New Analysis Continues to Disprove Food vs. Fuel Debate

There is no statistical evidence to support the argument that growth in ethanol production is driving consumer food prices higher, according to a comprehensive study (pdf) released recently by Informa Economics. Rather, the report concludes that retail food prices are determined by a complex set of inter-related factors, including supply chain costs for energy, labor, transportation, packaging and other marketing-related expenses.

The new study, “Analysis of Corn, Commodity, and Consumer Food Prices,” concludes that “the statistical evidence does not support a conclusion that there is a strict ‘food-versus-fuel’ tradeoff that is automatically driving consumer food prices higher.” The analysis, which was funded by the Renewable Fuels Foundation, further found that “…there has historically been very little relationship between annual changes in corn prices and consumer food prices. The corn price would be considered a statistically insignificant variable in determining what drives the food [consumer price index].”

“Ethanol is not the only driver influencing corn prices, and corn prices have not been the only factor driving consumer food prices,” said Bruce Scherr, CEO and chairman of Informa Economics. “Rather, there is a complex and interrelated set of factors that contribute to corn and food prices. Further, the farm share of the retail food dollar is relatively small. Increases in other marketing bill component prices are contributing to food price increases.”

Renewable Fuels Association President and CEO Bob Dinneen says the new study adds to a mounting body of economic analysis that shows ethanol plays a trivial role in retail food pricing.

“Yet again, sound analysis has demonstrated that the farcical food-vs.-fuel debate is just that – a joke,” Dinneen says. “Unfortunately, the effort to scapegoat ethanol in order to continue our addiction to imported oil is not funny. The fact remains that no statistical evidence exists demonstrating a significant link between ethanol, corn prices and rising food costs. “If we learned anything from the commodities bubble and food price run-up of 2008, it should have been that consumer food prices are influenced by a multitude of important factors, not the least of which is higher energy prices. Oil prices at or above $100 will increase everything, including food prices and oil industry profits.”

The study presents a number of key findings based on statistical analysis and examinations of government data and information. Among the report’s major conclusions are:

• There has historically been very little relationship between annual changes in corn prices and consumer food prices. The corn price would be considered a statistically insignificant variable in determining what drives the food CPI.
• The costs of other components in the marketing bill (e.g., labor, packaging, transportation, energy, profits, advertising, depreciation, rent, interest, repairs, business taxes) have also been increasing and general inflationary pressures have also impacted food prices. Increases in these other marketing bill components are contributing to food price increases, as reflected in the growing farm-to-retail price spread for many food categories.
• The “farm value” of commodity raw materials used in retail foods accounts for just 16% of total U.S. food costs, a proportion that has declined significantly from 37% in 1973. For food products where corn is only one of several farm-produced inputs, the proportion of the total product cost attributable to the cost of corn is even less than 16%. The remaining portion of total retail food costs is known as the marketing bill.
• Historical price relationships between corn prices and livestock, poultry, egg and milk prices show relatively weak correlations. With these low correlations, it is statistically unsupported to suggest that high and/or rising corn prices are the only or even the main reason behind high and rising retail meat, egg and milk product prices.
• Ethanol has not been the only factor influencing corn prices; other supply and demand factors have also been at play. Weather events, a decline in the U.S. dollar, strong export demand and steady feed demand are among the supply/demand factors that have pressured corn prices in recent years.

In several places, the report references the important role of energy prices in determining consumer food prices and speaks to the ability of ethanol to reduce gasoline prices. According to the authors, “Within the overall marketing bill, the costs of energy and transportation have increased considerably over the last several years, with crude oil prices surging from just under $60/barrel in fall 2006, reaching above $100/barrel in the first half of 2008, falling back down during the economic recession and again breaking $100/barrel in 2011, roughly the same periods during which corn prices have increased.”

On the ability of ethanol to hold down gasoline prices, the report states “…to understand the net impact on consumers’ financial condition, changes in expenditures on not only food but also fuel would have to be considered. Specifically, if more abundant supplies of ethanol were to result in a measurable reduction in retail fuel prices, this would have to be compared to any food price increase in determining the net impact to consumers.” The Informa study makes reference to a recent analysis (pdf)by the Center for Agricultural and Rural Development that concluded growth in ethanol production reduced gasoline prices by an average of 25¢, or 16%, over the entire decade of 2000-2010.

The entire Informa Economics report is available here (pdf)and an executive summary is available here (pdf).

RFA also noted that the new Informa report confirms many of the key findings from a recently released USDA study on the factors contributing to higher food prices. The USDA report is available here (pdf).