Data Also Disproves Food v. Fuel Claims

The Wall Street Journal’s Scott Kilman reported earlier this week on a letter sent by General Mills, the Grocery Manufacturers Association and Kraft Foods to Ag. Sec. Tom Vilsack, asking for reduction of trade tariffs on sugar. From Kilman’s article and the letter, it’s clear that grocery manufacturers are once again trying to distract public attention from their price increases by pointing a finger of blame at biofuels.

Last year, you may recall, Roll Call exposed the Grocery Manufacturers Association’s plan to use the food vs. fuel debate to cover their industry’s price increases.

Kilman writes:

Prices are up because the world is consuming more sugar than farmers are producing. One big factor: The world’s largest sugar producer, Brazil, is diverting huge amounts of its cane crop to making ethanol fuel. Likewise, the food industry has complained bitterly in recent years about the U.S. ethanol industry’s ravenous appetite for corn, which helped push up prices for that key ingredient too.”

Sugarcaneblog provides the real explanation for current, temporary sugar price increases – rain has slowed the pace of harvesting – even while Brazil’s sugar production is up 15 percent this year.

Reuters reporter Brad Dorfman provides much more thorough, clearer analysis on the claims made by the grocery manufacturers:

Food industry analysts say inflation should be contained for an industry that sharply increased prices in the past year as costs for commodities such as vegetable oil, wheat and corn surged.
“Many commodity prices have retreated, and manufacturers are trying to defend the price increases as consumers and retailers try to rein in costs in a weak economy.”

The Consumer Price Index shows that food prices have actually declined a percentage point over the first half of this year, after rapid increases in the past two years. The data also show that the increases in the past year were out of proportion to inflation in other categories.

CPI Percent increase/decrease

2002

2003

2004

2005

2006

2007

2008

2009

Food

1.5

3.6

2.7

2.3

2.1

4.9

5.9

-1.1

Energy

10.7

6.9

16.6

17.1

2.9

17.4

-21.3

14.8

Other Goods

1.9

1.1

2.2

2.2

2.6

2.4

1.8

2.3

Source: Bureau of Labor Statistics.

Neither biofuels nor energy provide a good explanation for increases in food prices.

Increases in food price inflation do not correlate well to either biofuel production or energy price data.

Increases in food price inflation do not correlate well to either biofuel production or energy price data.

Even a Congressional Budget Office study requested by Members of Congress who wanted to make a case that biofuels’ were raising the cost of government food programs could only find a 10 percent to 15 percent impact on food prices from biofuels. That study showed that nearly two-thirds of the price increases could not be explained by either biofuels or energy prices.

Of the 5.1 percent CPI increase for food between April 2007 and April 2008, energy had a larger effect than biofuels. But even together, they account for a fraction of food price inflation:

Biofuels

0.5 to 0.8

10 to 16%

Energy

1.1

22%

Other Causes

3.2 to 3.5

62 to 68%

Source: Congressional Budget Office, “The Impact of Ethanol Use on Food Prices and Greenhouse-Gas Emissions,” April 2009

So why is GMA resurrecting its campaign to blame biofuels for food price increases? (See also their letter to Sen. Boxer from a few weeks ago.) Likely because it was a very profitable strategy for them last year and it continues to work, at least with half the time.

Land O’Lakes

16%

Kraft Foods

21%

Sara Lee

55%

General Mills

61%

Kellogg Co.

9%

Source: 2020 Project, FoodPriceTruth.org.

CBO Calculates Ethanol’s Impact on Food Prices

According to a newly released Congressional Budget Office report, ethanol contributed between 0.5 and 0.8 percentage points (10-15 percent) of the overall 5.1 percent increase in food prices between April 2007 and April 2008. That estimate is considerably lower than previous estimates. The report also calculated the increase in costs for federal food aid programs, which was the initial reason that Reps. Ron Kind (D-Wisc.), Rosa DeLauro (D-Conn.), and James McGovern (D-Mass.) requested it.

Despite that purpose, the Grocery Manufacturers Association, American Meat Institute, National Turkey Federation and National Council of Chain Restaurants were quick to publicize the report in their anti-ethanol Food Before Fuel campaign.

However, the report leaves a very large question open about the true causes of food price increases. The CBO notes that energy costs contributed another 1.1 percentage points (22 percent) to the 5.1 percent increase. That means that 3.2 percentage points (roughly two-thirds) are unaccounted for. And note, the 5.1 percent rise came on top of 2.5 percent and 4 percent food price increases in 2006 and 2007.

