Ethanol small factor in food prices

Corn ethanol had a minimal impact on higher food prices in 2007-08, according to a study by the Congressional Budget Office (CBO). The report, The Impact of Ethanol Use on Food Prices and Greenhouse-Gas Emissions, was released in April 2009.

National Corn Growers Association President Bob Dickey noted, “We applaud this report, the next chapter in a growing narrative that shows ethanol is not principally responsible for higher food prices despite what food companies have tried to make consumers believe during the past 12 to 18 months.

“The report found that the increased use of ethanol accounted for 0.5 to 0.8 percentage points out of the 5.1 percent increase in food prices between April 2007 and April 2008, representing 10 to 15 percent of total food price increases.

“We note that the impact of higher energy costs on food prices represented 36 percent of the overall food price increase. We hope that those who are truly concerned about increased food prices will look to those causes that have played a more significant role, and join grocers and others who are holding food manufacturers accountable for increased food prices at the same time commodity prices — even those for energy — have dropped.”

The CBO looked at four factors in calculating the impact of corn ethanol production on food prices — the impact of ethanol demand on corn prices, the impact of higher corn prices on food, the impact of higher corn prices on livestock feeding and the impact of increased corn acres on the prices of other crops, particularly soybeans.

The CBO estimated that the upswing in the demand for corn for domestic ethanol raised the commodity’s price by between 50 cents and 80 cents per bushel between April 2007 and April 2008. That range is equivalent to between 28 percent and 47 percent of the increase in the price of corn, which rose from $3.39 per bushel to $5.14 per bushel during the same period.

The price increase occurred despite an increase in corn production. During the 2007-08 corn marketing year, the United States harvested a record 13.1 billion bushels of corn. Of that total, approximately 3 billion bushels was used to produce ethanol.

As the mandated use of biofuels rises over time, increased production of ethanol and biodiesel will probably continue to push up prices for corn and soybeans, the CBO report said. According to USDA estimates, 3.7 billion bushels of corn will be used to produce ethanol during the 2008-09 marketing year.

That estimate represents an increase of about 700 million bushels over the total for the previous marketing year, which could increase the price of corn by 10 percent to 17 percent over the 2008–09 period.

In addition to the expanding demand for corn to produce ethanol, the CBO cited several other factors contributing to the rising price of corn in the United States between April 2007 and April 2008.

For example, the depreciation of the U.S. dollar increased the demand for U.S. corn abroad. Exports rose approximately 14 percent between the 2006-07 and 2007-08 marketing years.

Concerns about a poor harvest because of unfavorable weather for spring planting also caused corn prices to rise during the spring of 2008.

At the same time that corn production was rising, producers were experiencing hikes in the cost of producing corn. The CBO report noted that between 2007 and 2008, corn producers’ expenditures on energy grew by 35 percent and expenditures on fertilizer climbed by 50 percent. Overall, during that period, the cost of producing corn rose by 31 percent.

The CBO report said that rising demand allowed producers to pass along the increase in costs to consumers, who proved willing to pay the higher prices.

The CBO concluded that the increase in the average price of corn resulting from ethanol production in 2007 — 50 cents to 80 cents per bushel — directly increased expenditures on food by between $700 million and $1.1 billion, or by about 0.1 percent.

The CBO also calculated the corn price’s impact on the price of meat and the corn price’s indirect impact on the price of soybeans.

Assuming that farmers passed along to consumers the increases that occurred in animal feed prices, the higher prices resulting from the production of ethanol increased consumer expenditures on food by an additional 0.2 percent to 0.4 percent.

The CBO report said that rise in soybean prices resulting from the increase in corn acres at the expense of soybean acres raised expenditures on food by between 0.2 percent and 0.3 percent, bringing the total effect to between 0.5 percent and 0.8 percent.

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TAGS: Corn
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