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Ethanol Facts:
Food vs. Fuel As the U.S. ethanol industry continues to expand, the amount of corn used for ethanol production is increasing dramatically. Critics question whether corn growers can satisfy demand for both renewable fuels and traditional uses like livestock and poultry feed, food processing and exports, and the contrived food vs. fuel debate has reared its ugly head once again. Coinciding with growing ethanol demand, prices Americans are paying for food have also risen. However, numerous statistical analyses have demonstrated that the price of oil - not corn prices or ethanol production - has the greatest impact on consumer food prices because is integral to virtually every phase of food production, from processing to packaging to transportation. A February 2008 report by the Federal Reserve Bank of Kansas City cites robust food demand, record high crop prices, and accelerating costs for labor and energy for the sharp gains in retail food prices in 2007. Click HERE to review the report. A December 2007 report by Informa Economics, Inc., "Marketing Costs and Surging Global Demand for Commodities are Key Drivers of Food Price Inflation," found "the so-called 'marketing bill'—the portion of final food costs that excludes grains or other raw materials—as a key driver of the consumer price index (CPI) for food, largely due to rising energy and transportation costs. Another significant factor in consumers’ food bills is surging global demand for commodities... The report finds a comparatively 'weak correlation' between corn prices and overall food costs. In fact, just four percent of the change in the food CPI could be attributed to fluctuations in the price of corn. Simply put, the growing U.S. ethanol industry is not the cause of food price inflation." Click HERE to view the study. According to a June 2007 analysis of food, energy and corn prices conducted by John Urbanchuk of LECG, LLC, “rising energy prices had a more significant impact on food prices than did corn.” In fact, the report notes rising energy prices have twice the impact on the Consumer Price Index (CPI) for food than does the price of corn. “Energy costs have a much greater impact on consumer food costs as they impact every single food product on the shelf,” said Urbanchuk. “Energy is required to produce, process, package and ship each food item. Conversely, corn prices impact just a small segment of the food market as not all products rely on corn for production. While it may be more sensational to lay the blame for rising food costs on corn prices, the facts don’t support that conclusion. By a factor of two-to-one, energy prices are the chief factor determining what American families pay at the grocery store.” According to the study, “Increasing petroleum prices have about twice the impact on consumer food prices as equivalent increases in corn prices. A 33 percent increase in crude oil prices – the equivalent of $1.00 per gallon over current levels of retail gasoline prices – would increase retail food prices measured by the CPI for food by 0.6 to 0.9 percent. An equivalent increase in corn prices – about $1.00 per bushel over current levels – would increase consumer food prices only 0.3 percent.” The report goes on to find, “Corn and energy prices both affect consumer food prices. However, since increases in corn prices are limited to a relatively small portion of the overall CPI for food, an increase in corn prices resulting from higher ethanol demand or a supply disruption such as a major drought is expected to have about half the impact of the same percentage increase in petroleum and energy prices.” The report can be accessed here: http://www.ethanolrfa.org/objects/documents/1157/food_price_analysis_-_urbanchuk.pdf Clearly, while ethanol demand is providing American farmers a better value for their grain, it is not the sole culprit or even a major reason for rising food prices. Factors like $100 for a barrel of oil, record global demand for food and feed grains, and a weak U.S. dollar play more significant roles in determining consumer food prices than the price of corn or the growth of the U.S. ethanol industry. Corn demand for ethanol has no noticeable impact on retail food prices. A central theme in the “food versus fuel” myth is the false assertion that moderately higher corn
prices, spurred by ethanol demand, are leading to higher retail food prices for consumers. Yet the truth is numerous cost factors contribute to retail Retail food products such as cereals, snack foods, and beverages sweetened with corn sweeteners contain very little corn. Therefore, fluctuations in the price of corn are not often reflected in the retail prices for these items. As an example, a standard box of corn flakes contains approximately 10 ounces of corn, or about 1/90th of a bushel. Even when corn is priced at $4 per bushel, a box of corn flakes contains less than a nickel’s worth of corn. Retail food price data from the Bureau of Labor Statistics further demonstrates that increased demand for corn for ethanol production has not dramatically increased consumer food prices. While the cash price of No. 2 Yellow Corn has increased from $2.18/bushel in April 2006 to $3.36/bushel in April 2007, consider the change in price in the following grocery items:
As the above chart demonstrates, the aggregate increase for these food items from April 2006 to April 2007 is just 3%. For perspective, the 25-year average annual food inflation is 2.9%. Thus, while it is true increased ethanol production is creating a real market-driven price for corn, energy prices, not ethanol, are responsible for much of the increase in the price of food. Further, the ethanol industry is rapidly developing next generation cellulosic ethanol technology that will allow it to meet the growing demand for renewable fuels from wood chips, switch grass and other materials in addition to corn. Ultimately, the market will adjust and all those in the food, fuel and fiber industry will be able to prosper. Much of the debate has centered on the notion that the U.S. will not be able to produce enough corn to satisfy all markets, creating shortages and intensifying competition that will continuously drive the price of corn higher. However, advancements in seed, farming and ethanol technologies are allowing American farmers to continue feeding the world while helping to fuel our nation. “There is no conflict between food and fuel—we can produce both,” said Ken McCauley, president of the National Corn Growers Association. “Demand for corn is at unprecedented levels, and we fully expect unprecedented levels of supply as well. This spring U.S. corn growers planted the largest crop this country has seen since the 1940s. Given normal weather conditions this summer, we’ll produce the largest corn crop in history, and that will allow us to readily satisfy demand for livestock feed, human food processing, exports and fuel ethanol.”
