06/06/2010 04:44 pm ET Updated May 25, 2011

Biofuels and Food Prices: An Update

When U.S. food price inflation hit 5.5 percent in 2008, a lot of people pointed to growth in biofuel production as the culprit. A lot has happened in the last two years, so it may be a good time to revisit old arguments in the light of recent experience.

Between 2005 and 2008, U.S. ethanol production increased from less than 4 billion gallons to more than 9 billion gallons. As more of the nation's grain was used to produce ethanol, the price of corn more than doubled, from $2.00 per bushel for the crop harvested in 2005 to $4.20 for the crop harvested just two years later. Prices for other crops also increased, and food price inflation hit the highest level in decades.

The basic argument of biofuel critics was, therefore, pretty simple. More biofuel production meant less grain was available to feed people and livestock, and the result was higher food prices. Because the biofuel industry benefits from a variety of subsidies and regulations, critics argued that government policies were to blame.

Biofuel supporters argued that other factors explained the sharp run-up in food prices in 2007 and 2008. Poor crops in other countries, changes in diets caused by economic growth in Asia, devaluation of the dollar, higher oil prices and market speculation were all cited as the real causes of higher food prices.

In my book, The Economics of Food: How Feeding and Fueling the Planet Affects Food Prices, I argue that both sides make valid points, but overstate their cases. Growth in biofuel production did contribute to higher food prices, but so did a wide range of other factors.

Food price inflation slowed dramatically in 2009, to just 1.8 percent, and it currently appears that 2010 food inflation will only be slightly higher. What happened? And what does it imply for the debate about the effect of biofuels on food prices?

In short, almost everything that pushed food prices sharply higher from 2005 to 2008 reversed course to result in slower food price inflation in 2009. The global recession resulted in weaker demand for meat, dairy products, and many other types of food. The dollar strengthened, oil prices fell, more favorable weather resulted in record world grain crops, and many speculators abandoned commodity markets.

The collapse in oil prices in the fall of 2008 reduced demand for biofuels, and the resulting decline in prices for ethanol and biodiesel caused many biofuel plants to shut down as a wave of bankruptcies hit the industry. However, as some plants were shutting down, construction was completed on other plants started during the biofuel boom. Most of the plants that shut down eventually reopened, often under new ownership.

As a result, ethanol production has continued to grow, to more than 10 billion gallons in 2009 and even more this year. Yet corn prices are sharply lower today than they were in the summer of 2008. Clearly, grain prices are affected by a lot more than just biofuel production.

In my last blog posting, I argued that domestic farm subsidies reduce food prices, but that the effect is probably fairly small. It is hard for $20 billion of farm subsidies to have too large of an impact when Americans spend more than $1 trillion on food each year.

A case can certainly be made that biofuel policies do more to raise food prices than farm policies do to reduce them. For example, current farm program subsidies only provide about 10 percent of corn producer income, but biofuel production uses about a third of the corn crop. Removing all current government supports would sharply reduce biofuel production, which would result in lower prices for corn and other crops.

Again, though, it is important not to exaggerate the size of the impacts on food prices. Consumer food prices "only" increased by 5.5 percent in 2008 in spite of much more dramatic increases in farm-level prices for corn, wheat, and other crops. The farmer share of the consumer food dollar was only around 19 percent in 2006, according to USDA, so even large changes in farm-level prices only have modest effects on U.S. consumer prices for most foods.

Farm and biofuel policies do have important effects, but it is important to keep them in perspective. Even eliminating current farm and biofuel policies would not change food prices enough to have a big impact on the nation's obesity epidemic. In fact, it could even make it slightly worse, as the current mix of farm and biofuel policies probably does more to raise food prices than it does to lower them.