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Food and Fuel: What are the Facts?
by Johnathan Eisenthal

Those who claim that biofuels production has caused the rise in food prices have not made their case.

Price hikes in commodities have stretched livestock and food processing company budgets in America and are causing crises in 37 countries in the developing world. But the impact of commodity prices on retail food prices in America has actually been quite limited. The U.S. Bureau of Labor Statistics projects that the food and beverage Consumer Price Index will rise by about a nickel for every dollar the consumer spends this year – only slightly more than over the past 25 years, when the average increase has been three cents per dollar.

“Wheat farmers see just 22 cents from a $2.69 loaf of bread, corn farmers get only 16 cents for every $5.05 box of corn flakes, and ranchers can expect to receive 88 cents for a $7.99 top sirloin steak,” Tom Buis, President of the National Farmers Union, said recently in testimony before Congress. “All told, farmers and ranchers receive a paltry 19 cents from every dollar spent on food in this country. The rest is gobbled up by food manufacturers and grocery stores.”

Biofuels expansion alone does not explain commodity price hikes, most agriculture economists agree. Biofuels require only a small fraction of the world’s farmland and its produce. Total crop yields and acreage under cultivation have been expanding worldwide at a rate greater than the increasing call for grain and oilseeds from ethanol and biodiesel.

The food price pinch comes from a perfect storm of skyrocketing oil prices, middling crop performance over several years, and a political and economic situation that has brought about hoarding by economically strong, developing nations like Russia, China, and India.


What’s driving up food prices?

Skyrocketing oil prices

Weather-related harvest shortages

Growing demand by the new middle class in China and India

Speculation in the commodities markets

Developing nations stockpiling food }}

The increased value of commodities in the face of booming demand for both meat and energy has inadvertently brought pain to underdeveloped countries, where peoples’ diets depend far more directly on staples. One analysis, showing the impact of commodity price increases over the past two years, notes that an American’s food budget has gone from 10 percent of his income to 10.6 percent. But in poorer countries, where 70 percent of a person’s food dollar goes to raw commodities – bags of rice or wheat – the price increase means that he goes from spending half of his income on food to spending 60.5 percent on food.

World leaders like Lula de Silva of Brazil have suggested that transfer of agricultural technology and liberalization of world commodity markets would take care of the food crisis in the Third World. Shutting down biofuels would do nothing to ease the crisis, da Silva said during a recent trade mission to Ghana. He signed three agreements that will extend Brazilian technology and know-how for Manioc production, as well as offering a market for surplus production.

Energy and labor costs emerge as food price drivers

“Biofuels is being driven by world events, not driving them,” said agricultural economist Steve Taff, a professor at the University of Minnesota. “The high price of oil is causing people to look for other ways to make energy.”

Energy is a huge component of retail costs – everything from transporting goods to the power needed for factories and groceries. With $120 per barrel oil, these costs speed their way into the retail price of food.

“Food prices have surged during times of higher crude oil prices, with energy passed through quickly to higher retail prices,” writes Jason Henderson, Assistant Vice President at the Kansas City office of the Federal Reserve. His report, “What is Driving Food Price Inflation,” was published in the April issue of Mainstreet Economist.

One study cited there found that food prices increase 52 cents for every dollar increase in gasoline.

“Labor costs have emerged as the biggest component of the retail food dollar,” according to the report. Because processed food and restaurant food are more labor intensive than more basic foods, labor has risen to 38.5 percent of the retail cost of food for Americans, who are spending more at away-from-home eating.

Looking at what we spend in the grocery aisle, Americans are somewhat insulated from increases in commodity prices. In 1950, 41 percent of the retail price of food came from commodity costs. Today, 20 percent of that retail cost comes from commodities.

In addition, not all food commodities are equal when it comes to farmer share of the retail dollar. Livestock and fruit and vegetable producers receive a higher portion of the retail dollar than crop farmers, where for instance, the farmer’s share of a bag of flour remains around 19 cents, 5 cents for the wheat in that loaf of bread, and about 4 cents for the corn in the box of corn flakes.

