The Impact of Bio-Fuel Production on Food Price in the Unites States

Topics: Supply and demand, Regression analysis, Peak oil Pages: 5 (1563 words) Published: April 8, 2013
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The Impact of Bio-fuel Production on Food Price in the Unites States -- Analysis based on an empirical model

With the raising concern about the food price in the United States, more and more people started to study at the production of biofuel, which is made up by food. Our study aims to test the relationship and significance of increasing biofuel production on food price. We made a hypothesis that the increasing biofuels production is the primary and direct reason for food price inflation in the U.S. Then, based on effective data collected, we tested our hypothesis by running a simple regression analysis. In microeconomics, the best way to solve the price problem in an open market is to study the demand and supply. As show in table 1, we listed the probable factors that may influence the demand and supply of food price and tested their correlation with data range from 1980 to 2010 in the U.S.

Table.1-List of variables
Predictor | Observations| Source|
Food Price (P)| 31| US Census Bureau|
Households Income (I)| 31| US Census Bureau|
Biofuel production (Qb)| 31| Earth Policy Institution on-line| Trade Weighted U.S. Dollar Index (E) | 31| FRED|
Economics growth of China (G)| 31| IMF|
Crude Oil Price (Po)| 31| US Census Bureau|
Wage (W)| 31| US Census Bureau|

We ran a regression analysis twice to determine the relation of each factor to the food price. First, we take all the variables into account and get a rough result. Then, we adjusted the model by dropping off several variables that failed in the first regression and rebuild our formula. The whole calculation is shown in the Appendix. Conclusion

In our research and analysis, the statistic result identifies our previous hypothesis that the relation between biofuel production and food price in the U.S is significantly positive. In other word, as the U.S government has an increasing demand of those raw materials that are used to produce biofuel, the food price has been pushed up. On the other hand, the North American Free Trade Agreement (NAFTA) and the Uruguay Round Agreement on Agriculture (URAA) made tariff on food and agriculture production less than the situation before 1994, which makes the global food price decrease. Our result of analysis also proves this. Trade policy has a significant impact on food price in the United States in the past 30 years. During our research, we found that households’ income in past 30 years also shows an impact on food price to some extent, which proves the supply and demand theory in microeconomics about how income affect production and price of a specific good. Crude Oil price is also a significant variable related to food price in the United States because the P-value is 0.094<α=0.1 The only insignificant variable turned out to be the Trade Weighted U.S. Dollar Index, which should be a related factor according to previous research. Thus, we suppose this inaccuracy to be caused by the small sample size and hope to enhance our database in future study. Finally, when dealing with the China GDP and Labor cost, which were dropped off in the second run, we still believe they have their economic meaning in some way. We guess that the complexity of the composition of China GDP may influence its performance as an independent variable in the model. And the reason to drop the Employment Cost Index is that it can’t directly show the labor cost of food-related production. We may change to other related cost in future analysis.

Appendix
1 The first Regression
The regression equation is:
P = 17.0 + 0.000059 I + 0.00263 Qb - 0.120 E - 0.00321 G + 0.33 Tp - 0.0279 Po + 1.44 W
Table.2-The result of regression 1
Preditor | Coef| SE Coef| T | p|
| | | | |
Constant| 17.00| 25.06| 0.68| 0.504|
Qb| 0.002631| 0.002332| 1.13| 0.271|
W| 1.4368| 0.1717| 8.37| 0.000|
E| -0.12017| 0.04768| -2.52 | 0.019|
G| -0.003210| 0.005722|...
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