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|← Demand and Supply Factors||Speculation in Commodities →|
Starting as a strategy to become energy independent, bio fuel production has been increasing as a significant and efficient environment degradation mitigating measure. However, the development in bio-fuel production has raised questions regarding the competition for arable land and the negative effect of production of food, an issue that dates back before food crisis in 2008. If the consequences of having bio-fuel as a source of energy is the reduction in the food supply, then the new source of energy can not be considered a viable alternative source of fuel. After the price crisis of food commodities in 2008, it was estimated that approximately 30 percent of the prices rise was because of increased bio-fuel production. This argument is based on the assumption; when the prices of crude oil increased, demand for bio-fuel increased, and hence attracting higher prices. The development toward bio-fuel was encouraged by developed economies such as the US, Canada and the European community, which established a connection between food markets and energy production. The increase in demand for the bio-fuel crops supply made food-exporting economies to shift to oil-seeds and corn at the expense of food crops; this reduced the grains supply in the international market. The increased demand for the bio-fuel crops in developed economies made commercial farmers to increase the corn acreage by 23 percent at the expense of food crops. This caused the reduction in soybeans oil production that tightened the global soy oil trade while increasing demand for the Asian palm oil, this pushed both palm oil and soy oil prices to the ceiling (Parliament 2008).
At the beginning of 2007, the US bio-fuel sector was allocated US$ 3 billion, which was four times more than the amount that was allocated to the sector that was working on renewable energy. A research that was conducted by Campeche (2007) indicated that, during the modest food price rise pre-2008, oil and food did not co-integrate. The relationship soared when the energy and food prices increased between 2006 and early 2008. The production statistics indicate that the production increased after the 2005 EU and US legislation. It is speculated that the production increase will continue to increase so long as the interest in bio-fuel remain (Nations 2008).