Earlier in 2008, prior to the severe economic woes of the past couple of months, the food vs. fuel debate was one of the hot political issues heading into the 2008 election. In recent weeks, those issues have again surfaced at the national level. Some major organizations, members of the national news media and a few members of Congress have blamed the rapid expansion of ethanol production in the U.S. as the primary cause of significant increases in food costs, food shortages in third world countries and many other problems around the world. These claims were based on the fact that the price of corn doubled in two years to $6-7/bu. in July, and that there could be potential shortages of corn. Some were calling for the U.S. to relax standards for utilization of renewable fuels, and to eliminate all federal government support for the ethanol industry in the U.S. None of these measures were implemented, the price of corn is now under $3.50/bu., and there appears to be more than an adequate supply of corn for usage in 2009 and beyond.

Much of the food vs. fuel emphasis was based on false assumptions and analysis, rather than on facts. Actually, there were a lot of factors that lead to the rapid rise in food costs in the U.S. and around the world, as well as a set of factors that led to the rapid rise in commodity prices for corn and other grains. In 2007, there was actually a perfect storm for the rapid rise in food prices. Russia, the Ukraine, Northern Europe, Argentina, Australia and other parts of the world experienced reduced crop production in 2007, due to drought, early frost and other crop problems. This was the second year in a row of drought and reduced crop yields in many of these countries. The U.S. had greatly reduced wheat acres in 2007, and had reduced wheat yields in much of the country. There was a reduction in total global grain and oilseed production in 2006, and again in 2007. This was only the third time in past 37 years that global production has dropped two consecutive years.

At the same time that the world grain supply was dwindling, there were changing monetary and political situations around the world that were influencing food costs. The weakened value of the U.S. dollar compared with many other currencies in the world in 2007 allowed foreign countries to rapidly expand the export levels of grain, meat and other food products. Even though the commodity prices had risen dramatically, the net cost of the food imports from the U.S. was much less due to the weaker value of the dollar. Some countries, such as China, Russia and Argentina, placed restrictions on grain exports leaving their countries, which actually made available world grain supplies even tighter. The two commodities most affected by the export restrictions were wheat and rice, which are the two most common grains used for direct food production and consumption in much of the world.

There are also some bigger picture trends that are contributing to the current rising food costs and demand for grain worldwide. For years, we have talked about the rapidly developing economies in China, India and other countries. As we saw during the Olympics this past summer, China has experienced tremendous economic growth in recent years, as have India and other Asian countries. As economic conditions improve in these countries, middle class residents tend to increase their demand for protein in their diets, from red meat and other agricultural products. This increases U.S. exports of meat products, oilseeds and feed grains such as corn to feed livestock in other countries. Even though world corn prices were relatively high in late 2007 and for most of 2008, U.S. corn exports for 2007-2008 are estimated at approximately 2.5 billion bushels, which is the highest ever, and occurred at the same time the ethanol industry was growing rapidly in the U.S.

As residents of China, India and other countries have upgraded their lifestyles, those countries have also rapidly increased their consumption of gas and oil, with demand growing at about 1 million barrels/day. Worldwide oil production is expected to reach about 87 million barrels/day in 2008. The rapid increase in worldwide oil demand, steady oil supplies and the world economic climate led to the very high oil prices earlier in 2008. The resulting high prices for gas, diesel and other petroleum products greatly increased the cost to produce food, process food and transport food products. Only about 20¢ of every consumer dollar spent on food in the U.S. goes to the producer for the raw food product. The other 80¢ is for the off-farm costs of food such as labor, marketing, processing, wholesaling, distributing and retailing. Based on a 2007 study, rising oil prices had more than twice the impact on retail food prices, compared to a comparable increase in corn prices.

In 2008, worldwide ethanol production is expected to be approximately 16.2 billion gallons, which is equivalent to 1 million barrels/day of oil production. About half of the world ethanol production, or approximately 8 billion gallons, will be produced in the U.S., who along with Brazil account for most of the global ethanol production. Some estimates have indicated that gasoline prices in the U.S. would currently be 20-25% higher without ethanol production. One overlooked factor in ethanol production is that the ethanol only utilizes only a small portion of the corn kernel. Every bushel of corn, weighing 56 lbs., produces approximately 18 lbs. of dried distillers’ grains (DDGs), which are a high-quality livestock feed with three times the protein value of regular corn. These DDGs are being fed to livestock in the U.S., as well as being exported to other countries.

Bottom Line
The rapid increase in ethanol production in the U.S. in recent years has certainly increased domestic demand for corn and helped strengthen corn commodity prices, and has probably had a minor effect on worldwide food prices. However, there are major worldwide economic and political forces, which, along with high global oil prices, have been the primary factors driving higher worldwide food costs. In recent months, we have seen both grain prices and oil prices drop dramatically, which has seemed to ease the concerns somewhat. However, we are still in a troubled world economy, with very volatile prices for grain, oil and other commodities, which could again cause food prices to rise in 2009 and beyond. As a result, we may continue to see more inflation in worldwide food costs, and some difficulty for low-income countries to purchase needed food resources. Even with moderate increases in food costs in the U.S., the average U.S. consumer only spends about 10% of their income on food, which is among the lowest for any country in the world.

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.