Positive Environment News

Ethanol Group Blames Oil Prices for Costly US Food

Date: 15-Jun-07
Country: US
Author: Christopher Doering and Timothy Gardner

Consumer groups and environmentalists have blasted ethanol, made mostly from corn in the United States, for sending a shock wave through the food system as the grain is pulled away from the food crop to produce fuel.

Ethanol group the Renewable Fuels Association released a study on Thursday that chided critics who say corn is responsible for the lion's share of the food price increase.

"Hyperbolic rhetoric is being substituted for fact," Bob Dinneen, president of the RFA, told reporters on a teleconference.

"Critics in the animal feeding and oil industry in particular are using scare tactics to frighten the American consumer to believing their unsupported claims."

US food consumer prices, as measured by the government's Consumer Price Index, have risen from a year-over-year rate of 2.5 percent in September 2006 to 3.7 percent this past April.

The RFA-funded study found a US$1.00 increase in the price of gasoline will result in a 0.6 percent to 0.9 percent increase in consumer food prices compared a 0.3 percent jump resulting from a US$1.00 per bushel rise in the price of corn.

"One of the reasons why energy prices have a much larger impact on retail food prices than does the price of corn...is they affect the entire food system" ranging from production and transportation, said John Urbanchuk, author of the study and director of LECG, a financial consulting firm.

Current US ethanol production capacity will double if the nearly 80 US refineries currently under construction are finished. The Bush administration has authorized millions of dollars worth of ethanol incentives in an effort to cut foreign oil dependence and hike output of low-carbon fuels.

CORN'S PULL ON ON OTHER GRAINS

The industry's critics found the study unconvincing.

Lester Brown, the president of environmental research group Earth Policy Institute, said the report did not consider the corn spike's potential to boost other prices for grains, such as wheat and rice. Historically, when the price of one grain rises, it makes output of other grains scarce as farmers maximize output of the expensive grain. In turn that pulls up prices for a wide variety of foods, he said.

"Oil is a factor, but I don't think it explains these very substantial rises in grain prices that began a year ago and are now beginning to translate into higher food prices," he said in a phone interview. Wheat futures prices on Thursday hit the highest levels in 11 years.

The RFA study found that a majority of the 1.2 percent increase in food prices since September was attributed to products not affected by corn, such as fish and fruits and vegetables. Foods including meat, poultry, eggs and dairy, where corn is a major input, accounted for only 0.2 percent of the jump.

US corn prices have risen to US$4.10 a bushel from around US$2.40 per bushel at the same time a year ago. The US Agriculture Department last month forecast record-high farm-gate corn prices during 2007/2008 at US$3.40 a bushel despite a projected record crop of nearly 12.5 billion bushels.

"The days of cheap corn are more likely than not over," said Urbanchuk. "The new reality is that corn prices are likely to remain near the US$3.00 per bushel than the US$2.00 per bushel mark for an extended period of time."

The National Corn Growers Association said farmers will harvest an estimated 150 bushels per acre this year and could soon see yields topping 180 bushels, allowing the corn industry to easily meet both food and energy needs.

Oil prices hit a record last summer of more than US$78 per barrel and were trading at nearly US$68 on Thursday.

Reuters
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