The economics of oil, biofuel and food commodities

•We study the effects on the food market of the development of biofuels as a substitute for fossil fuel.•We establish a positive correlation between the food price and the oil price.•The respective paths of the food price and the energy price are derived, as well as the oil-extraction path.•The effects of measures aiming at increasing land productivity are discussed.

We study the effects on the food price of introducing biofuels as a substitute for fossil fuel in the energy market. Energy is supplied by a price-leading oil cartel and a competitive fringe of farmers producing biofuel. Biofuel production shares a finite land resource with food production. A positive relationship results between energy and food prices. We establish that the equilibrium price of food will be growing as long as the oil stock is being depleted, and beyond if demand is growing. An analysis of the effects of the productivity of land use in either the food or the biofuel sectors is carried out. It is shown that, with a highly inelastic demand for food, an increase in the productivity of land in agriculture will decrease the price of food in the short-run, only to increase it in the long-run as the stock of fossil fuel is depleted.