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Minnesota Farm Bureau: Ethanol defended in questions over food prices

American Farm Bureau Federation senior economist Terry Francl says the production of ethanol and biofuels as been wrongly targeted as a scapegoat for rising food costs. He spoke at last weekend's Minnesota Farm Bureau Federation annual meeting in Brooklyn Park, Minn. Pioneer Photo/Brad Swenson

BROOKLYN PARK, Minn. -- As rising food costs mirrored higher oil prices, critics blamed ethanol production. But now that oil is half the price it was this summer, why hasn't food prices likewise dropped?

Food prices have soared the past two years, and some blame that on the diversion of corn to ethanol production and away from the table and as feed stock.

"There's no question that food prices have been going up, but you have to put a perspective on it," Terry Francl, American Farm Bureau Federation senior economist, said last week. They started soaring in 2007-08, but so did other commodities such as iron and other metals.

In trying to make a connection with biofuels, Texas Gov. Rick Perry petitioned the U.S. Environmental Protection Agency to roll back a renewable ethanol and biodiesel standard, but the EPA denied his request.

The Grocery Manufacturers Association, however, picked up the gauntlet, Francl said, and launched a campaign to convince consumers that ethanol was a detriment to food and feedstock, plus isn't helping the environment.

"They wanted to undermine ... whatever intellectual justification might still exist for corn-based ethanol among policy beliefs," Francl said.

Francl, who spoke at last weekend's Minnesota Farm Bureau Federation annual meeting in Brooklyn Park, Minn., said a host of reasons has caused food prices to climb, with ethanol production only a small part.

He said critics knew of all the factors that framed higher food costs, but couldn't do much about most of them. "The only thing that's out there that's political was ethanol and biofuels. That was like a big target on their back."

Citing U.S. Department of Agriculture surveys, Fancl said the average in 2007 was $3.39 a bushel for corn versus $4.69 today. An 18-ounce box of Corn Flakes contains about 12.9 ounces of milled corn, which should raise the price of a box by 0.5 to 1 percent. Instead, the price went up 5 to 10 percent.

In some cases, food manufacturers use smaller packages to hide higher prices, Francl said.

"These poor, poor people ... saw percentage increase in earnings over the last year of 28 percent for Del Monte, 23 percent for Land 'O Lakes, 51 percent for Sara Lee, 85 percent for Cargill," Francl said.

"These folks were just using these higher prices as an excuse to raise their prices," he said. "This is nothing new, we've seen this happen over and over again."

According to the GMA Web site, the organization supports the development of sustainable and energy efficient fuel alternatives "in a market-based environment" and supports policies "that ensure that the country can increase biofuels production without impacting the food industry's ability to continue to provide reliable and affordable food to the nation and other markets."

GMA also opposes current efforts to extend a $5 billion subsidy for corn ethanol.

The group cites a study by a former USDA official that food prices were up 6.9 percent for the first four months of this year, while they rose only 4.9 percent in 2007. "Higher energy prices, overall inflation and biofuels are major contributors to recent food price increwases," says the report.

In looking at volatility of food prices over the last 20 years, Francl said eggs was No. 1, followed by fruits and vegetables, at 6 to 8 percent. Pork and beef see price volatility at 4 or 5 percent, cereal and bakery at 3 or 4 percent.

Inflation should hold at 5 percent, he said, and steady at 4 to 5 percent next year. The big increases have come in fruits and vegetables, at 6.5 to 7.5 percent. "I ask you, what impact do you think corn or soybean prices have on fruit and vegetable prices?"

Francl said "the numbers just don't support all the rhetoric going around on this.

With higher corn prices, however, Francl admits the cost of feeding livestock is going to go up, meaning farmers will need to at some point adjust their numbers by cutting back production to a level where prices can be increased to cover the higher input costs.

Those adjustments are being made now, which will cause meat prices to climb, he said, "but we're talking about maybe 1 percent above the long-term average of 2.5 to 3 percent."

Food price factors

In 1955, total expenditures for food saw 25 percent for meals away from home, Francl said. Today, about half the expenditures are for out-of-home dining.

