Friday, April 25, 2008

Ethanol Facts and Myths


Ethanol and biofuels in general have taken a lot of heat lately for the presumptive cause of food price increases. Many want to reconsider the nation’s focus and support for these alternative fuels, including criticism of members of Congress who supported biofuel legislation.

Whatever else one may criticize about corn ethanol, or biofuels in general, they are not the primary cause of recent food price increases.

Consider the fact that growers planted 24 percent more corn in 2007, which more than supplied all the corn that went into ethanol for the year.

One could, therefore, totally remove corn ethanol from the equation and most of the present food price issues still would be present because there are many more factors at play with food prices here and abroad.

The impact of farm gate commodity prices on final retail prices is dampened by the fact that 80 percent of the retail grocery cost is added after the food leaves the farm.

A standard box of cornflakes contains approximately 10 ounces of corn. Even when corn is priced at $4 per bushel, a box of cornflakes contains less than a nickel’s worth of corn.
A can of soda contains less than 2 cents worth of corn sweetener.

Further, the U.S. exported record amounts of corn in 2007, smashing the argument that the U.S. is “starving the world.”

There is no shortage of corn. Greater competition for it, yes, leading to higher prices for corn — but no shortage.

Indeed, livestock producers have been affected by higher feed costs, but those costs don’t get passed through directly to the consumer; it’s felt harder and longer on the farm before it reaches retail.

Additional factors affecting food prices include:
1. Low worldwide wheat prices the past several years have led growers everywhere to plant less wheat, which led to record-low wheat stocks, causing wheat prices to soar.
2. Regional pests, diseases and other natural disasters all impacted fresh produce availability and price.
3. Increases in labor costs, as state and federal minimum wages ratchet up — from farm to processing and the restaurant — affect food prices.
4. Rising fuel costs, over $100 per barrel, make it more expensive to grow, process, refrigerate, and transport food from the producers to stores and restaurants.
5. Personal choices — for example, organic milk costs nearly double conventional milk. Consumers are choosing to pay higher prices based on preferences.
6. Dollar decline makes food imports more expensive at the store and creates greater demand for U.S. agricultural exports. Approximately 30 percent of fruits and vegetables consumed in the U.S. are imported.

7. Corporate profits can be an excuse to hike prices. Kroger: fourth-quarter 2007 sales up 10 percent and profits up 18 percent. Safeway: sales up 3 percent, profits up 12 percent.
There isn’t a single study that has sorted out all these factors on total food price increases. However, given available data, I calculate the 4 percent to 5 percent increases in food prices during the last year can be broken down as follows:
0.2 percent to 0.3 percent due to ethanol use of corn
0.8 percent to 1 percent due to gasoline/fuel price increases
3.5 percent to 4 percent due to other causes

There also are regional differences in food prices, and the impact was more significant in the eastern U.S. than other regions, rising nearly 8 percent, while in Oregon the food price CPI for 2007 was 3.4 percent. (U.S. Bureau of Labor Statistics).

For perspective, between 2001 and 2007, while food prices (national average) rose 11 percent over a six-year period (barely more than 2 percent per year), the average price of a home increased 36 percent; a gallon of gas increase 96 percent; and the price of coffee rose 363 percent.

Hard to blame that on ethanol, but I suppose some will try.

Brent Searle grew up on a farm outside of Idaho Falls and has worked in agriculture his entire life; he is a special assistant to the director of the Oregon Department of Agriculture, where he has worked for the past 17 years. He lives in McMinnville.

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