How biofuels policies affect the level of grains and oilseed prices: Theory, models and evidence

•Biofuel policy created a link between crop and biofuel prices for the first time.•Biofuel price multiplier high as a 1¢/gal increase in ethanol prices increases corn prices by 4¢/bu.•The new counterfactual is a crop price locked onto crude oil prices with the tax credit/exemption.•Otherwise, biofuel and hence crop prices float up and away from crude oil prices.•Policy effects were sudden and developing countries were unable to benefit directly.

This paper synthesizes and critiques three approaches to the analysis of the recent booms in food grains and oilseeds commodity prices: the ‘perfect storm’; statistical time-series models; and models explaining how biofuels linked the fuel and agricultural markets, thus giving rise to a new era of commodity prices. We find that biofuel policies and corn markets were a key instigator of the sharp food commodities price rise in 2006 onwards. We argue that the price increase in the corn market had a spillover effect on the wheat market and caused policy responses and speculation, including hoarding, which caused rice prices to spike. We conclude that because of the sudden increase in commodity prices, the developing countries were unable to benefit from the higher prices even though they have comparative advantage in biofuels production.