Keywords

Biofuel, Ethanol, Panela, Sugar, Food Security

Citation Information:

Calderón, D.F.V., Melenje, E.L.S., & Pérez, J.F.B. (2021). Association between the increase in the price of panela and ethanol production from 2000 to 2017 in Valle del Cauca. Journal of Management Information and Decision Sciences, 24(S6), 1-9.

Introduction

Historically, biofuels date back to the late nineteenth century, pioneered by the German engineer Nikolaus Otto who integrated ethanol as fuel in one of his engines. Later, Henry Ford, in 1908, installed an engine that ran on a mixture of ethanol and gasoline in his very well-known Model T. The biggest boom of ethanol developed during the Second World War, when there was little access to oil, and ethanol was used as an alternative.

The impact of ethanol on the increase of food prices is relatively new. Authors such as Rosegrant (2008); Gorter, Drabik & Just (2013); Gorter, et al., (2013) have shown the relationship between the increase of land use for ethanol production and its impact on global food prices. Therefore, this study aims to determine the degree of association between the increase in the price of panela and ethanol production, from 2000 to 2017, in the department of Valle del Cauca. The specific goals to reach the general purpose are, first, to identify the characteristics of ethanol production in Valle del Cauca during 2000–2017, second, to identify the characteristics of panela price behavior in Valle del Cauca for 2000–2017, and finally, to determine the degree of association between the behavior of ethanol and panela prices.

The article comprises four sections presented below: The first one presents the theoretical framework, a bibliographic review of the background of international and national research on the topic of biofuels, ethanol, and food security, as well as the economic theory linked to the research topic. The second section presents the econometric methodology of the Error Correction Model (ECM), the third one compiles the results in relation to the goals set in the research work, and lastly, the fourth section outlines the final conclusions of the article.

Theoretical Framework

The study of biofuels, especially ethanol and their association with food prices, has had little relevance in Colombia because the country’s production is relatively new compared to that in other countries, such as the United States and Brazil, which are the world’s leading producers. International studies conducted by De La Torre Ugarte, et al., (2000); Lazear (2008); Razo, et al., (2007); Zhang, et al., (2010) on the increase in food prices and the link between the increase in the price of panela and ethanol production have shown that ethanol is causing a shift in crops that were historically used for human consumption toward their current use in ethanol production. This generates an increase in food prices for consumers, especially food related to the cultivation of sugarcane and its derivatives. The study conducted by Giraldo, Arango & Martínez (2014) in Colombia has reached the same conclusion regarding the increase in food prices, especially those related to sugarcane.

Regarding the increase in food prices, it is important to analyze the most widely consumed food in poor households in Colombia, such as panela, not only because of its sweetening properties but also because of its high caloric level (Mascietti, 2014). Colombia is the second largest panela producer in the world only after India, which is in the first place. Moreover, Colombia is the world’s leading consumer (Orjuela, Huertas, Figueroa, Kalenatic & Kadena, 2011). as shows in Table 1.

Therefore, households with unsatisfied basic needs consume more panela compared to households with a lower level of unsatisfied basic needs, which prefer to consume refined sugar, as shown in Table 2.

Ethanol is a biofuel obtained from organic raw material. It is considered a renewable fuel due to the use of crops as raw material, ranging from sugars, corn, or beets to any organic product that contains large quantities of sugars. In Colombia, ethanol is produced with first-generation technology, the national development plan 2006–2010 established the guidelines of the key development sector for ethanol production, while Resolution 180687 of 2003 provided that the production must be carried out with biomass as the sole product and it must be with sugarcane, thus completely setting aside the oil industry and prioritizing sugar mills.

Sugarcane is an agro-industrial crop; hence, the raw material for both panela and ethanol. The growing increase in the demand for ethanol because of Law 693 of 2001 and Resolution 90932 of 2013 provides for the increase of ethanol blending with gasoline at 10%. Therefore, this increase has caused the demand for raw material to rival food crops (Orjuela, et al., 2011); consequently, there is an increase in food prices and food security is threatened, as established in the study by von Braun & Torero (2009).

The association of price increase as a feature of the interrelation between the fuel market such as ethanol with food product market such as panela can be seen in relation to the general equilibrium theory of Leon Walras. The increase in the price of panela is the result of increased demand for sugarcane due to the growth of ethanol production, thus generating a shortage of raw material and a new effective demander, such as sugar mills in the market (Granger, 1981), resulting in an increase in the price of panela for consumers.

Methodology

The methodology used to approach the described problem, between the association of the increase in panela prices and ethanol production for the department of Valle del Cauca, relied on the ECM, which has been integrated in different empirical research studies, thus contributing to the statistical analysis proposed by Granger (1981); Engle, et al., (1982) in the time series analysis.

The equilibrium relationship presented in the model is based on cointegration, which is reproduced in a statistical model against the equilibrium relationship (Robert, Engle & Granger, 1987), thus establishing the concept of cointegration by integrating it into the ECM. The model has a wide scope and allows to relate two different points between the analysis of time data: the first one, a statistical approach to time series of the Box–Jenkins method type, which does not consider long-term information but solves the spurious regression problem, and the second one, which considers the econometric approach that presents a model based on economic theory.

Y_t is a scalar variable, which follows a first-order autoregressive process as stated by Obando (2003) in his article:

Where:

Where:

According to the methodology described above, an empirical model is proposed to determine the association between the increase in panela prices and ethanol production for Valle del Cauca, based on the statistical data provided by DANE, which subtracts the panela price from the database used to calculate the consumer price index and ethanol production, downloaded from the statistical database of Asocaña’s website, by selecting the variables described in Table 3.

Table 3 Description Of Independent Variables
Variable		Type of Variable	Measurement Scale
	Dependent Variable
	Panela Price Logarithm	Numeric	Colombian Pesos
	Independent Variables
	Ethanol Production Logarithm	Numeric	Liters
	Sugar Import Logarithm	Numeric	Tons
	Sugar Export Logarithm	Numeric	Tons

Finally, the econometric model proposed to empirically explain the degree of association between panela prices and ethanol production is as follows:

The descriptive statistics of the econometric model variables for ECM are presented in Table 4.