How Biofuel Policies Ushered in the New Era of High and Volatile Grain and Oilseed Prices

Abstract

So far, we have emphasized the importance of the crop-biofuel-energy-crude oil price links, and the resulting two states of nature where corn prices can go no lower than when locked onto crude oil prices through ethanol and gasoline prices, and with tax credits.¹ To illustrate the importance of price links and how quantity (sectoral supply/demand) shocks may not be the principal driving force in explaining food commodity price levels, consider Figure 1.1. Production of biofuels accelerated in mid-2000s and has now leveled off. Many commentators use that fact along with the pronounced volatility in grain prices in the meantime as a proof that biofuels are not the leading cause of high prices (e.g., Hamelinck 2013).