"If you're buying your food at a restaurant, at McDonald's or Dairy Queen, there's going to be more costs involved," Francl said. Recent increases in the minimum wage also play a role.

Consumption is being driven by emerging middle classes in China and India, he said, adding that China's middle class is now about the size of the entire U.S. population of 300 million.

"As peoples change, as their incomes change, both for the middle class and for the country as whole, they become very much more higher protein oriented," Francl said. "They're going to go to the higher proteins, generally in China more to meats like chicken, pork, a little beef, even fish. That increases the demand for all products -- corn, wheat, rice."

Over the last eight years, demand for all commodities has begun to outstrip production, he said. Reasons include less food storage capacity today in the United States and food manufacturers keeping supplies down and making only what is ordered.

"That's fine for car parts, but if you're dealing with crops, how many times do we produce those?" Francl asked. "Once a year. So if something happens, you have to wait a whole another year."

The value of the dollar has also affected crops, he said, as the declining dollar makes U.S. products cheaper to other countries. The dollar has seen a steep decline in the past five years. "That increased the demand for our products."

The trend line for oil and corn prices over the past two years nearly match, Francl said. "There's about a 90 percent correlation between crude oil prices and corn prices."

Corn futures prices moved from $2 a bushel in 2005 to nearly $8 last fall.

Hedge funds and other market forces have also affected food prices, he said. "They were betting on inflation, so they really jumped into the markets." Some 300,000 contracts at one time has dropped to 6,000 because of the current economy and problems with equity.

Historically, corn between the 1930s and 1940s traded for between 50 cents and $1, he said. Corn traded up to $1 to $2 during World War II. Another jump came in the early 1970s when President Richard Nixon opened up U.S. grain markets to Russia and China.

Francl believes now is the time for commodity prices to rise again to the next plateau, when the old high becomes the new low.

"As prices go up, we tend to react to those prices," he said. "The price of our inputs go up, the price of fertilizer and feed ... basically what happens is you institutionalize that entire cost level into the production and set up a new floor."

That new floor for corn in the future may be $3 to $5 a bushel, Francl believes.

Also, costs are deceiving unless adjusted for inflation. Corn in 1947, adjusted to 2000 dollars, would cost $14 a bushel, he said. Corn prices today may seem high, "but adjusted for inflation, we've had a heck of a lot higher prices in the past."

All told, Francl estimates that corn at $3 to $6.50 a bushel is impacted by ethanol production only 50 cents to a $1. Other impacts include the effect of funds on commodity prices at 25 to 75 cents, higher world demand for crops at 50 cents to $1, up to a decade of declining crop stocks at 50 cents to $1, falling value of the dollar at 25 to 75 cents and weather reducing U.S. yields at $1 to $2.

"Ethanol probably affects only 20 to 25 percent of the increase in our corn prices last summer," Francl said. "Weather really pushed these prices up."

Farm income and land values also play a role, he said.

Defending ethanol

Ethanol plays an important part in the U.S. energy picture, he said. It reduces the reliance on foreign energy sources, it creates new jobs and economic growth in rural areas, it enhances the environment and consumers and taxpayers are the big winners.

About 8 percent of the gasoline consumed in the United States this year will be ethanol, Francl said. "Ethanol has increased the supply 8 percent. What happens when the supply goes up? The price goes down."

Last summer, with gas at $4 a gallon, that incremental increase of ethanol affected the price of gas by 40 to 60 cents. "That is about $43 billion to $87 billion," Francl said.

"When all this rhetoric was going on, for every $1 increase in food prices, people were saving at least $2 at the pump for gasoline," Francl said.

Growing the United States' renewable fuels promotes less dependence on foreign oil, "so we aren't held hostage," said Francl.

"Bottom line, ethanol doesn't have as much energy in it as gasoline does, only about two-thirds, but its an octane enhancer,' Francl said. "That more than offsets the different in the BTUs."

Some studies show a 50 to 60 percent increase in the amount of energy using ethanol," he said. "In other words, consider all energy that goes in and all energy that comes out, you're ahead of the game by 50 to 60 percent."

While admitting it costs energy to make ethanol, Francl called it "a higher and better use."