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

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Cereal and oilseed price indicies (January 2005 = 1)

Corn Wheat Soybeans Rice

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

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Near futures prices for corn, soybeans and crude oil

Corn Crude oil (index) Soybean

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?

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Crude oil, ethanol and corn prices 33 months before the earthquake

Crude oil (index) Ethanol Corn MTBE ban

Crude oil > $40 per barrel

Corn-ethanol price link

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

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Predicted versus actual corn prices

Corn price (actual) Predicted corn price (de Gorter-Drabik-Just formula)

How well does the soybean oil price equation forecast?

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Prediction Errors for US Soybean Oil Prices

Soybean oil price Predicted soybean oil price

The law of one international relative price of grains & oilseeds due to:

- Competition for land- Substitution in demand

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Four Revealing Time Periods: Cereal and Crude Oil Price Movements

Cereals Price Index Crude Oil Price

Earthquake not heard round the world

June-10April-11

Jul-2007Dec-2008

Mandatepremiums

Dec-08May-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)

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The effects of export restrictions on rice prices

Source: Headey and Fen (IFPRI)

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Jan: Egypt restrict exports

Jan-Feb: Drought in Iran order 0.8 million mt of Thai rice

Jan-Apr: Philippines buys normal annual quota in just 4 months, including govt-to-govt deal with Vietnam

Mar: India, Vietnam, China & Cambodia impose tighter export restrictions & new Thai govt discusses possibility of ban

Apr: Nigeria scraps 100% tariffs & imports 0.5 million mt Thai rice

Sep-Oct 2007, Vietnam and India place partial restrictions on exports

Sep: India lifts export ban on some higher quality varieties

Q1: Saudi Arabia subsidizes rice imports; imports from Thailand rise by nearly 90% after India’s ban

Strong demand from energy exporters keeps rice prices 25-30% above 2007 levels

Jun: Cambodia removes ban

Jun: Egypt announces re-export of rice from Sep.

Jun: Japan allowed to re-export rice stocks, dollar strengthens, oil & other crop prices fall

The Conventional Wisdom

Or did policies follow prices?

Ch. 6: Developing Country Policy Responses

• “Standing up in the stadium effect”• Really?

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2.5Consumption weighted domestic and international prices in developing countries

Domestic International

price trend Jan 06 to June 07

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* Price index of rice, wheat, maize and sugar.

India rice prices

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What if Brent crude oil prices went up instead?Brent crude oil price

What if Brent went up instead?

Corn price

Lowest corn price if Brent went up instead

$110 average crude oil price Jan 2011 to June 2014

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

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Real Corn Prices

projected trend

Implications for Food Security?• Best cure for high prices is high prices (8 years

2006-2014)• Best cure for low prices is low prices (one and

only one event sparked 2006-14 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”

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