April 13, 2008

Texas A&M Studies Ethanol's Effect On Food Prices

Texas A&M study on the effect of ethanol on food and feed pricesTexas A&M recently released a study into ethanol's effect on Texas food and feed. Like many other studies it found that energy prices had a greater impact than did commodity prices. Some of the key findings include..

  • The underlying force driving changes in the agricultural industry, along with the economy as a whole, is overall higher energy costs, evidenced by $100 per barrel oil.
  • With rising energy costs, corn and other commodity prices would have to increase. Rising fertilizer costs led to a 3 million acre reduction in planted corn acres in the 2006-07 crop year. Higher production costs will continue to pressure acres.
  • This research supports the hypothesis that corn prices have had little to do with rising food costs. Higher corn prices do have a small effect on some food items.
  • Important food items like bread, eggs, and milk have high prices that are largely unrelated to ethanol or corn prices, but correspond to fundamental supply/demand relationships in the world.
  • Relaxing the RFS does not result in significantly lower corn prices. This is due to the ethanol infrastructure already in place and the generally positive economics for the industry. The ethanol industry has grown in excess of the RFS, indicating that relaxing the standard would not cause a contraction in the industry.
The report also notes as have others that money flowing into commodities as a hedge against inflation has lead to volatility in commodity prices.

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