9. Demand Behavior and Commodity Price Volatility Under Evolving Biofuel Markets and Policies

Rising petroleum prices, growing incomes in developing nations, and changes in energy policy around the world are having a significant effect on agricultural markets as biofuels begin to play a more substantial role in meeting the world’s energy needs. Some see biofuels as a means to reduce carbon emissions, increase energy independence, and raise farm income. Others note that the new demand for commodities to produce biofuels can lead to higher food prices, potentially undermining food security, and bring about unintended environmental consequences from expanding crop acreage that may result in greater carbon emissions. While there are a large number of studies that examine the influence of biofuels and biofuel policy on the prices of agricultural commodities, one poorly understood impact of greater biofuel production is how these changes have affected commodity price volatility. Price volatility is important for food security, farm income, policy formation, and investment behavior. We examine how greater biofuel production, whether motivated by policy or market prices, might change commodity price volatility in the future.