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.

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.

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.

The 15 Percent Solution

Politicians are now beginning to call for a repeal of the Renewable Fuel Standard (RFS). Sen. Kay Bailey Hutchison (R-Texas) recently announced that she would introduce legislation to freeze the biofuel mandate at current levels, saying, “Expanding biofuels while refusing to take other measures, such as lifting the ban on oil and natural gas production in Alaska and the Outer Continental Shelf, is counterproductive.”

Texas Gov. Rick Perry (R) also asked for a 50 percent waiver of the RFS.

But will relaxing or freezing the RFS reduce food prices and quickly make more grain available? Will it make more fuel available? Unlikely.

New York Times blogger Mike Nizza gives a run down of the many factors behind the current rise in prices for grains. He includes the usual suspects — energy prices, droughts and increased demand from growing economies in Asia — and notes some longer term factors such as trade barriers. Nizza notes that the International Food Policy Research Institute attributes 25 to 30 percent of the global rise in grain prices to biofuels, and the UN Food and Agriculture Organization attributes 10 to 15 percent of the current rise in food prices to biofuels.

Allison Kilkenny of the Huffington Post puts the blame for rising food prices squarely on the rising price of oil:

There are food shortages because oil is nearing $120 a barrel. The necessary evil, oil, is the fuel behind all the food production in the world, so when the price soared over $100 a barrel, the poorest people took the brunt of the shock. In short, they ran out of food.
“Rather than branding biofuels the villain of the food crisis, the blame should be aimed at the persons pricing the oil.”

I’ve noted before that OPEC has not increased production to meet rising demand. It’s also true that oil companies have not expanded refinery capacity to meet demand. According to the Energy Information Administration, in 2006 oil companies planned to expand refinery capacity by 1.5 million barrels per day by 2012; but in 2007 oil companies cut expansion plans to 1 million barrels per day by 2012.

With high oil prices, reserves continue to decline. Economic consulting firm KPMG International polled financial executives from oil and gas companies back in April 2007, indicating then that oil reserves and prices were a problem. 34 percent of those polled said that declining reserves were a “major concern” for the industry, and 60 percent predicted that oil reserves would continue to decline, due to rising demand from emerging markets.

A big question out there is whether OPEC can open the spigots and bring energy supplies in line with demand. Even if they are able to do so, eventually, there remains a question about the ability of U.S. refiners to meet demand.

The need for alternative energy remains. And a few environmentalists still believe the RFS is the right policy for reducing greenhouse gases. See for example Nathanael Greene of the Natural Resources Defense Council: “The RFS just adopted is not perfect, but it is the first biofuels policy to mandate a shift in our production practices in a way that will address these challenges.”

Beyond this, the RFS was also intended to provide new incentives for increased agricultural production. Gordon Quaiattini of the Canadian Renewable Fuels Association points out:

Because of this new market and 21st-century agriculture practices — less fertilizer, less water, drought-resistant grains and increased yields on existing agriculture land — more crops are being planted and harvested, increasing supply at a time when, in the United States at least, a legislative cap actually restricts the amount of corn that can be directed toward ethanol production.”

And Colin A. Carter of the University of California at Davis and Henry I. Miller at Stanford University’s Hoover Institution argue that increased adoption of biotech agriculture can help break the competition between food and fuel.

A medium- and long-term benefit of high commodity prices may be that the governments in poor countries will be able to justify the testing and commercialization of critical gene-spliced food crops such as rice and wheat. Countries like China have this new technology ready to go, and the licensing of gene-spliced rice and wheat will quickly boost yields, and because of better insect, disease and weed control, reduce the costs of production.”