UK government is now urging a major review of the developed world’s biofuel policies at the G7 summit in June.
Effectively managed and regulated, the answer is no.
Using the U.S. as the context, America alone would have the agricultural production capacity to accommodate our biofuel needs and feed ourselves.
[...] up to date.Adding to the ongoing discussion about biofuels affecting worldwide food prices (see Biodiesel Is Raising Food Prices), NPR’s Morning Addition briefly interviewed World Bank President Robert Zoellick last [...]
Why can’t we show the hungry people of the world how to grow the weed from India that grows anywhere and produces large amounts of bio-diesel? We could trade them corn and soy for the biodiesel?
What ever happened to hemp? It will grow better than corn or soy and, in poorer conditions, and produces lots of oil as well as fiber. If the USA could get over its’ ‘hemp phobia’, or if hemp could be modified genetically to be ’safe’ to the American sensibilities,(Come on Monsanto, redeem yourself!) poor countries could produce bio-diesel and high quality fiber and trade for food in the ’states. Americans could drive 300hp+ diesel machines using less petroleum and all would be well?
I think what needs to be said is that food stocks processed for fuels TODAY are what we need to move to the far more efficient non-food stock fuels being worked on. Granted, Biodiesel doesn’t require infrastructure changes, but as has been said is not the panacea for our problems - It needs to be one of a tool set to take us into a cleaner future.
PS. This is a really cool website!
Doesn’t the U.S. government actually pay some farmers NOT to grow so to keep crop prices from falling.
If so, how does this figure into the discussion? Doesn’t this negate the whole supply/demand arguments… stop paying farmers to not grow… and spend that money else where?
My opinion is that the wealthiest people on the planet (Oil Tycoons) are having a significant influence into all these “studies” and “opinions” on how “bad” biofuels are for the planet. You cannot tell me, that no matter how “bad” biofuels would be, it pales to compare with how “BAD” fossil fuels are to the planet… like the alcoholic smoker who decides to quit eating beernuts because they’re high in cholesteral.
That is what needs to be focused on… Relative cost between fuels; not absolute… because ANY fuel source will cost something. It’s a matter as to which one costs less in the LONG-RUN, i.e. conversion costs of utilizing two parallel fuel sources until the new one can be fully adopted should be minimized in the argument. It’s equivalent of corporate mergers, short-term there’s duplicitous work being done needlessly, but long-term those processes will be synergized and create a bigger more healthy and efficient entity.
Big Oil… has there hands in a LOT of pockets. Being a statistician… I’ve seen first hand how the person signing the paychecks… well, let’s just say it this way: the bosses presumptions going into the study don’t tend to be wrong too often when the ‘final’ analysis is completed. It’s called the “Emperor’s New Clothes-Syndrome”.