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.

USDA Says Biofuels Not Responsible for Increasing Food Prices

On Monday the USDA held a press briefing. The subject? Food and fuel.

One theory that has been widely discussed in recent weeks is that the nation’s growing demand for biofuels and the crops needed to produce them is the real culprit behind higher food prices, both at home and abroad. Yet the evidence that we have seen, and that Joe will take you through in just a few minutes, does not support this.

said, Agriculture Secretary Ed Schafer

Dr. Joe Glauber, USDA‘s Chief Economist cited reasons such as global economic growth, drought, export restrictions, energy costs — and their impact on food marketing and transportation costs.

The Secretary closed with,

Our need for food and fuel is only going to grow. For agriculture to meet that need, we must work with other nations to get more productivity out of the land that we have through wider use of biotechnology and better farming and irrigation and pest control methods. We must build our fair framework for international trade so every nation can build on the strength it brings to agriculture and to benefit from the strengths that other nations can offer.

and then took questions from reporters.

To see the video of the briefing, read the transcript, or view the powerpoint slides visit the USDA’s Newsroom.