Why is this?

I see it here being flogged bit by a biofuels interest group, but I’m not sure I’m going to take their word for anything.

So what does this mean? We see that oil at $25 leads to food at 90 while oil at $100 leads to food at 180. Consider the simplest formula

food = G + H * oil

Then G = 60 (fixed cost) and H = 1.2 (units per dollar in oil price)

So at the baseline, non-energy costs of production are 2/3 of the total while at the peak they are 1/3. Any further increases will track the fuel prices even more closely.

The breakdown of the food index is here.

The question I have is why there is so much energy in food. The claim that it is about shipping is very unconvincing. This volatility must be a severe stress for poorer countries where food dominates the household budget. How hard would it be to break this link? If fuel continues to rise, can some of the energy be subsituted by human labor?

How much of this energy link traces to the manufacture of artificial fertilizer? Presumably that is not shown, because the fertilizer is made using a natural-gas based process, and gas prices have not risen. But that means an even bigger slice of the cost of food is just fossil fuel, right?

Can we feed the world without artificial fertilizer?

Can we feed the world without carbon emissions?


21 thoughts on “Why is this?

  1. James Annan says:

    No, you've got it the wrong way round. Expensive food leads to expensive oil, because people replace manual labour with machines:-)but http://xkcd.com/552/

  2. Greg says:

    Well, it's probably insufficient to explain the correlation, but higher oil prices lead to diversion of food crops to biofuel production.BTW, the answers to the last two questions in your post are "no" and "no". It'll be ugly.

  3. Dan Olner says:

    You'd also have to consider the role that speculation played in both food and oil. E.g. see this.So while, yes, it's important to think about how food and oil actually connect – you know, in reality – it's very hard to make any definite statements about the fundamentals until someone has properly worked out the role of the financial sector. That seeming correlation – in this particular historical case – could be pretty much all speculation-related. (Were both oil and food prices a flight to quality? Seems not – oil price highs pre-dated the financial crisis…) That's, of course, terrifying: that a bunch of traders should be able to have such a massive global impact just doesn't seem like something that could happen in this universe. But then, neither does several EU countries signing up for massive austerity packages as a direct consequence of the same financial system.

  4. Andrew says:

    Actually, it's very worrying, because it suggests that the prices are as much to do with speculation and the flood of cash/credit into commodities as anything as mundane as supply and demand.Although it also goes that if there was a big excess of supply, this kind of bubble would be harder to support.

  5. Dan Olner says:

    Was just reading this about Glencore – hadn't heard of them until their recent flotation. Note how much of various food commodity markets they're trading in. Links also to this story on Barclays. A quote:"While a range of factors, from climate change to demand for biofuels, have contributed to food price rises, financial speculation in agricultural commodity derivatives is believed by many, including the FAO, to have magnified volatility. Others, including the banks and the OECD, argue speculation is not a significant factor."The graph MT shows here: it suggests to me speculation must have had a large role. There's no way the fundamentals (e.g. shifts in underyling production capital, changes in subsidies for agri diesel) could have changed that quickly…?

  6. Arnaud says:

    Hang on, some commenters don't quite get the point of the article, I think. The point to me was MT worrying (absolutely rightly of course) whether food price and oil price were causally linked and to what extent.This is a slightly separate question from whether the price jumps in those two trading items were due to speculation or to external factors (like, uh, climate change maybe?). To answer the second question you could overlay something like the Dow Jones or NASDAQ or whichever index is most relevant to the global casino.But re. the first question, I assume, MT, you're being rethorically candid here. You -must- know the quote "Modern agriculture is the use of land to convert petroleum into food". Fertilisers I don't really know, shipping probably not that much (although it is present), but instead think of all the machinery involved in producing food: Various guises of tractors & working machines, water dispensers, helicopters & planes in the larger US systems, not to mention the heating/lighting energy for greenhouse farming (actual greenhouse here). I myself live in the Netherlands in an area with intensive farming very present, and everytime I see it I mentally add the GHG feast this must be, all these huge flat fields with automatic water & harvesters, and enough lamps to light up the whole country running night and day. Huge carbon footprint.So, can we feed the world without artificial fertiliser? Probably yes, as demonstrated by the Organic/Biodynamic et al movement, providing the diet changes (less meat, less waste, etc…)Can we feed the world without carbon emissions? Mhhh… Either we find a way of powering machines with carbon-clean energy (so back to the energy debate), or we make agriculture more labor-intensive again. Pro of that: More work for a loooot of people. Con: Return to the 19th 18th centuty. In both cases of course food will get more expensive. I wouldn't say No, but I would say it's tricky. Of course that's before we've even thought about considering lower yields & co because of climate change.Ah damn, it's Friday, can you not give us a break from the gloom at the weekend?

  7. Joel says:

    The "green revolution" in the middle of the last century involved the heavy industrialisation of farming, increasing productivity but with massive increases in energy use. This means that the fuel is a huge input into food – well beyond just for transportation.The canonical paper on it appears to be Energy Use in the United States Food System, which documents these increases across the food sector – on farms, in processing, in refridgeration and cooking. Unfortunately, I agree with other commenters that the answers are no, and no, at least in the relatively short term. We can afford some carbon emissions (at least, if we get ourselves some breathing room we can), so I think it mostly means we need to cut down dramatically on non-agricultural emissions while we figure out how to change those answers.

  8. Dan Olner says:

    "Can we feed the world without artificial fertilizer?"http://www.agassessment.org/Guardian reports on it here. Yes, we can. Production isn't the main problem anyway, access is. Books like 'eating fossil fuels' make a lot of good points, but arguments on this tend to end up very black and white. No-one's disputing the fuel-food production connection, but it's far too easy to just say "we're eating fossil fuels" and stop thinking. E.g. can carbon-neutral, well-managed artificial fertilisation play a role? Or, given that we've been genetically modifying plants for thousands of years, is GM the problem or is control, patenting and centralisation the problem? Etc.