Depending on how you measure inflation, farm gate food commodity prices might merely be regaining lost ground.

An April 24 editorial in the Wisconsin State Journal stated: “Corn prices are considered high – $6 a bushel – only because farmers have faced low prices for the past 20 years. In inflation-adjusted terms, corn would have to be $6.87 a bushel to equal the price of 1981, and $14.60 a bushel to equal the price of 1974.”

The latest Consumer Price Index report from the Bureau of Labor Statistics projects an annualized growth in food costs of 5.1 percent, based on the first three months of the year. National Corn Growers Association CEO Rick Tolman testified in Congress recently that this is only a slight elevation above the typical year-to-year inflation for retail food prices.

Tolman noted that over the past 25 years, the average food CPI increase has been 2.9 percent per year. In other words, what a consumer bought for a hundred dollars the year before costs $102.90 this year. So if the current CPI holds true for the entire year, that would mean that what would have cost $102.90 in a more typical year, will cost you $105.10 this year – $2.20 more per hundred of your grocery bill.

By comparison, the impact of energy prices on the average family is far greater. In only one year, the price per gallon of gasoline has moved from $2.40 a gallon to $3.60. A two-car family that consumes 100 gallons of gasoline per month would see their fuel costs go up $120 a month.

Commodity prices up on drought fears, government hoarding

U of M’s Taff points out that reasonably high ethanol demand existed before corn prices went up.

“ High demand (for feed and meat) from China and India and bad crops elsewhere in the world are two things that have driven all the commodity prices up , Taff said. “The higher energy prices which worked into both energy markets and fertilizer have caused input prices to go up for farmers.”

The poor crops among many of the major exporters meant smaller-than-anticipated growth in food commodity supplies. Drought reduced production in Southeastern Europe, Russia, Ukraine, Turkey, Northwest Africa, Argentina, and Australia, according to USDA reports. For Ukraine and Russia it was the second year in a row of drought. Australia is seeing its third consecutive year of drought.

The Federal Reserve report notes that since the mid-1990s the demand for soybeans and other oilseeds has jumped 35 percent, led by a China hungry to enjoy protein and to utilize higher grade cooking oil.

With all the reports of drought coming from points around the globe, some countries that are better equipped to protect their access to commodity grains and meat have not hesitated to do so through a combination of high spending and government intervention.

Russia, India, China, Japan, and OPEC nations in particular have been able to amass huge pools of U.S. dollars – either from sales of oil or from sale of manufactured goods to the United States – and they have used this money to pay top dollar and acquire as much feed grain, oilseeds, and meat as they want , according to a USDA-ERS report “Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices,” by Robert Trostle.

China tops the list with $1.6 trillion in U.S. currency held in reserve. Emerging Asia holds almost as much, Japan has a trillion dollars, and OPEC and Russia each hold in excess of $200 billion in U.S. funds. Since world markets use dollars to trade farm commodities, this form of cash reserve proves especially convenient.

Trostle documents how many of these countries, as well as several other major food exporters like Argentina, have engaged in trade policies that penalize food commodity exports and lower existing tariffs that formerly protected domestic production – all with the aim of stockpiling food. While the apparent aim is to lower the price of food for their own populations, these governments’ stockpiling measures may be the most direct cause of the run-up of world prices.

American consumers save twice with biofuels:

Gas costs less, less government farm support

Ethanol causes gas prices to be 29 to 40 cents per gallon lower than they otherwise would be, according to a recent study by Iowa State University’s Center for Agriculture and Rural Development. Savings vary by region, with the Rocky Mountain states saving 17 cents a gallon, 23 cents on the Coasts, 25 cents in the Gulf Coast, and 40 cents a gallon in the Midwest.

For a family that uses 100 gallon of gas per month, that’s a direct savings between $17 and $40 per month, or $204 to $490 per year. So Americans are at least breaking even and in many cases coming out ahead, even with increased food prices.

In addition, as cited by a Wisconsin State Journal article, American taxpayers have saved $8 billion in countercyclical farm support payments that didn’t have to be made thanks to stronger commodity prices on the open market. At our current population of 304 million, that’s a savings of $26 per person – a family of four saves more than $100 per year.