The other cited causes of increased food prices are growing global demand for meat, the depreciation of the U.S. dollar, which made U.S. corn cheaper than overseas corn, and speculation in corn futures due to expected poor harvests and overall hype about demand for corn. Is it possible that ethanol’s impact on food prices is much lower than the impact of certain groups simply raising food prices?

Setting the Record Straight

I was pleased to read AP reporter Deborah Jian Lee’s story on Jan. 12, saying that the food and fuel debate has “receded to a murmur, and even the Grocers Manufacturers Association, one of the most vocal biofuel critics, seems to be backing off a bit.” Biofuel producers will likely remember that last May the Capitol Hill newspaper Roll Call revealed that the Grocery Manufacturers Association had launched a public relations effort to blame biofuels for rising food prices. I asked the question then whether the press would set the record straight, as noted economists and BIO have tried to do throughout the year.
It was interesting to note the comments of the GMA’s Scott Faber, who apparently said ethanol production is “just one in seven sources of commodity price inflation.”

How Much Corn Is in a Barrel of Oil?

A segment on the Discovery Channel’s show “How Stuff Works” caught my eye this week and prompted that question. The segment points out that Xanthan gum, fermented from corn syrup, is used in oil drilling. Xanthan is combined with the drilling mud used to cool drilling equipment, and it helps to clear dirt and rock from the mud as well as maintain a pressure cap on the bore hole.

The primary markets for Xanthan gum are of course food and cosmetic ingredients — check your supermarket shelves for the number of products containing it. But enough is used in oil production that a 2006 Saudi Aramco white paper explored establishment of a Xanthan gum production plant in Saudi Arabia to meet oil drilling needs. The white paper projects the market for Xanthan gum for 2007 and 2008 among the Gulf Cooperation Council countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates), using Saudi Aramco’s exploration and production models. For 2007, the projected need was nearly 15 million pounds, and for 2008, nearly 12.5 million pounds.

Arguments about the diversion of food and land for biofuel fail to consider exactly how many non-food products contain corn.

High Food Prices Hurt Consumers and Biofuels Companies

Yesterday, the New York Times wrote:

“A United Nations food agency called on Tuesday for a review of biofuel subsidies and policies, noting that they had contributed significantly to rising food prices and the hunger in poor countries.

With policies and subsidies to encourage biofuel production in place in much of the developed world, farmers often find it more profitable to plants crops for fuel than for food, a shift that has helped lead to global food shortages.”

Even though corn and other crop prices increased from 2006 to 2007, there is no shortage of food. According to the USDA National Agricultural Statistics Service U.S. farmers planted 92.9 million acres of corn in 2007 (NASS: Acreage), with average yield expected to be 153 bushels per acre (NASS: Crop Production). USDA says 3.4 billion bushels, roughly 26 percent of the expected harvest, will be converted to approximately 9.3 billion gallons of ethanol, leaving more than 9 billion bushels for food, feed and export markets, which would easily meet or exceed 2006 demand from these markets.  Translation, plenty of food.

Food prices increased 4.1 percent in the United States from June 2006 to June 2007 for a number of reasons:  increased corn prices, increased costs of oil, worldwide weather-related disruptions of food (droughts and freezes), and contamination scares.

Now fast-forward to October, 2008.  Barron’s wrote on October 2, 2008,

“Corn prices, for example, fell 6% in Thursday’s trading, dropping to $4.55 a bushel – the lowest price corn has commanded since December. “

High food prices aren’t just bad for consumers, they’re bad for the biofuels industry.

“There were ominous signs for the [biofuels] industry even before the Wall Street meltdown,” writes the Associated Press.

“By 2007, corn and soybean prices charged upward, cutting into the profit margin for biofuels and leaving some plants without enough cash to operate.

Plant operators in Lilbourn said doubling soybean prices wiped out cash reserves just as the first batch of biofuel was produced.”

But now,

“…with commodity prices dropping, construction for some stalled biofuels plants has restarted.”

The take-home message, high food prices result from a complicated set of factors and affect not only consumers but the biofuels industry as well.

A Tale of Two Studies

Don Mitchell of the World Bank’s Development Prospects Group has released an official version of his analysis of biofuels’ impact on the rise in global food prices. An early version of the study was leaked to the Guardian in London on July 4.

Mitchell attributes 70 to 75 percent of the increase in food commodities prices to “biofuels and the related consequences of low grain stocks, large land use shifts, speculative activity and export bans.” In other words, Mitchell assumes that U.S. and EU support for biofuel production is the direct cause of other phenomena that have contributed to the rise in food commodity prices. Mitchell attributes the remaining 25 to 30 percent of food price increases to the rising price of oil and the weakening of the U.S. dollar.

