Has the drive for more corn acres to produce ethanol caused a spike in U.S. food prices? Despite a year's worth of noise backing such a connection, new analysis by Informa Economics has found the claims dubious.
While comprehensive, the report (http://www.informaecon.com/PressReleases.htm.) is unlikely to escape criticism as pro-ethanol interests commissioned it. In a Dec. 10 press conference announcing the report's release, Informa employees preemptively pushed against such claims.
“We provide objective analysis,” said Bruce Scherr, Informa CEO. “We tell every client that if we do a study and the pills are bitter, so be it. We … aren't guided by an end result the client wants … We have hundreds and hundreds of clients in every part of the agriculture food renewable energy and energy value chain. We haven't got an axe to grind. Our interest is sustainable profitability and sustainable business liability for every sector and segment of the industry.”
And what Informa's study has found “debunks the claim that the ethanol expansion and associated increased corn demand has been the sole, or even major, source of CPI food inflation.
“In fact, corn prices play a relatively minor role in this equation. The farm value of raw commodities in food account for roughly 19 percent of total U.S. food costs. The remaining 81 percent is the so-called marketing bill that includes labor, packaging, transportation, energy, advertising expenditures, depreciation, rent, interest costs, business taxes and profits among other costs.
“Consider that since the 1950s, this trend toward the minor role of commodities in the consumer price equation has been the result of a tremendous decline in percentage of consumer income spent on food that's dropped from the mid-1950s from 22 percent to, roughly, 12 percent today.”
Moreover, “there was a decline of at-home consumption that represented 18 percent of the 22 percent — down to roughly 7 percent today. The consequence is the commodity prices play a less important role today than they have over the last four or five decades.”
There continues to be broad support for ethanol and biofuels in the United States “because people correctly perceive that (biofuels) are an important part of us addressing serious national energy security challenges,” said Bill Lee, who not only chairs the Renewable Fuels Foundation (which commissioned the report) but also manages a Minnesota ethanol plant. “And they're a way to mitigate the effects fossil fuels have on global climate change.”
Over the last year, those in the biofuel industry have been “dismayed that our friends in the food, livestock and petroleum industry have been misstating the case against biofuels. You could say they're super-sizing the impact corn and ethanol are having on consumer prices for food … The whole food-versus-fuel debate has generated more heat than light.
“That's why we engaged Informa to help get the facts … We believe this study sets the record straight. Hopefully, it will be the end of disingenuous and, frankly, irresponsible representation in food and livestock about the impact of corn and ethanol on food prices.”
Scherr said the study doesn't deny that corn demand is expanded due to ethanol growth. But it does “exhibit that, statistically, corn prices are essentially uncorrelated with consumer food prices with a correlation coefficient of about 20 percent. Statisticians know that is a relatively minor relationship. In fact, random numbers generally correlate higher than that.”
So what does Scherr and colleagues believe is driving global commodity prices?
“As the study points out, it's mainly synchronous global growth and middle-income expansions around the globe. Those are growing at unprecedented magnitudes …”
Scherr said there are likely 400 million to 700 million people achieving at least middle-income status with new “marginal income” prospects. This burgeoning sector is demanding improvements “from new infrastructure to more processed or value-added food products.”
The net effect has been that over the last five to 10 years, “we've not been operating under the same demand curves. The curves are shifting to the right — it's classic Economics 101. Population growth with new income shifts demand curves.”
This is especially evident in countries like China, “which is the largest construction site in the world. The Indian economy is growing at (a rate) just under double digits. China's growth is in double digits.”
Also a factor: ocean freight rates have increased five or six times over the last four or five years.
Extraordinary income growth with large numbers of people results in “increased demands for energy, base metals, concrete, steel, and infrastructures put in place. Included in that is an increased demand for food as people move from subsidence to primary, secondary and tertiary employment status … and move from the hinterlands into more urban areas.”
The weakening U.S. dollar is also playing a role, influencing the ability of much stronger currencies “being able to buy commodities.”
Further supporting the report's findings, Scherr said livestock prices had been on a “steady rise five years earlier than the recent corn price increases of 2006-07. Livestock markets were generally positive throughout that time period.”
The corn system “should be lauded for its efficiency in both meeting strong domestic demand and growing export demands at the same time.
“The corn market needed 2 billion bushels more for domestic use over the last couple of years. And the corn sector was able to produce 3 billion bushels more. There's more corn available today than a year ago by a significant amount … There is no shortage.”
