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Ethanol not to blame for food price hikes, says report

By Laura Crowley , 11-Dec-2007

There is little connection between corn ethanol production and food price inflation, according to a statistical analysis by Informa Economics.

The recent report, prepared for the Renewable Fuels Foundation, unsurprisingly finds that factors aside from corn are more influential in current food hikes.

 

 

 

In fact, it says that only 4 percent of the change in food prices is a result of fluctuations in corn future prices.

 

 

 

It identifies the "marketing bill", which is the final food costs excluding grains or other raw materials, as a key driver of the consumer price index (CPI) for food, largely due to rising energy and transportation costs.

 

 

 

Another significant factor is surging global demand for commodities.

 

 

 

"The statistical analysis plainly details that energy-intensive activities such as processing, packaging and transporting, as well as the cost of labor, have a far greater impact on consumer food bills than the price of grain," said Informa chairman and CEO Bruce Scherr.

 

 

 

"It may be politically convenient to blame ethanol for rising food prices, but it doesn't make it factually accurate."

 

 

There has been public debate in the past year surrounding the impact of the growing US ethanol industry on food prices.

 

 

 

According to USDA statistics, ethanol demand for corn will rise to 3.3bn bushels this year. Some 30 new ethanol plants have been opened since last year, and another 76 are thought to be under construction, which are expected to double current production capacity to 13bn gallons by 2009.

 

 

 

But with this intense shift in the market for corn, prices have naturally shot up. Higher raw material costs and higher prices for animal feed has led to higher prices for meat and dairy products. The annual increase in the food CPI has averaged 2.96 per cent since 1985, peaking at 5.84 per cent in 1989.

 

 

 

However, this report says the connection between food price hikes and ethanol production is less than previously argued.

 

 

 

It found that the farm value of commodity raw materials used in foods accounts for 19 per cent of total US food costs. This has declined significantly from 37 percent in 1973.

 

 

 

Furthermore, it said that for food products where corn is the only input, the proportion of the total product cost attributable to the cost of corn is even less than 19 percent.

 

 

 

The marketing bill has a higher correlation with the CPI for food than corn, although there is a notable long-term upward trend to both the marketing bill and the food CPI.

 

 

 

When analyzing the historical relationships between corn prices and livestock, poultry, egg and milk prices, results showed weak correlations. The report says that the upward trend in cattle, hog and poultry prices began in the late 1990s, well before the corn price began to increase significantly.

 

 

 

The report concludes that no single factor has led to food price increases. Scherr said: "Soaring energy prices, increasing global demand and rising labor costs have a far more significant impact on food prices than stronger corn prices due in part to ethanol demand."

 

 

 

This is not the first time the ethanol argument has been played down. Addressing the Consumer Federation of America in July, acting US Agriculture Secretary Chuck Conner said that the link between growing ethanol demand and higher food prices was overstated.

 

 

 

He said that other factors, such as higher oil prices, which last month hit a high of $100 per barrel, and which have a knock-on effect on energy-intensive food processing, packaging and transportation.

 

 

 

Prices for wheat have also been high because of bad weather conditions. Conner said that despite short term difficulties, farmers are responding to rising commodity demands by adding acreage and boosting yields. More wheat has been planted to address the shortfall, as has more corn.

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