Letter to the Editor
Rising food prices: Don't blame Ethanol
Wednesday, April 6, 2011
Food prices are rising here in the United States and around the world. Searching for scapegoats, many pundits, professors and policymakers are pointing their fingers at the Corn Belt. Ethanol is grabbing ever-increasing shares of the nation's grain production, making food scarcer and costlier. Or so we're told.
Iowa farmers have long suspected that there's hardly a kernel of truth in these attacks. After all, ethanol production increases every year, while food prices fluctuate, suggesting that that there is no cause-and-effect relationship between the two trends. Now our skepticism of the scapegoating is confirmed by credentialed experts: the economists at the US Department of Agriculture (USDA).
In its recent report, "A Revised and Expanded Food Dollar Series: A Better Understanding of Our Food Costs," USDA's Economic Research Service concluded that, out of every dollar that Americans spend on food, only 11.6 cents -- little more than a dime -- goes all the way back to the farm.
As for the other 88.4 cents, they're swallowed up by energy costs, labor, transportation, packaging and other factors in the supply chain. For all the "blame ethanol first" frenzy, this assessment of farm products' share of food prices is considerably lower than the USDA's previous estimate that nearly 20 cents of each food dollar made it back to the farm in 2008.
You don't have to take USDA's word. Back in 2008, the World Bank suggested that biofuels really were a major cause of food price increases. But, in July 2010, the World Bank reversed itself, releasing an analysis that found "...the effect of biofuels on food prices has not been as large as originally thought." Indeed, the World Bank noted, "... the use of commodities by financial investors may have been partly responsible for the 2007-08 spike."
Meanwhile, in 2009, the respected and nonpartisan Congressional Budget Office observed: "...from April 2007to April 2008, the rise in the price of corn resulting from expanded production of ethanol contributed between 0.5 and 0.8 percentage points of the 5.1 percent increase in food prices measured by the Consumer Price Index (CPI). Over the same period, certain other factors -- for example, higher energy costs -- had a greater effect on food prices than did the use of ethanol as a motor fuel."
If all farm products account for only 11.6 percent of food prices, then what's corn's share of the food dollar? In most years, corn accounts for about 15 percent of the total value of all US agricultural food and feed products. And 15 percent of 11.6 percent is ... 1.7 percent. So corn costs about two pennies of every dollar that Americans spend on the checkout lines at our groceries and supermarkets.
If corn prices aren't to blame, what is? In fact, about 33 cents of every food dollar are spent on energy-intensive factors -- transportation, packaging, and food processing. That's why food price increases tend to follow energy price increases. Commodity speculation is another cause of rising prices, as the World Bank noted in 2010.
Finally, food prices tend to be "sticky": Once food processors and retailers find that factors such as rising energy prices allow them to raise food prices, they keep food prices high even after energy prices drop. This happened in 2008, and it just might happen again this year.
In short, while ethanol production may be a convenient scapegoat, it's an unlikely suspect in the "Who raised food prices?" whodunit. US ethanol production uses only 3 percent of the world's grain supply, processing corn but not rice or wheat, and returns a third of the corn to the livestock market as distillers' grains and gluten feed.
Meanwhile, in Iowa alone, 41 ethanol refineries and 12 biodiesel refineries produced 3.5 billion gallons of clean-burning renewable fuels last year, supported more than 80,000 jobs, contributed about $12 billion to the economy, and provided almost $600 million in state and local tax revenues. Nationally, the industry produced some 13 billion gallons of ethanol and replaced the gasoline produced from about 445 million barrels of imported oil, much of it from unfriendly or unstable countries from Venezuela to North Africa and the Middle East.
When it comes to rising food prices, Iowa's corn farmers and ethanol producers have no reason to apologize. And they have good reason to be proud of their contributions to our country's economy and energy security.
Bill Northey is Iowa Secretary of Agriculture. A fourth generation farmer from Spirit Lake, he grows corn and soybeans.
Secretary of Agriculture