Ethanol = Savings at the Pump

Ethanol is having a direct impact on the price of gasoline at the pump, saving American motorists an estimated 17 to 40 cents per gallon, depending on region.

Rocky Mountain: 17 cents per gallon

East and West Coast: 23 cents per gallon

Gulf Coast: 25 cents per gallon

Midwest: 40 cents per gallon

Source: Iowa State University Center for Agriculture and Rural Development

Merrill Lynch analysts estimate that if ethanol producers weren’t expanding their output, gasoline prices would be 15% higher.

Without ethanol = 15% higher gas prices

15% = at least 50 cents a gallon }}

A thought experiment: the world without a biofuel’s industry

What would happen if, as a number of critics seem to wish, the biofuels industry were dismantled overnight. Would that solve the world food crisis? Experts say no.

“The people who say biofuels are causing the food crisis are giving a simple answer to a complicated story – so it’s simply wrong ,” said Michael Swanson, a senior economist with Wells Fargo Bank, Inc.

Swanson outlines a scenario in which ethanol is shut down and the market dynamics unfold from there.

“Say you were to allow the New York Times editorial board to run the world,” Swanson said. “They would shutter the ethanol plants and outlaw use of ethanol. What would the market do? They would see four billion bushels of demand in the 08-09 marketing year disappear instantly. ‘That’s 28 million acres of corn I no longer need,’ says the market, ‘what am I going to plant it to, to make money?’ Soybeans or wheat – those are the agronomic options – do we really need that much wheat or soybeans? So the market starts a reverse spiral. But would people in poor countries suddenly start eating again? Temporarily, with that loss of demand, futures prices of corn, beans, and wheat would drop from the loss of demand from ethanol. The cash price would drop and you could buy more food for the same amount of money. But what happens next year? What is the consequence to the farmer? Do they keep planting those acres at a loss? No, they would decide to let that land go fallow. The simple solution is predicated on farmers farming ground when they don’t make money – and that simply isn’t going to happen.”

Biofuels aren’t stealing food

The whole argument that biofuels diverts grain from use as human food disregards two clear facts. First, the type of corn used for ethanol is not the same kind as is used as human food. And second, the ethanol production process does not use the food portion of the corn kernel.

To those closer to agriculture, it seems obvious to point out the distinction between field corn and sweet corn – that field corn is a grain that is used mainly as livestock feed, and that sweet corn is a vegetable eaten by people. But many today hear “corn” and envision a summertime ear of corn on the cob, even though as the National Corn Growers Association notes, sweet corn is planted on less than one percent of all U.S. corn acres. Ethanol production does not directly divert food from the marketplace because it does not use the type of corn that people can eat.

Of the corn that is used by the ethanol industry, only the starch portion of the corn is removed and made into ethanol, while all the actual nutrients pass through the process intact and are returned to the marketplace. This ethanol process co-product is called distillers grain.

Ben Brown, general manager of the Heartland Corn Products ethanol plant in Winthrop, Minnesota, recently refuted idea that biofuels are competing with food in a letter to the editor of the New Ulm Journal.

“Less than two percent of the U.S. corn crop is used for human consumption as cereal grain,” Brown wrote. “We use almost as much for pet food as we do for cereal consumption. About six to seven percent of the corn crop is used to make fructose and sweeteners. The corn-to-ethanol industry only uses the starch portion of the kernel. All of the protein, oil, fibers, minerals, vitamins, and other components remain and are available for utilization as food for either human consumption, or for their traditional use as livestock feed. This remaining portion is commonly referred to as DDGS.”

Brown further argues, that since ethanol production leaves the protein and oils, it is fully compatible with marketing these fractions of the grain, either directly as human food, or making human food by feeding these components left by the ethanol process to animals.

‘The world is not short of starch for human nutrition,” Brown wrote. “The need is for proteins and digestible fiber. Soybeans traditionally carry a much higher value in the marketplace because they contain a much higher percentage of proteins and oils, and a much lower percentage of starch.”