Ethanol production does not reduce the amount of food available for human consumption. Ethanol is produced from field corn which is primarily fed to livestock and is undigestible by humans in its raw form. The ethanol production process produces not only fuel but valuable livestock feed products. Every 56-pound bushel of corn used in the dry mill ethanol process yields 18 pounds of distillers grains, a good source of energy and protein for livestock and poultry. Similarly, a bushel of corn in the wet mill ethanol process creates 13.5 pounds of corn gluten feed and 2.6 pounds of high-protein corn gluten meal, as well as corn oil used in food processing. Importantly, ethanol production utilizes only the starch portion of the corn kernel, which is abundant and of low value. While the starch is converted to ethanol, the protein, vitamins, minerals and fiber are sold as high-value livestock feed (distillers grains). Protein, which is left intact by the ethanol process, is a highly valued product in world food and feed markets. Aside from preserving the protein, a considerable portion of the corn’s original digestible energy is also preserved in the distillers grains. Distillers grains have an average protein content (28 to 30%) that is typically at least three times higher than that of corn, making it a valuable ingredient in livestock and poultry diets. In 2006/07, more than 12 million metric tons of distillers grains were produced by ethanol biorefineries and fed to livestock and poultry. It is estimated that distillers grains displaced more than 500 million bushels of corn from feed rations last year, allowing that corn to be used in other markets. It also is important to remember the amount of field corn actually used for human food is just a small fraction of the total corn supply. For example, cereal accounted for just over one percent of total corn use in 2005. The overwhelming majority of U.S. corn, including exported corn, feeds livestock—not humans. There is a popular misconception that corn is exported from the U.S. to feed those in malnourished countries, and thus ethanol use will diminish exports to these countries. The truth is the majority of corn exports are used to feed livestock in developed countries. Importantly, the U.S. ethanol industry is helping to satisfy foreign demand for high-protein, high-energy feedstuffs by exporting more than 1 million metric tons of distillers grains to countries around the world in 2005. Corn growers are responding to increased corn demand. Corn growers make their planting decisions based on signals from the marketplace. If demand for corn is high and projected revenue-per-acre is strong relative to other crops, farmers will plant more corn. And they have. U.S. corn growers have produced the three largest corn crops in history in the past three years. In 2007, corn producers harvesteda record 13 billion bushels of corn. Data from ProExporter Network suggests that while total corn demand in 2007/08 will be about 900 million bushels higher than in 2006/07, total supply will be about 1.6 billion bushels higher. At the same time, corn yields have increased by about 3.5 bushels per acre per year since the 1995-1996 crop year. Increased yields, together with improved farming practices, seed technology developments, and increasing ethanol processing efficiency ensure that the American farmer will continue to meet the world’s needs for food, feed, fuel and other uses. Ethanol production from other nontraditional sources continues to grow. An increasing amount of ethanol is produced from nontraditional feedstocks such as waste products from the beverage, food and forestry industries. In the very near future we will also produce ethanol from agricultural residues such as rice straw, sugar cane bagasse and corn stover, municipal solid waste, and energy crops such as switchgrass. For more information, we invite you to visit: http://www.ncga.com/news/OurView/pdf/2006/FoodANDFuel.pdf Sources: RFA, National Corn Growers Association and LECG, LLC |
