The Ethanol Hunger

America’s biofuels policies inevitably lead to larger price responses to supply shocks in the short run. In the long run, however, the higher prices that result could become an engine of economic development in the world’s poor rural regions.

WEST LAFAYETTE, INDIANA – Food prices have in many cases surpassed the peak levels reached in July 2008. At that time, food-price increases were attributed to growing global demand for food commodities, a major decline in the value of the US dollar, crop failures in some parts of the world, and biofuels. But what is driving the surge in prices today?

I believe that the key factors now are somewhat different from those that drove up food prices in 2008. Growth in global demand for food and feed commodities is still a major part of the story, as are biofuels. But the short- and long-term implications are quite different.

As developing countries become better off, one of the first things that happens is so-called “dietary transition.” With more income at their disposal, people begin to consume more of their food basket in the form of animal products. Producing these animal products requires significantly more agricultural resources than a predominantly plant-based diet. So, as incomes grow, demand for food products grows even faster. Both population growth and dietary transition contribute to faster demand growth and higher food prices.

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