Tuesday, April 15, 2008

Food Prices and Ethanol

For those of you looking for an unbiased and scientific source to back up claims that ethanol has little effect on rising food prices, Texas A&M University has the solution...
In the past few weeks it has been difficult not to see the reports of rising food prices around the world and the instability that it is creating. In fact, just the other day I watched a very interesting report on Iowa Public Television about rice problems in Southeast Asia. And TIME magazine and CNN have raised the possibility if not fully implicated biofuels and, in particular, ethanol, for the problems faced around the world. Even though ethanol may have a small impact on grain prices, the amount of corn that actually shows up in the price of grocery items is actually very small. Before getting to the Texas A&M study I wanted to jump back to the report I saw on rice issues in Southeast Asia. Evidently, the cost of rice has skyrocketed on projected weak inventories because of large increases in demand from India and China, whose countries are getting bigger and richer and demand more corn and especially, rice. Because of possible supply problems India, (second only to Thailand in Southeast Asia in the amount of rice exported), has agreed to suspend exporting any rice to ensure domestic demand is met. This has caused other countries such as Cambodia to fear for their own domestic stocks and have in turn closed their rice export industries. What this has done is put the whole rice burden for South Asia on the back of Thailand. And whether the rice stockpiles are actually decreasing or not, the action by certain counties has caused exactly what was originally feared... no rice on the open market.
Interestingly there are a lot of parallels between what is seen in Asia with rice and what is seen in the US with corn. A few months ago China decided that since there population was growing, they would suspend exporting corn. Since China is second only to the US in corn exports, this has a huge impact on the world corn market. Even though it has allowed the US to increase corn exports to record numbers, it has generated a wave of speculation and commodity purchasing of corn and other US products because of a perceived drop in inventories. This drop may be real, but it has little or nothing to do with biofuels.
More importantly, the increase in energy prices, along with the weakening dollar, has driven investors away from the stock market and into the commodities market; where speculation continues to drive up the price of grains.
The Texas A&M study was able to look at these trends and find that the overall biggest cause of rising food prices is high energy prices. They even found that grocery items such as milk, eggs, and bread that are closely tied to corn were largely unaffected by biofuels production and that reducing or removing ethanol production would have little impact on these prices. I find it interesting that media outlets will assume that one things causes another without any causal evidence to back up their claims. So next time you are in a conversation with a friend/neighbor/coworker about this topic, let them know that you've got scientific study after study that will refute any claim that ethanol is a major contributor to global food price increases.

For the original Texas A&M study:


mus302 said...

Interesting study. A lot of people seem to have the notion that if ethanol production were ended that corn prices would go back to the $2.00 a bushel that it was in early 2006 but this study shows that at that price farmers would be losing money because inputs costs have risen so much.

Joe said...

Part of the run up in the input cost of corn is due to the expansion of corn.