Finally, Brown makes the point that the human food grain of choice is not corn, but rice. Food crises have been ongoing in 11 countries during the first part of the decade, and yet there’s been no call for aid in the form of corn – less than a tenth of a percent of U.S. corn production ended up in these countries between 2000-2005, though the amount used up by biofuels in the U.S. was far less in that time period.

A fundamental misunderstanding about food production exists for many people, according to Brown. In most cases, rice acres cannot be converted into corn acres, nor vice versa, thereby undoing the argument that U.S. farm acreage devoted to corn for ethanol is somehow taking food directly from the hungry.

Grain available for livestock continues to increase, even with biofuels demand

Ethanol critics from the livestock industry have charged that biofuels alone are causing their feed costs to rise dramatically. The rising costs to the livestock industry are undeniable, but the critics’ argument falls apart when they singularly blame biofuels. It is important to note that the supply of corn and soybean meal to the livestock industry has continued to grow right alongside the ethanol boom.

And if the price of corn and beans is cutting so deeply into the livestock industry’s profits, how can U.S. pork production afford to grow by nearly seven percent this year, according to USDA projection? The fact is that livestock production remains quite profitable, though perhaps not as profitable as when the U.S. taxpayers subsidized crop production, essentially allowing feeding operations and everyone else to buy grain at prices below the cost of producing it.

Livestock still represents the largest customer of U.S. grain and oilseed production. It uses up more than half of the corn produced in America. One could argue that $4 billion in taxpayer money each year – half of the $8 billion per year the federal government would have to spend to support crop farmers when prices are low – is a direct transfer to the livestock industry under the economic conditions that industry CEOs prefer.

Looking at the supply picture of corn and soybeans to the livestock industry for this year, the estimated supply of soybean meal to the U.S. market rose this year by 850,000 metric tons, while the supply of corn (beginning stocks plus production) increased nearly 50 million metric tons, or 1.8 billion bushels.

Of that corn supply increase, the highest estimate of what the expanding ethanol industry will take is billion of those bushels, leaving 800 million bushels more corn than livestock and food processing companies had the year before. And then there’s the supply of distillers grain – a billion bushels of corn into ethanol will produce about 300 million bushels of high protein distillers grain. This will displace corn from cattle feeding and put it right into the feed bins of swine and poultry.

USDA’s Trostle notes that in the period 2002-2007, feed use of wheat and coarse grains across the world grew 27 percent. Rather than a zero-sum situation, where biofuels rob from livestock, production and use of grain have grown across the board.

Ethanol critics in the livestock industry undoubtedly find it more convenient to say that the price of their products are being inflated by biofuels, rather than to say that a boom in world demand for meat causes them to want to use up more feed at the same cheap price they enjoyed in 2004 and have enjoyed over the last two decades – prices which are below the actual cost of producing the corn and soybeans.

Russia, China, and India – swimming in surplus dollars from the massive trade imbalances in energy and manufacturing – can afford to pay as much as it takes to meet their growing hunger for animal protein. That means American consumers will have to pay more to keep our livestock industry products here, rather than watch them sail away to Asia and Russia. The Red River Farm Network (RRFN) reported that a shipping industry group estimates the reopening of U.S. beef trade with Korea this year will require 1,000 additional refrigerated shipping containers a month.

Farmers showed in 2007 that they can respond to calls from the market and supply everyone adequately. When weather lowers yields and increases prices, farmers will respond by planting more. Probability now rests on the side of favorable crop weather.

Taff and others believe that through more intensive management and continued development of agri-science, more food will come from the same amount of farm acreage. With demand growing in all segments of farm commodity markets, supply will follow, and there will be enough products to make food, fiber, and energy.

© American Coalition for Ethanol, all rights reserved.
The American Coalition for Ethanol publishes Ethanol Today magazine each month to cover the biofuels industry�s hot topics, including cellulosic ethanol, E85, corn ethanol, food versus fuel, ethanol�s carbon footprint, E10, E15, and mid-range ethanol blends.
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