Are biofuels causing food price rises? Gallagher’s answer

The Gallagher Review into biofuels has a view on how the diversion of food into biofuel crops affects prices but its not clear.

 Partly that’s because it’s economics (if predicting the weather is hard, why do economists try to produce simple models when meteorologists don’t? )

Gallagher says that the apparent impact of biofuels on food prices depends on the economic model that people use. There are two views:  one assumes that the whole economy adjusts to the change; the other that only part of the change can be adjusted for. The first looks like the long term to me, the second the short term.

Gallagher quotes from  the International Food policy Research Institute, this organisation recently produced a report showing that prices rises could be between 16% and 34% at best and 30 and 76% at worse. Gallagher thinks that this is probably too high, and the results from the other model are too low. The long term model shows rises of around 5%.

The effects of these prices are greater on the urban poor, who cannot grow food or take advantage of the opportunities that biofuels might offer their country cousins. A world bank working paper shows that a 10% rise in the main categories of food prices raises poverty by 0.4% in developing countries. Nicagraua was the worst affected country with poverty up 2%.

Another question I’ve been mulling, if not talking about out loud is

The role of speculators in the futures markets for grains. This is what Gallagher says…


Some futures traders argue since they never take delivery of the crop they cannot affect street prices but this ignores the affects on short term market volatility, a feature of current high prices. In these circumstances speculative price rises lead to positive feedback loop in which price4s rise far above the underlying value of the commodity creating an economic bubble that eventually  bursts and prices crash… George Soros, the renowned financial speculator and investor is quoted as saying ” you have a generalised commodity bubble due to commodities having become an asset class that institutions use to an increasing extent.”

Which is a pretty clear view of what I’ve had at the back of my mind. Gallagher says this needs “thorough examination by the Treasury” so quake in your boots if you’ve been a naughty trader.

He recommends

Biofuel targets and policies that don’t disadvantage the poor in the short term.

    So food prices must not be affected by the price of biofuels.

Gallagher also recommends international, short-term targeted assistance to reduce the current spike in food prices on the poorest.

That social criteria including land rights, should be incorporated into sustainability criteria. Targeted support to develop biofuel feed stocks to Southern Africa, Latin America and parts of South East Asia where the existence of considerable amounts of underused arable land offers considerable potential for biofuels to deliver economic benefits.

His preferred crops are sugar cane in countries where there is enough spare land, and palm oil, under the right conditions, if the price is higher than alternative uses. He’s not so sure about Jatropha, except as a local fuel source.

It’s hard to disagree with this. His request for the Treasury to investigate futures trading in food commodities is a sensible idea as are his calls for an international response to the current spike in food prices.

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