Biofuel-food market interaction: exploring the price link in the European and Brazilian context

Abstract

The last decade has seen a rapid increase in the production and consumption of biofuel at global level. Nowadays, world biofuel markets are dominated by ethanol (79%) and biodiesel (21%). The European Union is the leader in biodiesel production and consumption, while Brazil is the world’s biggest sugar producer and exporter, as well as the world’s largest producer and consumer of sugarcane ethanol as transportation fuel. However, first generation biofuels are questioned due to the possible link with food prices. This study contributes to this debate, investigating the relationship between the price of biofuels and related fuels and agricultural commodities in the European and Brazilian context. The problem has been addressed using a Vector Error Corrections Model. The results show that there are evidences of long-run equilibrium relation among the analyzed price series in both scenarios. In particular, EU biodiesel price is connected with feedstock price; while Brazilian ethanol price is connected to fuel price.