  9. Belette says:

    Forget the speculation, it is nonsense. Have you considered that food and oil are both wanted by growing economies? Neither causes the other (correlation does not imply causation, as you know).

  10. Belette says:

    …as James said 🙂

  11. Dan Olner says:

    Just in via triplecrisis: Primer on speculation in agri commodity markets. Heap of reading there I don't have time for, thought someone else might! Also of interest via Triplecrisis is a piece by Brad DeLong which goes a little way to underlining why there's still some way to go to understand all this.

  12. Belette says:

    Also, "early warning" is worth a read. e.g. http://earlywarn.blogspot.com/2011/03/long-term-crop%5Bblogger ate my comment :-(]

  13. Dan Olner says:

    What's with the black and white? It doesn't need to be "speculation or fundamentals", the two can co-exist. Demand outstripping supply for inelastic goods = volatility. Here's cost of energy on all that and climate crock with some good stuff on climate effects.

  14. Layzej says:

    This is at least in some part due to the value of the US dollar. It was weak in 2007 and it is weak now. The price of everything goes up when the value of the dollar goes down.Compare the food/oil graph with the US$/CDN$ graph here:http://www.wolframalpha.com/input/?i=canadian+dollar+vs+us+dollar(you will have to select 10 years from the dropdown as it defaults to 6 months) There is a striking similarity

  15. steven says:

    MT, I don't know if this will help, but recently I did some work for a NPO looking at the cost to raise various crops. I'll just use one example.The costs where dominated initially by the preparation of the field. Fertilizers, fuel costs for machines, initial seeding. When the field reached production, the costs were dominated by the labor costs and the fuel costs to run the machinery, fertilzers and weed control. etc. I was explore whether a farm could grow the fuel required to be self sustaining. That might be an interesting analysis.. somebody has to have done that.

  16. susan says:

    Corn biofuels were a terrible idea. Years ago Suroweicki (New Yorker) mentioned the choice was political:http://www.newyorker.com/archive/2006/11/27/061127ta_talk_surowiecki"Unfortunately, the ethanol produced in the U.S. comes from a less-than-ideal source: corn. Corn ethanol’s “net energy balance”—the amount of energy it yields in proportion to how much energy goes into its production—is significantly lower than that of other alternatives, and modern corn farming isn’t easy on the land. By contrast, ethanol distilled from sugarcane is much cheaper to produce and generates far more energy per unit of input—eight times more, by most estimates—than corn does…."What’s stopping the U.S. from doing the same? In a word, politics. The favors granted to the sugar industry keep the price of domestic sugar so high that it’s not cost-effective to use it for ethanol. And the tariffs and quotas for imported sugar mean that no one can afford to import foreign sugar and turn it into ethanol, the way that oil refiners import crude from the Middle East to make gasoline. Americans now import eighty per cent less sugar than they did thirty years ago. So the prospects for a domestic-sugar ethanol industry are dim at best.""Our current policy is absurd even by Washington standards: Congress is paying billions in subsidies to get us to use more ethanol, while keeping in place tariffs and quotas that guarantee that we’ll use less. And while most of the time tariffs just mean higher prices and reduced competition, in the case of ethanol the negative effects are considerably greater, leaving us saddled with an inferior and less energy-efficient technology and as dependent as ever on oil-producing countries. Because of the ethanol tariffs, we’re imposing taxes on fuel from countries that are friendly to the U.S., but no tax at all on fuel from countries that are among our most vehement opponents. Congressmen justify the barriers to foreign ethanol with talk of “energy security.” But how is the U.S. more secure when it has to import oil from Venezuela rather than ethanol from Brazil? These tariffs are bad economic policy, bad energy policy, and bad foreign policy. Talk about your Domino effect."more things change, more they stay the same.

  17. Holly Stick says:

    Oil as slave labour, but it canot last; and Ivan Illich:http://thetyee.ca/Opinion/2011/05/05/EnergySlaves/Climate change is causing lower crop yields:http://www.scientificamerican.com/article.cfm?id=climate-change-impacts-staple-crop-yieldsDroughts in China, Texas… there's a heap of trouble coming. Maybe speculation is affecting food prices, and maybe people see the need to stock up.

  18. Could check Granger causality for the two time series.

  19. What James said. However, you should take into account that in the early 2000's speculative money was allowed into commodities markets. How do you explain the rather rapid decline on oil prices over the last few days while the supply/demand equation remains the same?

  20. EliRabett says:

    Modern agriculture is the practice of turning oil into food.Many learned papers on same.

  21. Jim Bouldin says:

    The answer to your last two questions are YES we can, and YES we can. And because eventually we will *have* to, due to fuel shortages/prices, that means we will.This is a case of a whole bunch of processes, most +/- driven by fossil fuel use, adding up. These include the costs of tilling, planting, weed and herbivore control, water pumping under irrigation, harvesting, storage, and transport. Tillage alone requires huge amounts of fuel, as does water pumping in many places. I don't know why you would think transport's not important–it is. Then add to this the enormous amount of processing involved in much modern food–milling, mixing, cooking/fermenting, packaging etc etc. It all requires energy.Then add in the enormous inefficiencies inherent in converting plant to animal biomass, and the world-wide demand for an enormous amount of meat in the diet.And there you go.There are solutions to ALL of these problems. Try having a rational discussion about what society needs to do to make them happen however.

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