The impact of biomass consumption on US food prices

Abstract

The Energy Policy Act of 2005 increased the amount of biofuels that must be mixed with commercial gasoline sold in the US to 7.5 billion gallons by 2012. The Energy Independence and Security Act of 2007 further increased this requirement to 36 billion gallons by 2022. These large increases in the production and consumption of biofuels may compel farmers to divert significant quantities of land away from food and feed crops, which, in turn, may lead to a rise in crop prices, feed prices, and hence, overall food prices. Employing structural vector autoregression (SVAR) models and monthly US data for the period 1974:01 to 2019:12, this paper examines the impact of biomass consumption on food prices. We find that since the passing of these two acts, surges in biomass consumption are associated with food price increases in several categories, namely, fruits, beverages, food away from home as well as meat and poultry.

Keywords:

• biomass consumption
• food prices
• vector autoregressions

JEL Classification:

• E32
• E50

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The figure shows that overall food prices fell by more than 16% between January 1974 and December 2005. Over the same period, the prices of meat and poultry, dairy products, alcoholic beverages, and overall food at home displayed even larger declines, decreasing by as much as 41%, 32%, 25%, and 20%, respectively. Consumer prices of the remaining food items fell at a slower pace, with fruits and vegetable prices falling by 12%, non-alcoholic beverages by 6%, cereals and baked goods by 5%, and overall food consumed away from home by 4%.

2 In “The State of Agricultural Commodity Markets 2009,” the Food and Agriculture Organization (FAO) brought attention to these prices increases, both in the US and globally. The report shows that the situation posed a threat to food security and political stability in developing countries. Several food categories experienced this surge including wheat, maize, rice, soybeans, and others. In the US, some food prices have continued to trend downward since 2006, but at a much slower rate, as is the case with non-alcoholic beverages.

3 Specifically, transportation costs, as well as costs associated with plastic and foam packaging can lead to substantial increases in food prices.

4 For example, a global economic expansion is likely to lead to an increase in both biomass consumption and food prices, making it misleading to invoke the ceteris paribus assumption when examining the “effect” of biomass energy consumption on food prices.In this case, the increases in food prices cannot be attributed to increases in biomass consumption only. Put differently, food prices would have responded quite differently if, say, federal, state, and local government policies had been responsible for an increase in biomass consumption of the same magnitude as the increase resulting from the economic expansion.

5 This paper is related to the broader literature that employs structural dynamic econometric models to investigate the relationship between energy and food prices. Baumeister and Kilian (2014) apply a SVAR model to examine the impact of oil price shocks on food prices, concluding that “there is no evidence that oil price shocks have been associated with more than a negligible increase in US retail food prices in recent years” (page 691). Hausman, Auffhammer, and Berck (2012) apply an SVAR model to analyze the response of US crop prices to shocks in acreage supply, reporting that a negative shock in own acreage leads to rises in soybean and corn prices. Other papers that apply SVAR models to the food-versus-fuel debate include among others, Carter, Rausser, and Smith (2017), Rathmann, Szklo, and Schaeffer (2010), and Anzuini, Lombardi, and Pagano (2012).

6 According to the Congressional Research Service (), the 2005 Energy Act came during a period of all-time high for crude oil prices, which hit $63 per barrel and gasoline reaching $2.4 per gallon. At the time, the US imported 58% of its oil. Then, the US Energy Information Administration predicted that imports would grow to 68% of the domestic demand by 2025. https://www.everycrsreport.com/reports/RL33302.html

7 congress.gov/bill/109th-congress/house-bill/6

8 https://www.epa.gov/laws-regulations/summary-energy-independence-and-security-act

9 https://www.everycrsreport.com/reports/RL34294.html

10 https://drive.google.com/file/d/169Nj256wQ27xOnuVEllfj_jbb7JNGrlQ/view.

11 Expressing the variables in percentage change is supported by unit root tests. Those results are available upon request.

12 Chakravorty et al. (2017) report that 40% of US corn enters the production of biofuels which are primarily used as substitutes for gasoline in transportation. Using a Ricardian model they argue that world food prices could rise by as much as 32% in 2022.

13 The Energy Information Administration reported in May 2019 that the share of soybean oil in biodiesels went from 15% to 30%.