1. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Impacts of future energy price and biofuel production scenarios on international crop prices, production and trade *Gerald Schwarz *Harald von Witzke **Steffen Noleppa “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida, US * Humboldt University Berlin, Department for Agricultural Economics and Social Sciences, Chair of International Agricultural Trade and Development **agripol – network for policy advice GbR

2. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Outline  Background  Objectives  Review of determinants of world market prices: Energy price and biofuel production  Modelling framework  World market price changes  Impacts on crop production and trade  Conclusions

3. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Background  Trend of increasing agricultural commodity prices  Reversal of the trend of declining agricultural commodity prices  Many studies on the different factors contributing to the increase in food prices emphasise:  Critical role of levels of energy prices and biofuel production for future agricultural market prices  Increase in real international food and agricultural commodity prices in the decades to come  To what extent will future levels of energy prices and biofuel production contribute to higher prices and affect markets?

4. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Objectives  Main aim is to analyse the impacts of different scenarios of increasing energy costs and biofuel production on international agricultural market prices and production in key trade regions.  To review the reasons for higher prices in the next few decades than in the past, with an emphasis on the roles of the price of energy and the extent of biofuel production  To quantify the impacts of the determinants of world market prices of selected agricultural commodities for 2016/18 and the potential impacts on supply and trade quantities in main agricultural regions  At this stage: focus on key crop markets

5. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Determinants of world market prices (1/4)  Demand determinants  Continuation of population growth (higher food demand for grains)  Increase in per capita income in developing and newly industrializing countries leads to higher consumption of dairy, meat, and processed foods  Growing consumption of animal products in developing countries also suggests increase in animal feed demand for crops  Expected increase in world demand for key crop commodities: Source: Own calculations based on FAPRI (2009) Commodity2006 (million tonnes) 2018 (million tonnes) Increase (percent) Wheat74488519 Corn837104625 Soybean27935221 Rapeseed516940 Sunflowers324124

6. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Determinants of world market prices (2/4)  Supply determinants  Land reserves for food production limited:  The best and most productive land already is being farmed  Existing land reserves should not be farmed for environmental reasons (e.g. rain forest)  Required growth in productivity difficult to achieve:  Productive potential of existing methods increasingly captured  Lack of agricultural research investment  Water is becoming ever scarcer and more expensive  Expected growth of food supply will be smaller than the rise in demand  However, so far the discussion ignores the impact of rising energy prices

7. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Determinants of world market prices (3/4)  Energy prices  Agricultural production is rather energy intensive  Close relationship between agricultural commodity and energy prices: Source: CRB (2009)  Higher energy prices lead to higher cost of production and thus reduced supply  Food prices will increase with higher energy prices  Different projections of future level of oil price: EC (2008): US$ 102 per barrel in 2017 OECD (2009): US$ 70 in 2018

8. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Determinants of world market prices (4/4)  Energy prices and biofuel production  Higher energy prices are an incentive for increased biofuel production  Increased biofuel production on land suitable for food production reduces the availability of food  But only a small share of produced bioenergy is liquid fuel based on grains, sugar cane, oilseeds and other crops  In summary:  Demand growth > supply growth => higher agricultural commodity prices  Specific role of energy prices and biofuel production for food prices:  Impacts of different energy price scenarios?  Impacts of different biofuel production scenarios?

9. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Modelling framework (1/2)  Model structure  Multi-market, multi-region partial equilibrium model  Static net trade model based on VORSIM/SWOPSIM modelling framework  Cobb-Douglas supply and demand function with separate representation of food and feed demand functions and bioenergy demand (exogenous)  Elasticities are based on SWOPSIM and the FAPRI elasticity database and calibrated for homogeneity and symmetry  Multiplicative shift factors in supply and demand functions capturing regional differences and differences between food, feed and bioenergy demand shifts  Currently coverage of 10 regions including US, Canada, EU, Germany, France, Brazil, Australia, China, CIS, and RoW  Work in progress - model extensions on-going

10. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Modelling framework (2/2)  Scenarios and shift factors  Base period: 2004 – 2008  Scenario 2016/18: Matrix of implemented shift factors (example EU, in percent): ShiftsSupplyDemand Commodity Area Productivity Energy cost Populatio n growth Feed demand Bioenerg y Wheat-39-7811380 Corn-38-82410250 Other grains -38-52411300 Oilseeds-324-61611220 Sugar-35-9 1200 Source: Own calculations based on OECD and FAO (2008) Alternative scenarios: 1.With higher energy cost shift factor 2.Without energy cost shift factor 3.Without bioenergy demand shift factor

11. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida World market price changes (1/4)  World market price projections for 2016/18 – new base scenario for 2016/18 all shift factors included  Prices increase between 35 – 80 percent Source: Own calculations MarketPrices in base period (US$/mt) 2016/18 (US$/mt) base scenario Change (in percent) Peak prices in 2007/2008 (US$/mt) Wheat22530435 340 Corn15227480 218 Oilseeds37454646 583 Other grains 12718546 190 Sugar28341547 301

12. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida World market price changes (2/4)  World market price projections for 2016/18 – scenario with higher energy price (as project in OECD outlook 2008)  Higher energy prices lead to significantly higher price increases, e.g. 91 instead of 35 percent for wheat Source: Own calculations MarketPrices in base period (US$/mt) 2016/18 base scenario (in percent) 2016/18 with high energy price (in percent) Wheat2253591 Corn15280163 Oilseeds3744697 Other grain1274685 Sugar2834798

13. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida World market price changes (3/4) World market price projections for 2016/18 – scenario with constant energy price (no energy cost shift) Source: Own calculations  World market price changes are significantly smaller  Large variability in price effect depending on energy price development, in particular on wheat and corn markets Market Prices in base period (US$/mt) 2016/18 base scenario (in percent) 2016/18 with high energy price (in percent) 2016/18 with base period energy price (in percent) Wheat225359116 Corn1528016352 Oilseeds374469728 Other grain127468531 Sugar283479827

14. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida World market price changes (4/4) World market price projections for 2016/18 – scenario with constant biofuel production (no bioenergy demand shift) Source: Own calculations Market Prices in base period (US$/mt) 2016/18 base scenario (in percent) 2016/18 with high energy price (in percent) 2016/18 with base period energy price (in percent) 2016/18 with base period biofuel production (in percent) Wheat22535911627 Corn152801635240 Oilseeds37446972832 Other grain12746853132 Sugar 283 47982728  Reduction of price effects, but to a smaller extent than under a constant energy price – except on the corn market  Energy price major determinant of future price development

15. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Impacts on crop production (1/3)  EU – change in crop production (in percent) Source: Own calculations  Despite the increase in energy cost in the 2016/18 base scenario, crop production increases (except sugar)  Higher energy cost lead to a decline in the supply of wheat and sugar  The import role of the energy price is particular evident on the EU sugar market  The importance of biofuels is reflected in changes in corn (and oilseeds) production – reflecting the large drop in price compared to the 2016/18 base scenario Market2016/18 base scenario 2016/18 with high energy price 2016/18 with base period energy price 2016/18 with base period biofuel production Wheat4.19-3,167.704.22 Corn24.2917,0027.319.07 Oilseeds43.4140,8243.2335.35 Other grains12.836,4913.8210.31 Sugar-2.39-16,615.34-4.06 Source: Own calculations

16. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Impacts on crop production (2/3)  US – change in crop production (in percent)  Despite the increase energy cost in the 2016/18 base scenario, crop production increases (in particular sugar, corn and oilseeds)  Higher energy prices lead to smaller increases and a decline in wheat supply  Corn, wheat and sugar production particular affected by variations in the energy price  The importance of biofuels is reflected in changes in corn and sugar production  Shift of production towards wheat and other grains (from energy to food) Source: Own calculations Market2016/18 base scenario 2016/18 with high energy price 2016/18 with base period energy price 2016/18 with base period biofuel production Wheat 0.65-7,714.574.25 Corn 29.9622,5133.9517.14 Oilseeds 25.4723,7026.5322.53 Other grains 18.0214,4420.0720.31 Sugar 30.3521,9833.5022.23

17. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Impacts on crop production (3/3)  Brazil – change in crop production (in percent) Source: Own calculations  Highest relative increase in corn and sugar production of all covered regions  The impact of changes in the energy price is particular high for wheat and other grains (markets without substantial bioenergy demand)  The importance of biofuels is reflected in changes in corn and sugar production  Overall, projected world production increases of 10 – 30 percent within the range of OECD projections Source: Own calculations Market2016/18 base scenario 2016/18 with high energy price 2016/18 with base period energy price 2016/18 with base period biofuel production Wheat 7.17-0,6611.247.27 Corn 38.6235,0840.8323.93 Oilseeds 28.6324,3630.5524.62 Other grains 6.92-5,2713.129.68 Sugar 32.4029,0433.3223.74

18. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Impacts on net trade (1/2)  Net trade effects on the corn market  High market price with higher energy prices improve net trade of EU corn  The US corn market becomes an importing market under all three scenarios assuming an increase in biofuel production; small changes depending on energy price  Higher energy cost have a small positive effect on net trade of Brazilian corn Source: Own calculations

19. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Impacts on net trade (2/2) Net trade effects on the oilseeds market Source: Own calculations  Biofuels main factor affecting net trade in Germany, less important at EU level  Net trade in the US benefits from higher market prices and higher food and feed demand on the Chinese oilseeds market

20. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Conclusions (1/2)  In summary:  Results suggest that price of major agricultural crops will increase between 35 and 80 percent until 2016/18  Price of energy will be the single most important determinant of the price of food in the decades to come  Total production increases vary between 10 percent for wheat and 30 percent for oilseeds  Variations in energy cost have the biggest impact on sugar production in the EU and China, corn production in the North America and CIS, other grains production in Australia and Brazil,  Increasing bioenergy demand has generally the biggest impact on corn production followed by sugar and oilseeds  Trade impacts are mixed for the EU and US: Positive trade impacts for oilseeds, other grains and sugar markets in both regions and EU corn  Biofuel production is the main determinant for changes in net trade on the US corn, German oilseeds and Brazilian sugar market

21. “The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida Conclusions (2/2)  Results highlight need for productivity growth:  Large projected production increases only possible through higher productivity growth, as land reserves are limited  Large increases in oilseeds and corn production in the EU depend on the availability of additional land. Increasing competition with non-agricultural land uses such as nature conservation and housing likely to reduce available land.  Even higher pressure on food production in developing countries  But...  Assumptions on energy costs and oil price fluctuations  Assumptions of future biofuel production and dependency on policy developments  Impact of elasticities