And how did biofuels contribute to low grain stocks? According to Mitchell, it is because biofuel crops were grown “on land that could have grown wheat.” Mitchell notes that worldwide wheat acreage declined by only 1 percent and wheat stocks actually grew. Nevertheless, in his opinion, more wheat should have been grown.

Mitchell’s assumptions contrast with the conclusions of other studies, including a recent one by Purdue University economists released by the Farm Foundation. That study follows others in concluding that the rising price of oil is the largest contributor to rising food costs, in part because it is a stronger driver of demand for biofuels than government policy has been. Researchers at Texas A&M University came to this same conclusion, as has been discussed on this blog.

Despite the fact that Mitchell admittedly “does not consider how supply would respond to high commodity prices and moderate price increases over time,” he nevertheless concludes that “biofuels policies which subsidize production need to be reconsidered in light of their impact on food prices.” The Purdue study concludes with a much more cautious note: “The challenge facing policy makers is to find policy options that deal with the short-term effects created by rising food prices without creating a new set of long-term problems.”

Purdue University Weighs In on What’s Driving Food Prices

The Farm Foundation recently released a report prepared by Purdue University agricultural economists on the forces driving food price increases. They conclude that higher food prices are the result of the complex interaction of global changes in supply and demand for commodities, the depreciation of the U.S. dollar, as well as growth in production of biofuels.

According to the authors, these factors have combined to rapidly raise demand for U.S. grains beyond current production, leading to “the change from a surplus to a shortage era” and to increased prices. The authors also say that 75 percent of the demand for biofuels has come as the result of increased oil prices rather than the renewable fuel standard.

This is much the same conclusion drawn by researchers at Texas A&M University (see earlier post). It is also similar to the stated view of Bruce Babcock of Iowa state University’s Center for Agricultural and Rural Development during testimony to the Senate Committee on Homeland Security:
“Elimination of the [RFS] mandate would reduce expected ethanol production by about 4 percent … and the price of corn would fall by slightly more than 1 percent.”

The Purdue University researchers also highlight “the potentially large supply response that could result as farmers in developing countries increase production and productivity.”

Not a Secret After All

On Friday July 4, The Guardian newspaper of London published a story (“Secret report: biofuel caused food crisis”) about a “confidential,” unpublished World Bank report it had obtained purportedly demonstrating that biofuels are responsible for 75 percent of the global rise in food prices. “The damning unpublished assessment is based on the most detailed analysis of the crisis so far, carried out by an internationally-respected economist at global financial body,” according to The Guardian.

In the story The Guardian reporter quotes a source from Oxfam, the humanitarian aid and development organization, which released its own report condemning biofuels in June. However, she does not cite a published report by the World Bank that attributes the rise in food prices to a combination of factors, including the rising price of oil, depreciation of the U.S. dollar, declining stockpiles of grains, and production of biofuels.

This official World Bank report says, “Three quarters of the increase in global maize production (emphasis mine) in the last three years went to ethanol in the US.” Translated, this means that the United States is using increased production of corn to make biofuels, not taking corn out of traditional markets for food, feed and fiber. It is not the same as saying that biofuel production accounts for three quarters of the global rise in food prices – meaning all grains, meats, poultry, etc. According to the USDA, biofuels production has not reduced exports of food or feed. U.S. corn exports reached record levels in 2007-08, and soybean exports are up as well. The U.S. livestock industry is still the top user of corn, with more corn expected to be fed to livestock in 2008 compared to 2007.

The Guardian’s story was picked up and repeated by other news organizations, even though other reporters appeared not to have actually seen the “secret” World Bank study. As Reuters noted, “Due to Friday’s Independence Day holiday in the United States the Guardian report could not immediately be confirmed.” Yet, Reuters ran the story. The Guardian then picked up the 75 percent figure as established fact in an editorial on Monday July 7.

The Wall Street Journal revealed on Monday that the World Bank report was not a secret, it was a working draft that was intended to be incorporated in a position paper released in April. “Bob Davis of the WSJ spoke with Donald Mitchell, the author of the draft report—which wasn’t secret at all, but a working paper. And like all working papers, it doesn’t reflect the official position of the World Bank.”

The Guardian story is reminiscent of Time magazine’s one-sided report back in April on the indirect land-use effects of biofuel development. That article set the stage for the current media backlash against ethanol, though few reporters have ever questioned the facts of the story.

Food Supply Will Meet Demand

The UN Food and Agriculture Organization (FAO) and OECD released their annual Agricultural Outlook yesterday. It makes a strong case for increasing global agricultural production by increasing yield on existing acres – one of many solutions biotech can help provide.

