For the past few years and following the 2007-08 crisis, price volatility has become one of the key concerns of the international community, since its consequences on the nations’ food security and economic and social stability are devastating. In June and November 2011, the G20 Summit under French presidency strove to initiate measures to fight this price volatility through greater market transparency, food security stocks and strengthening international cooperation in times of crisis. But the new occurrence of hyper-volatility we are currently experiencing is reminding us that we need to go one step further regarding such measures. A study released by the U.K. Department for the Environment, Food and Rural Affairs is considering the possible use of biofuels as tools to regulate markets in case of crisis1
. The study, which is excerpted below, maintains that more flexible biofuel policies would lead to an increase in grain and oilseed availabilities when prices rise, and thus ease markets. While the paper makes it possible to initiate a major debate, it is nonetheless crucial to implement other instruments to regulate both physical and financial agricultural markets, in order to curb the scope of upwards and downwards price fluctuations. Because even beyond occurrences of price hikes and food crises, price volatility severely impacts farmers worldwide, and is a major obstacle to global food security. The issue of competition between food security and energy security is frequently raised. The implementation of an International Agricultural and Food Policy, broken down in coordinated regional policies, would develop the many existing productivity resources, and thus meet the sustainable growth objectives set by the G20.
momagri Editorial Board
Grains and oilseeds produced for use in biofuels could be allowed to flow into animal feed or human food markets during temporary spikes in the price of agricultural commodities. Currently this is strongly discouraged from happening by legal requirements to blend biofuels with conventional transport fuel (often called biofuels mandates or blending obligations), but temporarily relaxing these requirements could allow agricultural markets to work more efficiently and reduce the size of a price spike.
A system of flexible mandates would in effect create a ‘virtual grain store’. Biofuels mandates have led to increased agricultural production relative to a state of the world where there are no biofuels mandates - this extra supply could follow market forces onto food or animal feed markets during a price spike, if the mandates allowed it.
Research carried out by the UK Department for Environment, Food and Rural Affairs (Defra) shows that up to 15% of a hypothetical spike in the price of “coarse grains” could be avoided if the European Union removed its biofuels mandate at the same time as prices started to spike (coarse grains include maize, barley, oats etc.). The work also finds that similar action in the US could avoid over 40% of a hypothetical spike in coarse grain prices.
Introducing flexibility into biofuels mandates is only one potential way to reduce price spikes in grain markets. Better information on supply and demand and encouraging undistorted international trade, as well as a number of other initiatives are also currently being pursued by the G20 and others in order to reduce volatility in agricultural commodities markets. This proposal should be seen as part of a broader effort to consider all policy options; it is important to investigate further so this option can be considered alongside its alternatives.
In the European Union (EU), biofuels production is encouraged in a number of ways. The Renewable Energy Directive obliges a 10% share of renewable energy in the transport fuel mix by 2020, subject to the “sustainability” of production and commercial viability of second-generation biofuels. It is left to individual EU Member States to decide how best to achieve this target, and across the trading bloc reduced taxes, production subsidies and capital grants may be used. The EU also imposes various tariffs and quotas on imports of biofuels. These targets are for renewable energy in any form, but current technology and infrastructure mean that biofuels produced from grain and other foodstuffs are the most cost-effective way to meet them.
US biofuel policy consists of quantitative mandates for biofuel consumption (the Renewable Fuel Standard) requiring that by 2022, 36bn gallons of renewable fuel be consumed annually and of this 15bn gallons come from maize-ethanol (this translates into a need for about 143 million tonnes of maize in 2022 – equivalent to 45% of the 2010/11 maize harvest in the USA). Since the US is the only major maize-ethanol producer, this acts as an effective US production mandate. Until January 2012, there was also a subsidy to ethanol blenders (the ethanol blenders’ tax credit) and import duties payable on biofuels.
Removing the EU blending obligation (but retaining import tariffs and tax support) in the same year as a hypothetical spike in the global price of wheat, could reduce the magnitude of the spike by anything from 10% to 35%. Similarly, a hypothetical spike in the price of coarse grains could be mitigated by up to 15% by removing the blending obligation. These two price spikes are simulated by introducing a 25% reduction in the area of wheat or coarse grain harvested in the EU in either 2011 or 2018, which leads to price rises of up to € 200 per tonne for wheat and € 100 per tonne for coarse grain.
Reducing the US blending obligation to one half of its current value in the same year as a spike in the global price of coarse grain, could reduce the magnitude of the spike by around 40%. The model we used to calculate these figures would not allow for both US and EU mandates to be completely removed at the same time: the adjustment required in international commodities markets proved too large for the model to solve. This hints at the significant benefits of coordinated policy, but the important impacts of unilateral action by either the EU or US also demonstrate that it may not be necessary to wait for coordination.
These results are based on the AGLINK-COSIMO partial equilibrium model of the next 10 years of the global agricultural economy, developed and maintained jointly by the OECD and FAO. Results are generated from highly stylised scenarios in which agricultural prices spike, but oil markets are unaffected. In this model, the benefits of flexing biofuels mandates are therefore achieved at zero cost to oil or bioenergy markets. It will be useful to develop this initial analysis to explore alternative scenarios including feedback effects in the oil market, and to investigate what impacts there could be on bioenergy markets.
As with any modelling exercise, this approach has its limitations and there are reasons to believe the results presented here could over- or under-estimate the true potential of the idea. The model ignores the impact of panic buying and export restrictions, which often come in response to a price spike – if this policy avoided panic behaviour or export restrictions, its benefits would be significantly greater than suggested here. However, it also ignores how biofuels refiners might respond differently to a temporary rather than permanent change in the blending mandate. Further analysis of this idea should therefore not rely exclusively on high-level modelling.
Both the trigger and the mechanism used to introduce flexibility into mandates are crucial, and deserve more attention because these will dictate the impacts of the proposal on bioenergy and other markets. The trigger must be independent of political control to ensure this does not become a tool for market management and increase uncertainty in agricultural and bioenergy markets. The mechanism by which flexibility is introduced could potentially be designed to avoid a reduction in the overall ambition of bioenergy targets. Specific proposals for triggers and mechanisms need to be investigated and their costs and benefits assessed.
This work reveals the very significant potential associated with a mechanism that allows market forces to direct grain between biofuels, animal feed and food markets during a temporary supply shortage and price spike. It has not examined the implications of this idea for bioenergy markets and stops short of examining a particular mechanism, instead calling for commitments to more work to develop specific proposals and to appraise their individual merits.
The urgency of considering this proposal now arises from a review by the European Commission of EU renewable energy targets due in 2014, when a decision whether to introduce such flexibility into biofuels mandates could, in principle, be taken.
1 “Can biofuels policy work for food security?” Chris Durham, Grant Davies, Tanya Bhattacharyya, DEFRA, PSSP Working Paper No. 002, September 2012. The complete study is available from http://www.defra.gov.uk/publications/2012/06/27/pb13786-biofuels-food-security/