Journal of Agricultural & FoodIndustrial OrganizationVolume 5 2007 Article 6SPECIAL ISSUE:Explorations in Biofuels Economics, Policy, and HistoryEthanol Expansion in the Food versus FuelDebate: How Will Developing Countries Fare?Amani Elobeid∗Chad Hart†∗Center for Agricultural and Rural Development (CARD), Iowa State University,[email protected]†Center for Agricultural and Rural Development (CARD), Iowa State University,[email protected]2007 The Berkeley Electronic Press. All rights reserved.Ethanol Expansion in the Food versus FuelDebate: How Will Developing Countries Fare?Amani Elobeid and Chad HartAbstractThis paper examines the impact of ethanol expansion in the United States, brought aboutby higher crude oil prices, on agricultural commodity prices. Given the United States’s statureas a major producer and exporter of many agricultural commodities, the resulting increase incommodity prices has spillover effects into the global market. Using the price changes estimatedwithin a multi-commodity, multi-country agricultural modeling system, this paper attempts toshow how an increase in world commodity prices would affect the costs of food baskets aroundthe world and how higher food costs will impact food security, particularly in developing countries.In general, we find that countries where corn is the major food grain experience larger increasesin food basket cost while countries where rice is the major food grain have smaller food basketcost increases. Countries where wheat and/or sorghum are the major food grains fall in between.Consequently, the highest percentage increases are seen in Sub-Saharan Africa and Latin Americawhere food basket costs are estimated to increase by at least 10%. The lowest percentage increasesare seen in Southeast Asia, with cost increases of less than 2.5%.KEYWORDS: agricultural markets, energy, ethanol, food security1. Introduction The dramatic expansion in biofuels in recent years, particularly in the United States and Brazil, has been attributed to a number of economic and environmental factors. High crude oil prices have fueled interest in finding alternative energy sources and reducing dependency on imported oil supplies. Environmental concerns about greenhouse gas emissions have also contributed to the expansion. Additionally, the emergence of biofuels has represented an alternative market for a number of agricultural commodities. This push has been driven primarily by mandates and market incentives (for example, the National Alcohol Program (PROALCOOL) in Brazil, the Energy Policy Act of 2005 in the United States, and the 2003 Renewable Fuels Directive in the European Union). Ethanol is currently the major type of biofuel in the world, and it has been expanding significantly, especially in the United States and Brazil. The two countries account for over 70% of total world production, with the United States producing 5.3 billion gallons and Brazil producing 4.5 billion gallons in 2006 (RFA, 2007). A number of countries, such as China and India, are also taking an increased interest in ethanol as an alternative fuel. Biodiesel, the other major biofuel, has been lagging behind ethanol primarily because of higher feedstock costs. However, it is significant in the European Union and gaining importance in the United States and in South American countries. A number of studies have looked at the impact of biofuels expansion on agricultural markets both at the national and global levels (Elobeid et al., 2007; English et al., 2006; Hill et al., 2006; Secchi and Babcock, 2007; Tokgoz et al., 2007; von Lampe, 2006). These studies have found that, in general, with increased ethanol expansion, the prices of both the agricultural feedstock commodities and their competing crops increase with implications for land allocations, food prices, and the environment. While there is consensus on the impact of the growth in biofuels on the prices of agricultural commodities, there is debate as to whether the net effect on the economy and the environment is positive or negative. Doornbosch and Steenblik (2007), for example, contend that the contributions of biofuels to energy demands are very limited given their adverse effects on food prices and the environment. Nonetheless, there are benefits in terms of increased producer prices and positive income effects, particularly in rural economies (Schmidhuber, 2006). Prior to biofuels, agricultural prices were affected by energy prices mainly through their impact on the cost of production by way of input prices such as fertilizers and pesticides. However, higher energy prices now are affecting agricultural output prices directly, as agricultural commodities have become inputs in the production of energy. Schmidhuber (2006) points out that this new relationship means that higher energy prices are creating price floors for 1Elobeid and Hart: Ethanol and Developing CountriesProduced by The Berkeley Electronic Press, 2007agricultural commodities when demand from the energy sector is large and agricultural feedstocks are competitive in the energy market. Energy prices also create price ceilings for agricultural feedstocks depending on how fast the feedstock prices rise relative to energy prices and on their energy equivalents, particularly in the long run. Feedstock costs are a major component in the cost of producing biofuels, so feedstock prices need to remain competitive in the energy markets. This paper examines the impact of ethanol expansion in the United States, brought about by higher crude oil prices, on agricultural commodity prices and how the increase in these prices will affect food prices and global food security. Ethanol is produced mainly from corn in the United States. The United States is a major producer and exporter of not only corn but also other agricultural commodities such as sorghum, soybeans, pork, and broiler meat. U.S. corn accounts for about 40% of global production and roughly 70% of world trade. Thus, an increase in the demand for U.S. corn used in ethanol production would have an impact not only in domestic markets but also in the global arena. With ethanol expanding in the United States, the increase in corn prices will bid away land from other crops such as soybeans and wheat, which will result in an increase in their respective prices. With the continuation of the ethanol expansion in the United States in 2006, U.S. corn prices increased by 60% while world corn prices