Zurich April, 2007

1. FOOD VS. FUEL
Impacts of energy price
increases on developing
countries and the poor
Dr. Joachim von Braun
Director General
International Food policy Research Institute
Zurich
April, 2007

2. Overview
• The emerging biofuel economy, why now?
• What are the impacts on food prices and the
poor?
• What are the tradeoffs between food and fuel?
What are the opportunities, risks, challenges?
• Policy suggestions for creating a pro-poor
sustainable biofuel industry
• Conclusions
Joachim von Braun, IFPRI, April 2007

3. Energy Outlook
• Global consumption of marketed energy is
projected to rise by 71 percent between
2003 and 2030, with 3/4th of the increase
coming for developing countries
• Oil prices unlikely to fall in the future due to
increased demand + recent instability in
some major oil producing countries
• Biofuels have become competitive with
petroleum in many developing countries
Joachim von Braun, IFPRI, April 2007

4. The Emerging Biofuel Economy
• Potential to serve as an environmentally
sustainable source of energy
New sources are cleaner and more efficient
Can contribute to mitigating global climate
change
• However, competitiveness of biofuels
depends heavily on relative prices of oil
and agricultural feedstock for biofuels
Joachim von Braun, IFPRI, April 2007

5. Food Production and Price Trends
Source: Msangi et al., 2007
Joachim von Braun, IFPRI, April 2007

6. Food and Energy Price Trends
Price Indices 2000=100
300 Food
250 Crude Oil
200
150
100
50
0
04
05
06
4
5
6
4
5
6
7
4
5
6
00
00
00
00
00
00
00
00
00
00
l20
l20
l20
n2
n2
n2
n2
ct2
ct2
ct2
r2
r2
r2
Ju
Ju
Ju
Ap
Ap
Ap
Ja
Ja
Ja
Ja
O
O
O
Data Source: UNCTAD Commodity Price Statistics Database
Joachim von Braun, IFPRI, April 2007

7. Food and Energy Price Trends
Price Indices 2000=100
300
Corn US
250 Wheat US
200 Crude Oil
150
100
50
0
Mar2004
May2004
Mar2005
Mar2006
Jul2004
May2005
Jul2005
May2006
Jul2006
Nov2004
Nov2005
Nov2006
Jan2004
Jan2005
Jan2006
Jan2007
Sep2004
Sep2005
Sep2006
Data Source: UNCTAD Commodity Price Statistics Database
Joachim von Braun, IFPRI, April 2007

8. How Do Prices Correlate? Are there
Inconsistencies?
• Many markets linked to bioenergy markets  change in
price in one market affect can affect prices in ALL other
marketsa
Soybean
Corn Wheat meal Soybeans Soybean oil
Petroleum US India Germany US Netherlands
Petroleum 1.00
Corn US -0.06 1.00
Wheat India 0.51 -0.23 1.00
Soybean Meal
Germany -0.33 0.68 -0.71 1.00
Soybeans US -0.18 0.80 -0.56 0.82 1.00
Soybean Oil
Netherlands 0.49 0.01 -0.14 -0.02 0.30 1.00
Data Sources: IMF Commodity, UNCTAD Commodity Price Statistics, and USDA Feed Grain Databases; and Indiastat.com
aBullock and Goldsmith, 2006
Joachim von Braun, IFPRI, April 2007

9. Overview
• The emerging biofuel economy, why now?
• What are the impacts on food prices and the
poor?
• What are the tradeoffs between food and fuel?
What are the opportunities, risks, challenges?
• Policy suggestions for creating a pro-poor
sustainable biofuel industry
• Conclusions
Joachim von Braun, IFPRI, April 2007

10. IMPACT Model
• Methodology for analyzing alternative scenarios for
global food demand, supply, and trade
• Covers 36 countries and regions + 16 commodities
• Generates projections for crop area; yield; production;
demand by food, feed, prices; trade etc.
• Base year for simulations: 1997
• Key relevant parameters: price and income elasticities
of demand; price elasticities of area and yield; and
growth rates of population, income, crop area, yield etc.
Joachim von Braun, IFPRI, April 2007

11. Scenarios
• Comparison of 3 scenarios to ‗baseline projections‘
(which have current biofuel demand embedded)
• Scenario 1 - a “conventional” scenario with rapid global
growth in biofuel production under conventional
conversion technologies [3%->20% by 2020]
• Scenario 2 - considers the „softening‟ of demand on food
crops due to “2nd generation” cellulosic technologies
coming online
• Scenario 3 - adds productivity improvements [2-7%] to
show how the impacts can be further mitigated (“2nd
generation plus”)
Source: Msangi et al., 2007
Joachim von Braun, IFPRI, April 2007

12. Price Impacts Across Scenarios
Global Commodity Price Changes in 2020
160
140 135
% difference from baseline
120
100 89
76
80
66
60 54
41 45 49 43 43
40 30 29
21 23
16
20
0
Conventional 2nd Generation 2nd Generation Plus
Cassava Maize Oilseeds Sugarcane Wheat
Source: Msangi et al., 2007
Joachim von Braun, IFPRI, April 2007

