May 24, 2008

Recap Of Recent Food Price Studies

While almost every other news article it seems is trying in some way to blame ethanol for rising food prices, there have been several studies and reports published recently that conclude that other factors are having a much larger impact. Just to show the growing body of research I would like to recap those recent studies so that they can be seen in one place all together.

University of Wisconsin at MadisonThe opposition to ethanol production relies on the logical argument that the greater demand for corn from ethanol production raises the price of corn and all the food items that are made from corn. So the University of Wisconsin at Madison study published in April 2008 that focused on the effects of ethanol production on the price of corn seems like a good place to start. The study concluded that ethanol production was a factor in rising corn prices but not the only factor.

Since ethanol production capacity essentially doubled between the first two quarters of the last and current marketing years, the model results above suggest that ethanol’s contribution to the price rise was about 41 cents per bushel, ceteris paribus. This would have resulted in an average 2007/2008 first quarter price of $2.95 per bushel had nothing else changed. While this is a significant year over year increase, it is substantially less than the actual price appreciation between the start of 2006/2007 and the start of the 2007/2008 marketing year. As a result, while ethanol production has had a significant and positive impact on corn price, it does not fully explain price level changes in the 2006/2007 marketing year.

Whereas the study predicted that if ethanol were the only factor influencing the price of corn, the corn price would have been $2.95 per bushel, the actual cost was $3.34 per bushel. So ethanol increased the price of corn by 41 cents and other factors increased it by 39 cents. So according to this study ethanol was responsible for roughly half the increase in corn prices over the time period examined.

So the logical argument that ethanol production is raising food prices by raising the price of corn could only be half right at best.

Texas A&M study on the effect of ethanol on food and feed pricesThe study by Texas A&M published in April 2008 concluded that ethanol production has had little impact on food prices, but has effected certain food items.

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.

The study also plainly states that some of the food price increases that have been blamed on ethanol production are incorrect.

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.

University of Nebraska at LincolnThe most recent study released by the University of Nebraska at Lincoln concludes that ethanol production is having a small part in overall food price increases.

The evidence available suggests that the ethanol industry alone is responsible for perhaps 30-40% of the increase in grain prices over the past two years, while these high grain prices themselves are responsible for no more than a 4% increase in U.S. food prices. This implies that ethanol is responsible for a 1-2% rise in US food prices.

Federal Reserve Bank of Kansas CityThose are the studies that have come out in the last couple of months that deal specifically with ethanol's effect on food prices. The Federal Reserve Bank of Kansas City issued a report in March 2008 that detailed the various factors that are driving food price inflation. In their report they point to robust food demand, record high crop prices, and accelerating costs for labor and energy for fueling the steep increase in food prices.

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