There has been tremendous buzz about the real culprits of global food price inflation--some blame increasing demand from China and India, some blame biofuels, some blame droughts, some on speculation, and some on even excess liquidity in several non G-7 countries. However, which one of these has the greatest bearing on the rising food prices? Stefan Tangermann, Director for Trade and Agriculture at the OECD, argues that biofuels accounts the most part of the rise in prices because it has driven 60% of the growth in global consumption of cereals and vegetable oils.
The use of agricultural products, in particular maize, wheat, and vegetable oil, as feedstock for biofuel production has expanded dramatically in recent years. Between 2005 and 2007, i.e. in the period when food prices began to explode, nearly 60% of the growth in global consumption of cereals and vegetable oils was due to biofuels. Global output of cereals and vegetable oil did not decline during that period, but just grew slower than the rapid expansion of use.
In a situation of depleted stocks and very low demand and supply elasticities, this gap between use and output growth has pushed prices up very strongly. As a large part of the use expansion was due to biofuels, there cannot be any doubt that biofuels were a significant element in the rise of food prices. More specifically, in North America and Europe biofuels cannot be produced, and would be very little used, in the absence of government support through subsidies, tax breaks, tariffs, and use mandates. In other words, biofuel support policies have contributed greatly to the rise in global food prices.