13. % Changes in World Feedstock Crop Prices
under Scenarios, Compared with Baseline
Aggressive biofuel
Aggressive biofuel growth scenario
Cellulosic
growth scenario with productivity
biofuel
without technology change as well as
scenario
improvementsa cellulosic
conversion
Feedstock crop 2010 2020 2020 2020
Cassava 33 135 89 54
Maize 20 41 29 23
Oilseeds 26 76 45 43
Sugar beets 7 25 14 10
Sugarcane 26 66 49 43
Wheat 11 30 21 16
aAssumptions based on stated plans for biofuel production in Brazil, China, Europe, India, and the US, and on a scenario of aggressive biofuel growth in Africa
Source: von Braun and Pachauri, 2006
Joachim von Braun, IFPRI, April 2007

14. Implications for Food Security: Caloric
Availability Across Scenarios
2020 Base 2020 Conventional
2020 2nd Generation 2020 2nd Generation Plus
kilocalorie availability/
4000
3500
per cap per day
3000
2500
2000
1500
1000
500
0
S Asia SE E Asia SSA LAC WANA
Asia
Source: Msangi et al., 2007
Joachim von Braun, IFPRI, April 2007

15. Implications for Food Security: Childhood
Malnutrition Across Scenarios
S Asia SE Asia E Asia SSA WANA LAC
180
160
140
million children
120
100
80
60
40
20
0
1997 2020 Base 2020 2020 2nd 2020 2nd
Convent. Gen Gen +
Source: Msangi et al., 2007
Joachim von Braun, IFPRI, April 2007

16. Summarizing...
• BOTTOM LINE: Energy crop production
does not need to lead to food insecurity
• Why?
- Opportunities for small farmers
- BUT, ―food vs. fuel tradeoff‖ exists
Joachim von Braun, IFPRI, April 2007

17. Overview
• The emerging biofuel economy, why now?
• What are the impacts on food prices and the
poor?
• What are the tradeoffs between food and fuel?
What are the opportunities, risks, challenges?
• Policy suggestions for creating a pro-poor
sustainable biofuel industry
• Conclusions
Joachim von Braun, IFPRI, April 2007

18. The Food vs. Fuel Tradeoff
• Low crop productivity innovations and technology
investments
• Reliance on conventional feedstock conversion
technologies
• Increased food prices
- Winners: Farmers with net surplus of food
- Losers: Poor consumers and food deficit farmers
• Limited natural resource base  Possible diversion of
land and water away from production of food + feed
Joachim von Braun, IFPRI, April 2007

19. Opportunities
• Y effect: Energy crops have to potential to provide
farmers with an important source of product
demand  Increased income for small farmers
• Employment effect: Biofuel production is labor
intensive and may be a boon to rural areas with
abundant labor
• Productivity effect:
- crop residues e.g. stalks which can be converted
into ethanol
- Farmers can grow energy crops on degraded
land not suitable for food production
Joachim von Braun, IFPRI, April 2007

20. Challenges
• Biofuels not necessarily better for the
environment
• Can lead to deforestation, loss of
biodiversity, excessive use of fertilizer +
pesticides, land degradation etc.
• May exacerbate socioeconomic inequalities
Joachim von Braun, IFPRI, April 2007

21. Overview
• The emerging biofuel economy, why now?
• What are the impacts on food prices and the
poor?
• What are the tradeoffs between food and fuel?
What are the opportunities, risks, challenges?
• Policy suggestions for creating a pro-poor
sustainable biofuel industry
• Conclusions
Joachim von Braun, IFPRI, April 2007

22. Strategies to Reduce Trade-offs
• Breed crops that yield high amounts of
energy per hectare or unit of water
• Focus on food crops that generate by-
products that can be used for bioenergy
• Grow biomass on marginal rather than
prime agricultural areas
• Invest in technologies that increase
efficiency and productivity in biofuel
production + processing
Joachim von Braun, IFPRI, April 2007

23. Minimizing Risks…
• Improve access to finance + sound policies
for contract security
• Provide access to information on benefits of
biofuel production + infrastructure
• Provide research + extension services
• Design + management of biofuel projects
must be participatory
Joachim von Braun, IFPRI, April 2007

24. Stakeholder Responsibilities
• Public sector
Politics of bioenergy can be complexa
 Can help overcome high initial costs +
vested interests - ag and industry
lobbyists
Trade + regulatory systems
 Reduce trade distortions
aBullock and Goldsmith, 2006
Joachim von Braun, IFPRI, April 2007

25. Stakeholder Responsibilities
Enhance market incentives to realize
environmental + social benefits
 E.g. develop and promote markets for
carbon payments
 What is the role of CO2 trading?
 partly complementary
 partly competitive
Joachim von Braun, IFPRI, April 2007

26. Stakeholder Responsibilities
• Research
- Public/Private partnerships (e.g. appropriate
scales for biomass production + processing)
• Private Sector
- More long-term investments + commitments
Joachim von Braun, IFPRI, April 2007

27. Conclusions
• Impacts of global biofuel development and growth
on the poor can be both positive and negative –
needs careful assessment
• Not necessarily a ‗crowding-out‘ effect – there‘s
room for complementarities and synergy- in R&D
• Rural agricultural development and socioeconomic
growth can go hand-in-hand with enhancement of
bioenergy production capacity
• Current growth in biofuels is dependent on supply
and demand policies—subsidy requirements might
be large if demand increases rapidly
Source: Msangi et al., 2007
Joachim von Braun, IFPRI, April 2007