Keith Collins, former chief economist for the Department of Agriculture (he stepped down in January 2008), has waded into the ethanol food-versus-fuel debate with a new report commissioned by Kraft Foods Global, Inc. The report is titled “The Role of Biofuels and Other Factors in Increasing Farm and Food Prices: A Review of Recent Developments with a Focus on Feed Grain Markets and Market Prospects.” (It’s available here in PDF format.) Kraft has faced higher dairy and animal feed costs this year, which are used to make Kraft food products.

Collins, an economist, concludes that “Many factors are contributing to higher farm-level and retail food prices.” Collins lists seven factors:

  • strong global economic growth (which thereby increases demand for U.S. commodities),
  • the declining value of the dollar (“although recent real trade-weighted exchange rates suggest that the weakened dollar has been less important to corn and other key crops”),
  • reduced supplies of some crops (like wheat and rice, due to adverse global weather),
  • higher energy prices that have increased farm production costs and food processing and distribution costs,
  • changing foreign agricultural policies that insulate countries from higher global prices,
  • increased investment by index funds and other managed investments that probably have increased price volatility but are not likely to have sustained effects,
  • biofuels (“particularly corn-based ethanol”).

About biofuels, Collins says they have been “a major factor for feed grain and livestock markets, with corn used in ethanol rising from 2.1 billion bushels in 2006/07 to an expected 4.0 billion in 2008/09.”

Key points made by Collins in the report:

  • The index of prices received by farmers for all farm products increased by 34 percent over the period January 2006 through May 2008. The index of prices received for feed grains and hay, led by surging corn prices, increased by 144 percent over that period.
  • The expected increase in corn used as a feedstock in ethanol plants from 2006/07 to 2008/09 is equivalent to the production of corn on about 12 million acres. The increase in corn demand due to ethanol is rising faster than growth in corn yields per acre. So long as that situation continues, corn will have to attract acreage from other crops to meet its expanding demand. This shift will mean higher prices for all crops that compete, directly or indirectly, for acreage with corn.
  • Ethanol drivers. There are two important factors that have increased the price of ethanol. First, high crude oil prices and correspondingly-high gasoline prices have helped establish the current level of ethanol capacity. Second, Federal biofuels policies are encouraging continued ethanol production even with record-high and steadily rising corn prices. The ethanol tariff limits U.S. access of foreign supplies; the tax credit enables ethanol producers to pay the equivalent of up to $1.43 more per bushel for corn used as feedstock; and the Renewable Fuel Standard (RFS) mandates steady, undeviating annual increases in ethanol demand.
  • The increase in farm-level prices has contributed to higher retail food prices, which were up 6.9 percent at a seasonally-adjusted annual rate during the first 4 months of 2008. This increase compared with a 4.9 percent increase during 2007…. Higher energy prices, overall inflation, and biofuels are major contributors to recent food price increases. This latter factor – biofuels – is likely to have more of an impact over the next few years as meat production slows due to higher feed costs.

The entire report can be found here.

Power Politics

June 24, 2008