Impacts: At a Glance

Ultimately, the question that pertains to the interests of policymakers, investors, farmers and other stakeholders is what the impacts of biofuels are and will be in the future. Below are brief answers from our study based on economic modeling efforts, with the paper linked for further detail. Previous sections explain methods for modeling as well as motivations for understanding the effects of biofuels, in the larger global context.

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What specific types of impacts does this study focus on?

Goals of this study include objectively assessing the full spectrum of market and societal values of biofuel development in the Greater Mekong Subregion (GMS), for example, forgone food and other agricultural output, impacts on environmental services, and overall improvements in well-being of the rural poor. A proper economic analysis is necessary to weigh the up-front social costs and benefits of biofuels and to decide when, where, and how to embark on a biofuel program. Economic analysis also may be a valuable tool in reshaping planned or existing programs to maximize their efficiency and their net benefits to society. Key questions addressed include: How will the rise in demand for biofuels affect food prices, agricultural production, and trade in the GMS and the rest of world? What are the implications for national food security and land uses? The geographic locations considered are in the GMS, which covers five countries (Cambodia, Lao PDR, Myanmar, Thailand, and Vietnam) and two provinces (Yunnan and Guangxi provinces) of China. This study is limited to the five countries and excludes the two provinces of China.

How are global agricultural prices, production, and trade affected by biofuel development?

Based on a modified multi-country, multi-sector computable general equilibrium model, this study reveals that global biofuel development will significantly increase agricultural prices and production and change trade in agricultural commodities in GMS and the rest of the world.

Biofuel development in the US, EU, and Brazil will have a remarkable impact on world food prices. The price of all agricultural commodities will increase with much variation. Compared with the reference, the world average export price of maize, soybean, other oilseeds, and sugar will rise by 17.7%, 13.6%, 27.6% and 11.3%, respectively, in 2020. There will be significant increases among the prices of commodities that have high mobility of land usage by feedstock crops and are highly dependent on the world market to satisfy domestic demand in the GMS.

The impacts of biofuel development in GMS on the world price of agricultural commodities, in contrast, are quite small with the exception of the change in world prices of cassava and sugar. There are two reasons for this: 1) Policy-mandated target biofuel production volumes in the GMS nations are much less than those of the US, EU, and Brazil. 2) Feedstock used for ethanol production will come mainly from cassava, sugar and other coarse grains (e.g. sweet sorghum). Cassava is the dominant feedstock, and primarily used domestically, with limited international trade.

World agricultural production will change significantly as global feedstock crop production increases, at the expense of other agricultural commodities. Rising production occurs in the US, EU, and Brazil, as well in regions without biofuel expansion (e.g., China and the other 5 GMS countries). Similar to the effects on world price, the impacts of biofuel development on world agricultural supplies in the GMS are very limited and only concentrated to those feedstock crops used in GMS countries.

How are GMS agricultural prices, production, and trade affected by biofuel development?

Biofuel in the GMS will have little impacts on global prices, but will have significant effects on domestic agricultural production, land use, trade and food security. While biofuel development in the GMS countries will also have some impacts on agricultural price, but the effects are concentrated on several feedstock commodities (mainly cassava and sugarcane). Interestingly, biofuel development of the GMS countries has a much weaker effect on many other agricultural commodities. Four specific commodities (rice, vegetables and fruits, pork and poultry, and processed food), however, are significantly impacted because of two main reasons. First, the low mobility of land-use between feedstock and other crops means that biofuel development in S1 has less effects. Second, these four commodities constitute a large portion (74.9%) of total agricultural production.

Production of feedstock crops, which are used as feedstock in the US, EU, and Brazil, will increase in GMS countries. Production of cassava and sugar rise remarkably by 48.3%; and naturally, the output of other agricultural commodities will decline slightly. However, production of fiber and other crops (mainly horticultural commodities, coffee, etc.) rises as well. This is due to the world supply drop of these crops (due to biofuel feedstock crop production), which increases demand for domestic supply and domestic production.

Biofuel development in the rest of the world will increase the trade surplus in the GMS. Interestingly, projections show that the trade status of feedstock crops used in the GMS results in the opposite effect. As domestic prices of cassava and sugarcane rise, import of these two commodities will rise, with export decreasing significantly.

What role do international oil prices and the degree of substitution between biofuel and gasoline?

The results also show that the extent of impacts from biofuel is highly dependent on international oil prices and the degree of substitution between biofuel and gasoline. Biofuel (biodiesel and ethanol) production increases significantly more than in simulations that do not include assumptions of higher oil prices and elasticity of substitution between biofuel and gasoline change. World prices of agricultural commodities are also higher if the same assumptions are true. Production of most agricultural commodities changes dramatically. Specifically, feedstock crop production increases significantly, at the expense of other agricultural commodities. Agricultural prices in the GMS will also rise significantly.

What are the implications for policymakers and stakeholders?

The findings of this study have important policy implications for the GMS countries and the rest of the world. Based on simulation results, which accounted for international oil prices and the degree of substitution between biofuel and gasoline, we observe the dependence of the impacts of biofuels on these two factors. If energy prices rise to a certain level (e.g. US$120/barrel in this study) in 2020, and if ethanol becomes increasingly substitutable for gasoline, the only policy that ensures food self-sufficiency is to ban biofuels. Even if any country reduces or eliminates its subsidy and other policies supporting biofuel development, those decisions would bear little impact.

In any case, biofuel is good news for agricultural producers who own land and sell crops in the market. With rising agricultural prices and corresponding increases in land prices and agricultural wages, farmers’ incomes and their ability to buy food will improve. In this regard, biofuels may improve their household food security.

Of course, biofuel is bad news to consumers, particularly the poor who are net food purchasers. It is inevitable that many consumers will get hurt. Developing a social support system may be necessary to support for vulnerable citizens. On the other hand, there will be more responses from both government and the private sector in agricultural investment. Increasing investment in agriculture induced by higher food prices will raise agricultural productivity, which will partly offset the rise in agricultural prices from the expansion of the biofuel industry.

Global Impact Pathways

The first phase of this project utilizes a modeling framework to understand the global impact pathways between biofuel production and their ultimate effects, particularly whether small producers and vulnerable consumers in poor countries such as South Asia and Sub-Saharan Africa will be hurt or benefit. The three sections below contain short descriptions and outputs from this part of the project.

Modeling Approach

Brief explanations about the modeling work in this project, including basics about: why economic modeling, how projections are being made, what the scenarios are, which countries are considered and why, what makes our modeling approach unique, and challenges.

Findings and Outputs

Modeling Forums: Project meetings and forums held are documented here through agendas, meeting notes, participants and attendees, as well as Powerpoint presentations.

Publications/Working Papers

Presentations: Powerpoint presentations at conferences and other events posted with written narratives.

Impacts at a Glance

Projection results and implications explained, answering questions such as: What are the impacts of expanded biofuel use on maize prices? What additional effects does the combination of high global oil prices and the emergence of biofuels have?