  • Adverse weather conditions in major grain-producing regions, coupled with low stocks, were enough to trigger the current sharp rises in food prices even if all other factors were equal.
  • Productivity gains from increased yields will eventually meet and exceed the growing demand for food, feed, fiber and biofuels.
  • Continued growth in yields will be a more important factor in meeting demand than increased use of land for agriculture.
  • Food and feed remain the largest sources of demand growth in agriculture, not biofuels.

The report also credits new technological developments – such as cellulosic biofuels – with the possibility that we could reduce world food prices in the future, but also points out that these technological developments are not considered in the current projections.

How the world can boost agricultural output without increasing land use is a challenge that U.S. Agriculture Secretary Ed Schafer will address when he travels to the UN High-Level Conference on World Food Security: the Challenges of Climate Change and Bioenergy in Rome next week. His agenda for the meeting will include support for increased adoption of and reduced trade barriers for agricultural biotechnology. At a briefing for reporters, he noted:

The United States will propose that all countries consider strategies that expand research, promote science-based regulations, and encourage innovative technology — including biotechnology…. 

“I will be hosting a side event focused on new technologies to showcase developing countries that have moved forward with public investment in adoption of bioengineered products….

“According to our [White House Council of Economic Advisors] analysis, the increased biofuels production accounts for only 2 to 3 percent of overall increase in global food prices. At the same time, the International Energy Agency reports that biofuels production over the past three years has cut the consumption of crude oil by 1 million barrels a day. Biofuels are helping address both environmental concerns and the economic impacts of high oil prices.”

The IEA perspective on biofuels mentioned by Schafer is well worth reading. It says in part:

Biofuels are playing an increasingly important role in meeting growing transport fuel demand. They represented 49% of the growth in Non-OPEC oil supply in 2007 and this share is expected to rise to 55% in 2008.”

Will the Press Set the Record Straight?

Last week, Roll Call revealed that the Grocery Manufacturers Association paid for a PR campaign aimed at blaming high food prices on biofuels (call it the ‘vast chicken wing conspiracy’). But since the revelation, there’s been very little effort in the press to set the record straight.
The USDA this week held a press conference to tell reporters the true causes of food price increases. And on Tuesday this week, Michael W. Masters, Managing Member and Portfolio Manager of Masters Capital Management, LLC, testified before the U.S. Senate Permanent Subcommittee on Investigations Committee on Homeland Security and Governmental Affairs on whether institutional investors are contributing to food and energy price inflation:

Institutional investors are one of, if not the primary, factors affecting commodities prices today.
“When asked to explain this dramatic increase, economists’ replies typically focus on the diversion of a significant portion of the U.S. corn crop to ethanol production. What they overlook is the fact that Institutional Investors have purchased over 2 billion bushels of corn futures in the last five years. Right now, Index Speculators have stockpiled enough corn futures to potentially fuel the entire United States ethanol industry at full capacity for a year. That’s equivalent to producing 5.3 billion gallons of ethanol, which would make America the world’s largest ethanol producer.
“Turning to Wheat, in 2007 Americans consumed 2.22 bushels of Wheat per capita. At 1.3 billion bushels, the current Wheat futures stockpile of Index Speculators is enough to supply every American citizen with all the bread, pasta and baked goods they can eat for the next two years!”

So, what’s the solution? Purdue Agricultural Economist Dr. Chris Hurt told the Purdue Biofuels Symposium on Sunday May 18:

We must not throw out all the work that’s going on, the tremendous amount of research into cellulose, into increasing the yield ability of corn and the amount of ethanol we can get from that. Our fuel problems aren’t just going to go away. Agriculture needs support over the next several decades. That’s the message we all in agriculture want to get across. We’re into this now. We have huge potential. Let us continue to develop that potential.”

According to Alan Tracy, U.S. Wheat Alliance President, and Ron Suppes, USW Chairman,

Biotechnology is the best and most practical tool available to give the world the boost in agricultural productivity we must have to reduce starvation and environmental degradation. Continued mindless opposition to this applied science will only bring greater misery, poverty and environmental destruction to the world.
“The genetically modified crops now planted broadly across the U.S. require less herbicide and insecticide and consume less of the oil and energy it takes to make such pesticides. (Doesn’t it just make sense to build an insecticide into a plant rather than broadcast one onto the whole field?) Engineered herbicide tolerance brings better weed control, which leads to less tillage, which uses less fuel and preserves both the soil and its capacity to store away carbon. Higher yields mean that less new cropland has to be found to meet the needs of a growing world population. That means less forest and jungle and savannah get destroyed along with their air purifying and carbon storing capacity. Biotechnologically derived saline tolerance is now on the near horizon, meaning that we will be able to reclaim croplands that have been abandoned. Modern biotechnology is roving to be one of the most important environmental advances that agricultural science has ever discovered.”