RFS, food CPI not correlated

RFS, food CPI not correlated

- RFS one of many factors driving corn demand. - Rate of food price inflation has actually slowed since RFS enactment. - Processing ac

DESPITE media coverage and food industry claims to the contrary, a study by ABF Economics released June 12 found no direct correlation between the renewable fuel standard (RFS) and the overall increase in food prices.

Conducted by John Urbanchuck, the study examined the relationship between the RFS and recent changes in consumer food prices.

Specifically, Urbanchuck analyzed the relationship between corn prices and consumer food prices, the factors that affect corn prices, the role major industry participants play in determining consumer food prices and the relative importance of components such as agricultural commodities and energy in consumer food prices.

Among the study's key findings, Urbanchuck reported that the rate of food price inflation, as measured by the Consumer Price Index (CPI), has actually slowed since the RFS took effect. Comparing the CPI during the five-year period after RFS implementation to the five years prior to implementation, the study found that retail food prices have increased at a slower rate post-RFS implementation (Table 1).

While ethanol production and the demand for corn to produce ethanol have increased as a result of the RFS mandates, corn prices have also been influenced by what the analysis describes as a sharp increase in petroleum prices and rapidly expanding global demand for food and agricultural commodities.

One of the biggest drivers of recent record corn prices, rather than the RFS, is the tight supply of corn available to the market. Urbanchuck's analysis notes that average corn yields reached a record 164.7 bu. per acre in 2009 but then declined for three consecutive years, hitting a bottom of 123.2 bu. per acre during the historic drought of 2012.

Given smaller production for three consecutive years, coupled with increasing demand for corn from multiple sectors, corn supplies remain extremely tight. Current U.S. Department of Agriculture estimates suggest that the ratio of corn stocks to demand for the 2012 marketing year will be the second lowest on record (Figure), according to the analysis.

Much of the debate over food prices has centered on the ethanol industry's impact on livestock feed supplies. While the cost of corn has clearly increased in recent years, Urbanchuck's study suggests that the livestock sector has actually benefitted from ethanol production because of the increased production of dried distillers dried grains with solubles (DDGS).

"A bushel of corn used for dry-mill ethanol production generates about 17.5 lb. of DDGS, or about a third of the corn's original weight," the report explains. "Considering this, as a result of the RFS, the availability of DDGS for the livestock and poultry sector has more than doubled between 2007 and 2012, increasing from 21.3 million tons to nearly 40 million tons in 2011."

On a gross basis, the study concluded that DDGS production actually increased the amount of corn equivalents available for feed by 21% over the five years since RFS implementation (Table 2). Urbanchuck arrived at that conclusion by calculating the corn equivalent of DDGS produced and adding that to the volume of corn used for feed.

"Because of the increase in DDGS production due to the RFS, the amount of corn equivalent (grain plus DDGS) was as much as 21% higher than would have been the case without ethanol production," the report explains. In other words, farmers would be producing fewer bushels of corn if there were no ethanol mandate and, by extension, would be producing fewer tons of DDGS.

Among the study's most pressing conclusions is that corn production accounts for very little of consumer spending on food. USDA data indicate that farmers received only 15.5 cents of the consumer food dollar in 2011 — virtually unchanged during the RFS era — while marketing (all supply chain activities that take place post-farm) accounted for 85.5 cents.

Broken down by sector, Economic Research Service data show that the farm and agribusiness sector's share of the cost of food in 2011 amounted to 10.8 cents of every dollar, a drop of 8.4% since 2007. On the other hand, the food processing industry's share tallied 22 cents, up 15.7% over the same period.

The report concludes that higher costs in food processing — e.g., energy costs — are often passed on to the consumer in the form of increased prices for processed foods and are reflected in the CPI.

Editor's Note: Urbanchuck discusses his analysis in the latest "Feedstuffs in Focus" podcast at www.Feedstuffs.com.

RFS, food CPI not correlated

1. Comparative changes in CPI, all urban workers, %

 

Jan. 2003 to

Jan. 2008 to

Dec. 2007

Dec. 2012

All items

15.8

8.9

All, less food and energy

10.8

8.3

All food

16.8

13.3

Cereal and bakery products

13.9

17.4

Meat, fish and poultry

21.2

17.7

Eggs

58.2

-4.4

Dairy products

36.2

1.3

Energy

69.2

7.0

 

2. Impact of DDGS on feed availability, 2007-08 to 2012-13

 Marketing

DDGS

DDGS

DDGS net

DDGS

Corn

Total

Total feed

year starting

production

exports

availability

corn equiv.

feed use

feed avail.

grain due to

Sept. 1

-Million tons-

-Million bu.-

DDGS, %

2007

21.343

1.962

19.381

692

5,858

6,550

11.8

2008

29.208

4.297

24.912

890

5,182

6,072

17.2

2009

36.154

5.470

30.685

1,096

5,125

6,221

21.4

2010

39.540

9.128

30.412

1,086

4,793

5,879

22.7

2011

39.462

9.136

30.326

1,083

4,548

5,631

23.8

2012 (est.)

36.225

8.317

27.908

997

4,550

5,547

21.9

Source for Tables: ABF Economics.

 

Volume:85 Issue:24

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