Can Biofuels Be Blamed For Higher Food Prices?

Corn and soybean producers have taken a beating in recent months because of high commodity prices. Critics, who include consumers, livestock producers, advocates for food stamp recipients, and supports for international food aid have all expressed concern about high food prices, and many have made the link to corn and bean values whether it was legitimate or not. USDA’s new Chief Economist went to Capitol Hill earlier this month and said most of the criticism was not appropriate.

Joe Glauber has been at USDA for many years, but now holds the top economist job, and testified to the Senate Committee on Energy and Natural Resources. He said a couple facts were true, that corn and soybean oil make up 90% of biofuel production, corn and bean prices have risen over 50% in the past year, and global food prices have risen over 45%. But he says to blame the corn and soybean producer, or even the biofuels industry, is not correct.

Glauber said food prices are rising for a number of reasons:
1) Global economic growth is raising family incomes and bolstering demand for processed foods and meats.
2) Adverse weather has created grain shortages in many countries, and buyers are buying ahead, pushing prices higher.
3) Many countries have installed export restrictions to reduce their own domestic food price inflation.
4) Higher costs for food marketing, transportation, and processing are due to higher costs for energy.

Farmers retain an average of 20% of each dollar spent by the consumer on food, but that is less than the value of the processing. Regarding grains and meats, each has a different economic track it is following.
1) Wheat is in the 3rd consecutive year of low global production, with US stocks at record lows and prices at record highs, but global production will rise beyond the point of demand.
2) Corn has strong domestic demand from livestock operators and a 15% increase from export business due to currency relationships; however ethanol demand will rise to 4 billion bushels, further reducing US carryover stocks.
3) US rice prices are high because of tight global supplies and export bans by several producers that have pushed up prices.
4) Soybeans are priced higher because of low stocks and carryover, with strong demand from China, and the prospect for larger US crop production.
5) Fruit and vegetable prices are higher because of drought and freeze damage.
6) Livestock and poultry prices are responding to increased cow slaughter and herd contraction, increased pork production and low market prices, and stable broiler production from higher feed costs.
7) Increased dairy production from higher international demand.

The biofuel industry doubled its demand for corn and soybean oil over the past three years, but while that was responsible for part of the rise in food prices, it was not the only reason. The strength of exports from global economic growth and drought resulted in 15-18% more corn and soybeans being exported. The increased use of corn and soybean for biofuels has raised commodity prices slightly, but has had little to do with higher prices for wheat and rice. Globally, food prices have increased 45% over the past year, with the largest increases in rice and sunflower oil, but lower prices for meats. Corn contributed 5% of the 45% increase and beans contributed 12%, and assuming there was no growth in the biofuels industry, global food prices would have still risen over 40%.

Regarding domestic food price increases, USDA’s Glauber says the Consumer Price Index for all food rose 4% in 2007, pushed up by a 30% increase in egg prices, 7% for dairy, 5% for poultry and 4% for beef. And he says it is very unlikely retail prices were affected by higher corn and soybean prices, since higher feed costs impact producers and there would not have been any time for that event to translate into higher retail prices.

Glauber says the ratio of livestock prices to feed costs tells producers whether to increase or decrease production, and in April the steer-corn price ratio was the lowest since August 1996, the hog-corn ratio was the lowest since December 1998, and the milk-feed ratio was the lowest since 1995.

In the Consumer Price Index, Glauber says biofuel expansion increased food prices in 2007 by .10-.15 percentage point, and in the first four months of 2008 the increase was .20-.25 of a percentage point, while the CPI for all food rose 4.8%. He forecast that in future years, a curtailment of livestock production from higher feed costs would still only raise the food CPI by .6-.7 of a percentage point.

Summary:
Food prices have risen both domestically and international, but USDA says that cannot be attributed to the increase in the biofuels industry. It has contributed less than a quarter of a percentage point to the 4.8% higher food costs this year, and less than 5% of the 45% increase in global food costs. The real reasons are higher demand from income growth areas, increased energy costs to process and transport foods, and global grain shortages due to weather adversities.

While that might be the bottom line economics, should this issue be viewed differently?