Price transmission between biofuels, fuels, and food costs

Policy Summary

This paper studies price transmission for the biofuel markets and related commodities, which is equivalent to studying price cross-elasticities. The strength of transmission increased remarkably during the food crisis of 2007-8. The challenge for policymakers comes from a clear imbalance in the literatures on biofuels and food prices. This paper’s major finding of consistently different price transmission dynamics over time and market conditions highlights the challenge for policymakers to assess jointly short and long-term effects. Policymakers should also keep in mind that a range of other effects can manifest in the longer term. While short-term sharp price increments may have severe negative food security effects, over the long term they may stimulate agricultural investment, improve farm incomes, and strengthen rural employment. With respect to price-influencing policies, policymakers have to be aware that winners and losers are not only between rich and poor but also among poor, and that policy response to a past price increase may come with a lag, so quick market interventions may be a preferred tool.

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