Falling food prices should end 'food vs. fuel' debate

Falling food prices should end 'food vs. fuel' debate

New analysis from Informa finds crude oil prices on consumer food price inflation was nearly nine times greater than the impact of corn prices.

Millions of Americans preparing for Thanksgiving are undoubtedly noticing that dinner will cost less than it did a year ago. According to the U.S. Department of Agriculture, overall grocery prices are roughly 2% lower than at this time last year, and prices specifically for poultry products — like turkey — are down 1.5% compared to last fall. Meanwhile, the amount of corn used for fuel ethanol is primed to set a new record in 2016, up roughly 3% from last year.

Food CPI: Annual % Change and Ethanol Usage - Despite the strong increase in the amount of corn used for ethanol, the growth rate in the food CPI slowed after passage of RFS2 at the end of calendar year 2007. Source: USDA, BLS, and Informa Economics IEG (analysis)

The Renewable Fuels Association (RFA), which released an independent analysis on the impact of ethanol on food prices, said the current collision of falling food prices and record ethanol production should end the contrived “food vs. fuel” debate once and for all.

The new statistical analysis, conducted by Informa Economics IEG, retrospectively examined the effect of ethanol expansion on food prices, concluding that “…retail food prices were not impacted in any demonstrable way by expansion of U.S. grain ethanol production under the Renewable Fuel Standard (RFS) over the past decade.” In fact, the study finds that food price inflation has actually slowed during the “ethanol era.”

The analysis shows that growth in food prices slowed considerably after passage of the RFS2, with prices for groceries advancing at roughly half the rate seen prior to the program’s adoption. “Prior to the passage of RFS2, food away from home [e.g., restaurants] grew at an average of 3.4%, versus 3.2% for food at home [e.g., groceries]. After RFS2, food away from home grew at 2.6%, versus 1.8% for food at home,” the study found. “The increase in the food [consumer price index] actually decelerated as the usage of corn in ethanol production increased dramatically.”

The study also examines the impact of ethanol on corn prices, and in turn the impact of corn prices on retail food items. While the authors conclude that corn prices were positively impacted by ethanol expansion, higher corn prices did not necessarily translate into higher consumer food prices.  “Statistical analysis shows that the link between corn prices and overall food prices has been weak,” according to the report, adding that changes in food prices are primarily driven by “…the costs of transforming farm products to retail grocery products, along with transportation and distribution at various levels of the supply chain.” The analysis shows that only 19% of consumer spending on food pays for the value of the farm commodities, with the remaining 81% paying for “…post-farm-gate activities (e.g., transportation, processing, marketing).”

Other factors that drive farm commodity and retail food prices were examined, with Informa concluding that core inflationary pressures, weather events (e.g., flooding and droughts), exchange rates, and energy prices all impacted commodity and food prices over the past decade. In fact, from 2009 to 2014, the impact of crude oil prices on consumer food price inflation was nearly nine times greater than the impact of corn prices.

“The U.S. ethanol industry is set to produce a record volume of high octane renewable fuel this year,” said RFA president and chief executive officer Bob Dinneen “And at the same time, consumers are spending considerably less on food today than they did a year ago. Today’s lower food prices continue a trend of deceleration in food inflation rates that began nearly 10 years ago when the RFS2 was adopted. As the new Informa report clearly demonstrates, there is no discernible link between ethanol production and retail food prices — here in the U.S. or globally. It’s time to put an end to the ridiculous ‘food vs. fuel’ myth that has been propagated for far too long by self-interested opponents of biofuels and the RFS.”

View the analysis here.

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