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The impact of biofuel demand on agricultural commodity prices: a systematic review

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By diverting agricultural land away from food, feed, and livestock production, increased production of biofuel feedstock crops tend to drive up prices for agricultural commodities. But by how much? This question has been heavily debated in recent years, following the food price crisis of 2007–2008. A systematic review of 121 studies that quantifies the impact of biofuel demand on agricultural commodity markets reveals that there is still considerable uncertainty around the exact magnitude of the price response. Increased demand for corn ethanol in the United States—the focus of the majority of studies—is estimated to have accounted for 14–43% of the rise in US corn prices in the period 2000–2008. The divergence in results between studies is mainly due to different assumptions regarding demand and supply elasticities for agricultural commodities, and there is very limited empirical evidence that can help reduce the uncertainty around the value of these parameters, especially outside the United States. Few studies analyze the impact of biofuel demand beyond current or near‐future levels and it is argued that estimated price effects can neither be extrapolated to large‐scale biofuel demand shocks, nor are most models able to capture accurately the impacts of such shocks due to weaknesses in how land markets and land transformation process are modeled. To better gauge current and future impacts of biofuel demand on agricultural commodity markets, we need better data on supply and demand responses, both in the short and long run, as well as improved modeling of land competition and land‐use change. WIREs Energy Environ 2015, 4:410–428. doi: 10.1002/wene.155 This article is categorized under: Bioenergy > Economics and Policy Energy and Development > Economics and Policy
Real (inflation adjusted) world market prices for main crops and other food items from January 1960 to November 2013. Source: Data from the World Bank.
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Estimated biofuel multipliers for the main biofuels as a function of the total biofuel demand in the corresponding model scenarios. The green line shows the current (2011) annual global biofuel production and the green‐shaded area near‐term (2020) projections for global biofuel demand, primarily based on existing and proposed national biofuel mandates and support policies. EJ, exjoules.
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The figure plots the estimated biofuel multipliers from the models reviewed (horizontal axis) against the same measure estimated using an extremely simple model—one linear supply curve and one linear demand curve—calibrated using supply and demand elasticities from the larger model. The closer the data points are to the diagonal line, the more accurately the simple model reproduces the result from the full models. EJ, exjoules.
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Estimated corn ethanol multipliers for corn or coarse grain prices as a function of the models demand and supply elasticities. The histograms on the left and bottom show the distribution of demand and supply elasticities from the models reviewed, differentiating between partial (PE) and general (CGE) equilibrium models, as well as the average elasticities for each of the two model categories (standard deviations in parenthesis). EJ, exjoules.
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Histograms of estimated biofuel multipliers (percentage change in agricultural commodity price divided by size of biofuel demand shock), as calculated from the model studies included in the review. Panels (a)–(e) display multipliers for the main biofuels (corn, sugar and wheat ethanol, and biodiesel from vegetable oils) for different market prices. Panel (f) reports the difference in estimated corn price impacts for corn ethanol versus second generation, cellulosic ethanol in the United States, whereas panel (g) displays the differences in estimated US corn ethanol multipliers from partial versus general equilibrium models. PE, partial equilibrium; CGE, computable general equilibrium; EJ, exjoules.
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