In order to combat climate change, numerous countries introduced policies promoting the use of 1st-generation biofuels, generating a 7-fold increase in their production between 2000 and 2014.
In parallel, rising agricultural commodity prices since 2005 have nourished the food versus fuel debate concerning the use of food resources to produce energy.
A number of factors have contributed to these price increases, including the strong economic growth of emerging countries, leading to a change in their eating habits, or unfavorable climate conditions in producing countries. However, rising oil product prices may also have played a role via an increase in agricultural production costs and an increased demand for biofuels due to their improved price ratio with respect to fossil fuels.
A study of the relationships between agricultural and oil markets reveals that their prices are even more closely correlated if the amount of biofuels produced is high. This correlation has been significantly reinforced in the case of American corn (daily biofuel production using this resource has oscillated between 1,400 and 1,800 thousand barrels since 2014) and this effect is not limited to agricultural products used in energy production but is also spreading to food substitutes, such as wheat(1).
These price increases do not always benefit agricultural raw material exporting countries due, for example, to the increased cost of their energy imports, following the rise in oil prices. In fact, their current account is not affected by agricultural commodity price variations when the oil price is more than $45 per barrel. In addition, the main economies importing agricultural goods have been able to keep the value of their food imports constant by reducing import taxes on these goods. Agricultural commodity price increases have therefore not had any impact on the economic growth of these countries via their current account(2).
The price of oil has been a key factor in agricultural prices, following the development of 1st generation biofuels, but one of the ambitions of the 2nd generation, produced using agricultural and forest residues, will be to overcome this contagion effect.
(1) A. Paris, The Effect of Biofuels on the Link between Oil and Agricultural Commodity Prices: A Smooth Transition Cointegration Approach, submitted to International Economics, 2016.
>> https://ideas.repec.org/p/drm/wpaper/2016-5.html
(2) G. Gomes, E. Hache, V. Mignon, A. Paris, On the current account–biofuels link in emerging and developing countries: do oil price fluctuations matter?, submitted to Resource and Energy Economics, 2017.
>> http://www.cepii.fr/PDF_PUB/wp/2017/wp2017-07.pdf
Scientific contact: anthony.paris@ifpen.fr