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In recent years, rising prices for agricultural and energy commodities have heightened interest in the economic fundamentals governing these markets. This report presents bio-era’s latest thinking on some of these fundamentals, and how they may be changing in unanticipated ways. Part of what we explore here concerns the interactions between the principal “long forces” affecting these markets, including the forces of climate change, the limits of conventional crude oil supply expansion, and the impacts of continued underlying growth in global populations and economies. Not surprisingly, we foresee these long forces acting in combination to place additional upward pressure on fuel and food prices, and we present a model for thinking about the dynamics at work in what we hope is a simple, but useful, way. In addition, we also consider the growing linkages between agricultural and energy commodities, and how these linkages might affect current and future pricing dynamics within and between these markets. Under one, very specific set of conditions, we believe that price signaling between these markets could lead to a self-reinforcing feedback loop — which if left unchecked — could result in steadily escalating clearing prices.* The theoretical effect we describe is akin to an “evolutionary arms race” or a “red queen effect.” Should market circumstances ever give rise to the price dynamic described in the report, the implications could be far-reaching. Energy and food prices could rise steadily as a result, at great cost to the global economy. Continuing globalization might even be placed at risk.
- What are the fundamental economic drivers behind the rapid rise of food and fuel prices?
- How are the food and fuel markets interconnected?
- How are prices in these markets affecting each other?
- Is there an evolutionary "arms race" going on?
- What are the implications?
- How is climate change impacting these markets?
- What is happening with expanding supply?
- What is the future outlook?
- All seeking to understand the future of food and fuel markets
- Policy makers
- Biofuel company executives
- Biotech company executives
- Agricultural interests
- Environmentalists
- Goverment agencies and regulators
- Citizens
- Introduction
- The Commodity Market Context
- The Long Forces
- The Bottom Line
- The Dynamics Driving Sugar and Oil Markets
- Climate Change Pressures: The Price of Cleaning Up
- Climate Change and Biofuels
- The Demand Side: Continued Growth in Population and Economic Development
- The Supply Response: Where is the Conventional Oil Supply Response?
- The First Generation Biofuels Boom: 2000-2005/6
- Vegetable Oil Supplies and Markets
- Non-conventional supplies
- New vegetable oils
- New supply technologies
- Animal Fats and Oils
- Conclusions Policy Considerations
"...The dilemma however, is that vegetable oil, animal fat, and sugar-derived fuels are the only viable alternatives currently available to serve the oil-based transport fuel markets in any volume — and demand from these markets is growing very fast with rising incomes in developing economies. Should government actions simply limit the conversion of commodities with food use value into fuel, without parallel action to curtail overall demand growth and bring economically viable fuel substitutes to the fore quickly — the effect may only be to increase oil prices, with food prices following shortly behind. This pricing arms race will continue — despite efforts to prevent it — because as with the carnival game where you pound down a pop up figure, only to have that action pop up another figure — you cannot win. It is the kind of game that tires even the best of players quickly...So the choices facing governments are not good or easy ones. What we know from history is that governments which fail to ensure enough affordable food for their populations do not, as a general rule, last very long."
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