Summarizing the report, Scherr said dramatic worldwide commodity price inflation “is the result of many global forces at work at the same time. The least of (those) is U.S. corn demand growth which was met with a dramatic production response and ample supply.”
Asked about oft-heard claims that poultry and egg prices have risen due to ethanol feedstock needs, Informa's Scott Richmond said the study took “a two-phase approach to the analysis. The first was to look at correlations between corn and some of the primary products — livestock, poultry, dairy and egg prices.
“The reason was if we find a high correlation between corn prices and consumer-level food prices, we'd first expect to see a high level of correlation between corn prices and those first stage food prices (for more, see pages 21 and 23 of the study). The correlations between corn and cattle prices and corn and high prices are generally very low.”
So who is being hurt by the higher prices? “Certainly, relative to product pricing, the middle players in the value chain — not the consumer — would experience greater price volatility in terms of cost and some impact on margins,” said Scherr. “In some cases, the (middle players) can (pass the higher prices on). In others, it's more difficult.”
From a national economic standpoint, “in light of the extraordinary commodity increases we've seen over the last two or three years and the modest increase in overall consumer prices, that's certainly pushed pressure back on middle players in the value chain. Or, the consumer has found cheaper foreign alternatives in the case of many non-food items.”
The global commodity expansion has had an impact on a variety of businesses. And they handle it in a variety of ways — “whether through price risk management, the ability to push prices up, or to become more efficient. Certainly, the retail sector has been able to hold the line on prices because they've achieved dramatic efficiencies in logistics and distribution management.
“These price increases have fostered creativity and innovation. We've seen that in a variety of sub-sectors and the overall food system.”
Distiller's grains also play a significant role in the study. Gathering remnants of the ethanol production process “means a third of the (grain's) volume is retrieved after grinding for ethanol. About 85 percent in the U.S. is used for feeds for dairy and beef cattle. We've seen expansion of that over the last five years into swine rations with further room to grow.”
Richmond said timing of the study's release was not coordinated with the energy bill debate in Congress in mind. “We started this process several months ago and delivered the report shortly before Thanksgiving. This was just the soonest everything could be organized.”
Regardless of the timing, is there hope that it will influence the debate? “Of course,” said Scherr. “We hope it brings fact-based (information) to the discussion. We hope the (Bush) administration and (politicians) will take into account what we believe is an objective analysis.”
By keeping an eye solely on ethanol, everyone is missing the “other half of the story,” said Richmond. “We're on pace for the 2007-08 corn exports to be record highs …
“Also, we're seeing increases in corn yields. Biotech corn became available just over 10 years ago … We're seeing an acceleration (in yields) since biotech varieties became available …”
Today, U.S. corn yields average around 9.5 tons per acre. Chinese yields are at “just over 5 tons per acre and we know China is in the midst of evolving GM seed varieties. Brazil also has yields considerably lower than the U.S.”
If the United States has a 15-billion gallon corn ethanol mandated industry, “it's our studied opinion that between now and 2015 to 2020, the ability to produce corn at rates to meet those needs will be extraordinary and non-problematic.”
While the Informa study may address food prices, it doesn't address critics' claims that producing ethanol is inefficient. And what happens when U.S. standards mandate 15 billion gallons of biofuels by 2020?
Based on seed technology and improving means of producing corn, the need for 5.5 billion bushels of corn to produce 15 billion gallons of ethanol is a “slam dunk,” said Scherr. “And that includes the vagaries and issues associated with Mother Nature. The technology is available, it's extraordinary and being adopted.”
Lee claimed the ethanol efficiency debate a “false one, just like food-versus-fuel. The petroleum industry would like the debate to be focused on the efficiency of corn ethanol plants versus what's going on in the petroleum world.
“The fact is — and this is confirmed by a number of independent, credible studies — corn ethanol plants in the last decade have a very positive energy balance.”
There are three Minnesota plants moving from natural gas to biomass power. “This will give us something like three units out for every unit of fossil energy used to make our product. Cellulosic ethanol processes also have strong, positive fossil energy balances.”
At the same time, “the greatest North American hydrocarbon reserves are the tar sands in Alberta, Canada. It'll be much more energy intensive to extract and refine that sort of crude oil. That debate is characterized by misdirection and misinformation.”