USDA: high oil prices push up food prices more than corn ethanol

First-generation biofuels like ethanol made from corn and biodiesel from rapeseed have effects on food prices. However, new evidence from the U.S. Department of Agriculture (USDA) suggests high oil prices play a much larger role in this trend. The situation is far more complex than some want to believe, because some biofuels even succeed in pushing inflation down. Researchers point at the situation in Brazil: there inflation indices have dropped because of record ethanol output and record low prices for the biofuel (earlier post). Competitive biofuels bring down costs for all the economic sectors that would otherwise have to rely exclusively on very expensive oil products.

However, corn ethanol is another matter, because it is made from a major food crop and because it is much less efficient than sugarcane ethanol. But even here, the biofuel as such only plays a small role in increased food prices. The great irony is that ethanol's very counter-part, petroleum, is more to blame.

Acting USDA Secretary Chuck Conner - reiterating similar findings made by the UN's vice-director general and head of its Environment Agency (earlier post) and by the EU's Agriculture Commissioner (here) - explained today that global weather conditions, including droughts in Australia, as well as rising demand in China and elsewhere drove up wheat prices. More importantly, Conner says, the recent record highs for retail oil prices added to inflation by increasing the costs of everything: from packaging to transportation and processing.

In our contemporary food system, the cost of raw materials (such as corn or wheat) is marginal compared to the larger costs associated with planting, harvesting, shipping, storing, pre-treating, processing, packaging, and distributing food products. Obviously, all these steps are energy-intensive. So when energy costs and oil prices increase rapidly to reach current records, they are likely to trigger inflation.

What is more, high oil prices not only influence the food system, they influence the entire economy and virtually all of its industrial, agricultural and service sectors - thousands of manufacturing, transportation, and industrial processes (obviously, in energy-intsensive developing countries, this 'outrageous' situation - to quote India's Finance Minister - can be truly catastrophic - see here and here). Biofuels for transport and electricity are exactly meant to break this dependence on costly oil:
energy :: sustainability :: ethanol :: biodiesel :: biomass :: bioenergy :: biofuels :: oil :: petroleum :: inflation ::

And Brazil shows it works. With cheap ethanol - now at a 30% advantage compared to gasoline on an energy equivalent basis - and bioenergy from bagasse, the threat of rapidly increasing costs for these thousands of processes has been brought down.

In the U.S. food prices have increased about 2.7 percent in each of the last three years. But a jump of between 3.5 percent and 4.5 percent is expected this year before retreating a bit to between 3 percent and 4 percent in 2008, Conner said at a conference hosted by the Renewable Fuels Association, which represents the U.S. ethanol industry. Extremely high oil prices are responsible.

Ethanol producers in the U.S., meanwhile, have taken a hit to their bottom lines in recent months because corn prices remain high, while the price of ethanol has slid by 30 percent due to a supply glut. Conner said he would prefer if the ethanol price drop did not happen, but said long-term investments and production goals remain in place.

Neil Koehler, president and chief executive of Sacramento, California-based Pacific Ethanol Inc. blamed the oil industry for not absorbing as much ethanol as it could at a time when crude prices remain above $80 per barrel. Refiners contend they have limited capacity to blend the fuel with gasoline.

Still, ethanol production is booming. Archer Daniels Midland Co., Aventine Renewable Energy Holdings Inc. and other producers added a total of 1.2 billion gallons (4.54 billion liters) of capacity and 15 new plants since March, which matched the total additions in all of 2006, Conner said.

Meanwhile, the government expects U.S. farmers will produce a record 13.3 billion bushels of corn this year, with about 25 percent used for ethanol. But the number of bushels used for livestock feed also will rise slightly to 5.8 billion bushels, he said. (One bushel of corn equals 25 kilograms).

References:
USDA: Transcript of Remarks by Acting Agriculture Secretary Chuck Conner to the Renewable Fuels Association - October 2, 2007.

Associated Press: Oil prices, weather conditions driving up U.S. food prices more than ethanol, official says - October 2, 2007.

Biopact: India: 'outrageous' oil price damages economy, as $80pb could be new floor price - September 27, 2007

Biopact: High oil prices disastrous for developing countries - September 12, 2007

Biopact: UN: biofuels not to blame for high food prices - September 14, 2007

Biopact: EU Commissioner: biofuels have limited effect on food prices - May 04, 2007