The visible hand in economics

Biofuels and food prices

Posted on: April 17, 2008

Why is everyone acting so surprised about the fact that biofuel regulation will (and has) led to higher food prices? We said it would in August (well to be fair, Keith Woodford from Lincoln University said it before us, and other people were saying it before that 😉 ).

However, unlike some commentators, we do not believe that the fact that world food prices are rising should impact our decision on whether to make biofuels mandatory (something I don’t agree with), as NZ’s demand for biofuels will be so small that it won’t have an impact on the world price for food.

Also there are some unintended benefits for NZ from the mandatory regulations in the US and Europe. Corn etc has become more expensive, making it more costly for foreign dairy farmers to produce milk. This is part of the reason that milk spot prices have doubled over the last year – injecting a lot of money into the NZ economy.

On that note, I want to complain about this: (h.t. Kiwiblog)

Now the Dominion Post is a great publication, don’t get me wrong. But this illustration is so incredibly misleading. The illustration is supposed to make us feel like Stats NZ inflation statistics are a lie, with “only” 3.4% inflation compared to the 25% rise in this bundle. However, Stats NZ does take a representative bundle of goods, they re-evaluate it fairly regularly. The bundle in this illustration is not indicative of anyones grocery shopping – where is the meat (where price growth has been very weak).

Yes, the price of dairy products have gone up – the Stats data even says that. I would prefer it if people didn’t constantly act like the government and/or Statistics New Zealand is lying to them.


6 Responses to "Biofuels and food prices"

I totally agree. Let’s just take a food basket consisting almost entirely of dairy and wheat products, shall we? Remind me again where the largest commodity price increases were… LOL

It’s interesting that bread went up 15% while weetbix went down 6%. Any idea why?

“It’s interesting that bread went up 15% while weetbix went down 6%. Any idea why?”

Because Weetbix is an over-rated experience good. Net migration has eased substantially over the past year, implying that there is a smaller net inflow of people coming into New Zealand who will give Weetbix a go – implying that demand has fallen.

I don’t think this is probably the main reason, but I like it.

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When it comes to biofuels, it really is a matter of “the devil is in the detail”. More particularly, what type of biofuel am I using, and where is it sourced from?

The demand for some biofuels increases the value of the crops that they are produced from to the extent that virgin rainforest is cleared to make way for it. When the CO2 emitted from this, and the CO2 (or other GHG’s) used in energy and fertilisers applied when growing it are taken into account, these biofuels actually do no good for climate change. Likewise, some biofuel crops displace other crops, which has a domino effect on other land uses, and yes, ultimately pushes essential food prices up.

On the other hand, some fuels (ie Brazilian ethanol) are, on a life cycle basis, good for climate change and don’t effect food prices much. It all really is a matter of scheme design. And in the case of New Zealand, there is in fact an economically rational argument (though you might not agree with it) for regulating for biofuels IF DONE PROPERLY. Poorly targetted subsidies that ruin the environment and hike global food prices, such as those from the USA must be avoided.

The key thing is that it is impossible to say “good” or “bad” in general to biofuels, either in terms of effect on food prices, or the environment, or in terms of economic rationality. Unfortunately it is complex and requires detailed thought – a thing most people are reluctant to do.

“And in the case of New Zealand, there is in fact an economically rational argument (though you might not agree with it) for regulating for biofuels”

Agreed – I do discuss this in the post I link to ( when I say that I don’t agree. I think that investment subsidies may be a superior mechanism as they are more direct. However, a good cost benefit analysis can convince me otherwise.

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