August 2, 2010

Bank error in ethanol's favor

In the game of Monopoly there's a Community Chest card that lets you collect $200 thanks to a bank error in your favor. In the game of real life that includes a media circus or two, you likely won't see a dime. Or even an "Oops, we screwed up. Sorry."

And that's where we stand with a World Bank report that came out last week that updated a "leaked" and draft version that came out, of course, during the dreamed up food/fuel debate involving corn and ethanol two years ago. That leaked report blamed biofuels for 75 percent of the commodity price spike seen during that time to biofuels. The new report: not so much.

Maybe if the new report was "leaked" and made to sound so much more underhanded the folks who jumped all over the first fake report would do an update and correct themselves. Or at least pay everyone $200 for their error.

For some time, corn and ethanol groups noted that higher corn prices during 2007-08 were driven mostly by outside factors, including investor money, high oil prices and trade embargoes put in place by some importers and exporters of certain commodities. Bad weather in some parts of the globe also played a roll. Interestingly enough, the World Bank cited all those points as factors that played a bigger role than biofuels - with the 300 pound gorilla ignored by everyone two years ago ($140 oil) getting top billing.

[For more on food prices and biofuels, see: CBO: Ethanol had minor impact on food prices, Grocery Gang's efforts don't change the facts and High oil prices add $5.1 billion to cost of food programs.]

Here's a quote from the paper, which you can download from the Renewable Fuels Association:

This paper concludes that a stronger link between energy and non-energy commodity prices is likely to be the dominant influence on developments in commodity, and especially food, markets.

And more, relating to the investor money pouring into commodities at the time:

The paper also argues that the effect of biofuels on food prices has not been as large as originally thought, but that the use of commodities by financial investors (the so-called "financialization of commodities") may have been partly responsible for the 2007/08 spike.

A couple more good points (emphasis added):

Clearly US maize‐based ethanol production, and (to a lesser extent) EU biodiesel production) affected the corresponding market balances and land use in both US maize and EU oilseeds. Yet, worldwide, biofuels account for only about 1.5 percent of the area under grains/oilseeds. This raises serious doubts about claims that biofuels account for a big shift in global demand. Even though widespread perceptions about such a shift played a big role during the recent commodity price boom, it is striking that maize prices hardly moved during the first period of increase in US ethanol production, and oilseed prices dropped when the EU increased impressively its use of biodiesel. On the other hand, prices spiked while ethanol use was slowing down in the US and biodiesel use was stabilizing in the EU.

“In reversing course, this World Bank report reaffirms the marginal role biofuels play in world commodity and food prices,” said Renewable Fuels Association President Bob Dinneen. “The RFA has long noted that ethanol production has continued to increase while corn prices have now returned to normal levels. Volatile oil prices, speculation, and adverse weather conditions all played far more significant roles in driving commodity prices to record and near record prices. This report should silence critics in the food processing industry, the livestock industry, on Capitol Hill, and anywhere else that sought to portray ethanol as the boogeyman. With this phony food and fuel discussion put behind us, perhaps a real conversation about America’s energy future can ensue.”

Rob Vierhout, secretary general of eBio, the European ethanol industry organization, noted that, “We have always said that our industry had been wrongly blamed for the food versus fuel crisis and now we are proven right. This report should finally silence those that have blamed the biofuel producers for food shortages, food price increases and for committing a ‘crime against humanity’. It is about time these people recognize the facts.”

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