Prof. Harry de Gorter, applied economics and management, spoke to about 50 students and community members about the correlation between prices of agricultural commodities and biofuel in the most recent of Mann Library’s Chat in the Stacks book talks Thursday.
At the talk, de Gorter discussed his new book The Economics of Biofuel Policies, which offers a new explanation for the recent rise of agriculture commodities. He said the book discusses the rising price of goods like corn and soybeans, and attributes the changes to increased fuel prices.
De Gorter also said the specific time period these crop prices started to increase can be pinpointed. In 2008, in what The Economist described as a silent tsunami — the prices skyrocketed. The world was not ready for the price increase, and did not have the policies to anticipate it, according to de Gorter.
“What we argue in the book was that there was an earthquake that was not heard around the world and this sparked the increase in our prices, a boom, a boom, a boom, and no bust,” de Gorter said.
Prices typically rise and drop in a continuous cycle, de Gorter explained. However, in the past couple years, the prices of agricultural commodities have risen, but there has been no subsequent fall. He said real corn prices are 75 percent higher in 2014 than 2005, while wheat is 40 percent higher and rice is 30 percent higher.
De Gorter said the reason for the rise in prices was that crop prices were locked to fuel prices due to certain provisions of biofuel policy. Essentially, biofuel policies limit flexibility in how much agricultural commodity prices can be changed, according to de Gorter.
“One implication is that if corn is dependent on prices of gasoline and ethanol and crude oil, there is little that can be done about the agriculture prices since they are tied to the energy prices,” he said.
In terms of prices, corn is linked to ethanol, ethanol to gasoline and gasoline to crude oil. Furthermore, corn has a “floor price,” which has changed in recent times. When the price of corn rises, it drags up fuel prices with it, according to de Gorter.
“[The floor price] went up and away and now we have even higher prices for gas and ethanol,” de Gorter said.
de Gorter said he and his co-authors developed formulas that predicted the prices of crops like corn or soybeans based on the concurrent prices of biofuels such as ethanol. When de Gorter overlayed the predicted prices a graph at the actual corn prices, the two lines showed overlap. Similarly, the equation for the soybean predicted prices based on oil prices.
De Gorter explained that 80 percent of corn price increases between 2006 and 2010 would have occurred regardless of external factors, due to a new price floor for corn dependent on ethanol prices.
He also said the silent earthquake he described did indeed take place, and emphasized that there is a “new ballgame — price linkages [are] occurring.”
“That is the reality,” de Gorter said. “This is what people dealing with food security … have to have in their hip pocket.”
Corn prices are never going to be as low as they once were because of biofuel theory, de Gorter said. He added that biofuel prices are predicted to be $141 a barrel by 2040.
De Gorter said traditional explanations for the change in the prices of agricultural commodities must be abandoned when analyzing food crop prices, because they are locked to oil prices.
De Gorter said someone had asked him “Are you saying that rice prices went up because of biofuel policy?” and he replied, “I guess I am.”