Dec 12, 2007

What to do with conflicting information (Food Vs. Fuel)

We all have seen lots of articles recently stating how corn ethanol is making the price of food go up.
For the purpose of this blog, I will use two articles that directly conflict each other. One, written by Forbes, says corn-based ethanol is directly causing food prices to rise. The other, written by informa economics, states that corn-based ethanol has a very small impact on food prices.

We all know that there are better feedstocks to use besides corn for ethanol production - feedstocks that takes less energy to grow and create more ethanol per acre, but that doesn't mean that corn is a bad choice for right now. While everything is connected and the rise in food costs has something to do with rising ethanol demand, we shouldn't be quick to demonize the fuel and look to some basic facts like food surplus, exports and production costs (farmers have to pass high diesel costs on to their customers, just like any delivery company).

Ethanol driving up food prices is largely presented as fact. To counter this, an ethanol trade group, the Renewable Fuels Foundation, commissioned Informa economics to do a study based on statistical analysis of the Consumer Price Index to see what is actually happening. We can, of course, assume that the Informa report is biased, but it provides a much more holistic view of the issue as it breaks down what goes into a bushel. Here is what each had to say about the issue:
The boom in ethanol, a heavily subsidized replacement for oil... is behind the doubling of corn prices over the past 15 months and the knockon effect on basic foods from milk to bread. - Forbes
...the statistical evidence does not support a conclusion that the growth in the ethanol industry is driving consumer food prices higher... only 4% of the change in the food CPI is “explained” by fluctuations in nearby corn futures prices. Even when the corn price is lagged to allow for the effects to work their way through the food supply chain, the statistical results do not improve. - informa economics
So... lets see what industry experts say on surplus and export (we don't need an industry expert to tell us that gas prices have gone up). World-Grain:
U.S. corn exports are projected to reach a record 62 million tons in trade year 2007-08, up 2 million tons this month. The U.S. marketing year is also a record at 2.45 billion bushels, up 100 million bushels. According to U.S. Census data, October 2007 corn exports were up almost 20% over those of the previous year. The report also indicated that feed grain supplies for 2007-08 are unchanged from November and are up 55.3 million tonnes from 2006-07.
So, US production and exports are up, suggesting that there is a strong market abroad for American-grown corn. Feed grain stocks are steady or going up, suggesting feed (and therefore meat prices) would be unchanged as well. Ranchers are reporting raised costs, up to 20%, which I am suspicious of, given that there is not a decrease in supply. This means that either there is some price gouging and blame shifting, or farmers are using higher-value feed (a bi-product of ethanol production).

Bottom line: everything is connected, don't be reactionary and quick to pass judgment, take everything you read with a grain of salt and check references.


Anonymous said...

I'm a chemical engineer, not an economist, but it seems to me that the reason corn prices are higher is that the value of the dollar is lower compared to foreign currency. Farmers can get higher prices (in $) overseas. That means that domestic prices will be higher since they are competing with exports. And exports increase since farmers get more for their corn over there.

Sasha Friedman said...

Thats a great point - I hadn't thought of the weakness of the dollar contributing to all this.

The true value of a country's currency is really only comparable to the value of other currencies; this is classically illustrated by the varying prices of 'big macs' around the world. The ratio of the cost of the burgers would hint at the exchange rate.

Right now, the dollar has lost value as compared to most currencies, so it is more affordable to buy US grains. As we all know, higher demand begets higher prices.

Thanks for pointing that out!